Welcome to the Post Holdings Second Quarter 2022 Earnings Conference Call and Webcast. Hosting the call today for Post are Rob Vitale, President and Chief Executive Officer; and Jeff Zadoks, Chief Financial Officer. Today's call is being recorded and will be available for replay beginning at 12:00 PM Eastern Time. The dial-in number is 800-925-9356, no passcode is required. At this time, all participants have been placed in a listen-only mode. It is now my pleasure to turn the floor over to Jennifer Meyer, Investor Relations of Post Holdings for introductions. You may begin.

Good morning, and thank you for joining us today for Post's second quarter fiscal 2022 earnings call. With me today are Rob Vitale, our President and CEO; and Jeff Zadoks, our CFO. Rob and Jeff will begin with prepared remarks and afterward, we'll have a brief question-and-answer session. The press release that supports these remarks is posted on our website in the Investor Relations section at postholdings.com. In addition, the release is available on the SEC's website. Before we continue, I would like to remind you that this call will contain forward-looking statements, which are subject to risks and uncertainties that should be carefully considered by investors as actual results could differ materially from these statements. These forward-looking statements are current as of the date of this call and management undertakes no obligation to update these statements. As a reminder, this call is being recorded and an audio replay will be available on our website. And finally, this call will discuss certain non-GAAP measures. For a reconciliation of these non-GAAP measures to the nearest GAAP measure, see our press release issued yesterday and posted on our website. With that, I will turn the call over to Rob.

Thank you, Jennifer, and good morning everyone. We had a successful quarter, and despite some near-term challenges, we remain quite upbeat about the year. I want to start by expressing my appreciation to our colleagues who work towards the BellRing transaction. As you know, this quarter, we completed the spin-off of 80% of our position. The transaction required an enormous effort for many people across our organizations. I'm grateful to each person for their sacrifice and effort. I'm excited for the next chapter of the BellRing story. The Premier Protein brand remains a leader in the developing category with a considerable runway for expanding household penetration and innovation. Dymatize has become a clear leader in sports nutrition, this business has tremendous fundamentals in terms of both growth and cash generation. We believe the transaction will also improve its technical support with greater liquidity in its shares. We are pleased with our Post-performance this quarter. Nonetheless, the business is not firing on all cylinders and we are still earning below our potential. The expected second-half increase reinforces our thesis. Meanwhile, labor conditions are improving, controllable manufacturing performance is improving, transportation is improving, I make the distinction about controllable manufacturing because we continue to face periodic ingredient shortages that create inefficiencies in our factories and in our broader supply chains. Our procurement team has developed a triage approach to identifying flash points at the early as possible moment starting with better demand planning. However, because it is triage, it does lead to downstream inefficiencies. I expect the supply chains to continue to improve in our management of shortages will continue to improve. But the combination of pandemic disruption, labor imbalance, inflation, and now geopolitical instability has led to more lingering macro problem than we anticipated. Speaking of inflation, we have seen ramping…

Thanks, Rob, and good morning everyone. Before getting into the details of our quarter, I would like to remind you that BellRing has been presented as discontinued operations for all periods. And the consolidated figures, I will discuss represent results from our continuing operations. Second quarter consolidated net sales were $1.4 billion and adjusted EBITDA was $230 million. Net sales increased 17% and benefited from approximately $70 million of incremental sales from recent acquisitions. Pricing actions across each segment and volume demand recovery in the foodservice segment. Higher raw materials, freight, and manufacturing costs continue to pressure year-over-year margins this quarter, although they improved sequentially. While internal and external labor shortages and supply chain disruptions improved throughout the quarter, we continue to see lower throughput and higher per-unit product costs. Similarly, our customer order fulfillment rates improved, but we're still below optimal levels. Turning to our segments and starting with Post Consumer Brands, net sales and volumes increased 19% and 20% respectively. Excluding the benefit from the private label cereal, and Peter Pan acquisitions, net sales and volumes grew 8.8% and 3.4% respectively. Cereal average net pricing increased 5.4% driven by pricing actions and favorable product mix. Pebbles and Honey Bunches of Oats drove the volume increases. This growth was partially offset by year-over-year softness across value and private label cereal products, and our exit of certain low margin businesses. As Rob mentioned, on a sequential basis, we have seen some improvement in value sub-segment volumes. Adjusted EBITDA decreased 5% versus prior year primarily driven by costs related to supply chain disruptions across freight, supply reliability and warehousing. These disruptions drove declines in throughput and fixed cost absorption, causing higher manufacturing costs per pound. Weetabix net 3% and 4% respectively. The weaker British pound created a headwind to these growth…

[Operator Instructions] Thank you. Our first question will come from Andrew Lazar with Barclays.

The full year EBITDA guidance is about, I think at the midpoint, $5 million or so above what the implied range for RemainCo was prior to the distribution of BellRing shares. And I was just hoping you could dig in a bit on what sort of areas in the business specifically gave you the most comfort in this range, particularly in light of all the unknowns still out there and the fact that at the time, I think consensus is also at the sort of very low end of the range that you put out there.

Yes. I think if you look at each of the components of the business, we feel a bit of a firming with respect to our supply chain efficacy, even though there's still plenty of problems. I don't want to understate that. We feel good about the ongoing shift in some of the consumption behavior to more of our value-oriented products. We continue to feel good about the demand recovery and pricing stability in Foodservice. So rather than pinpoint, one thing I would tell you, it's a general sense of the business firming in the face of some ongoing challenges. And I want to put that, I would say two things, in context. One, we're talking about a fairly small change in that. So it's more of a refinement than a change. And secondly, we still think that despite the momentum improvements in the company and the firming of the guidance that the business is underperforming. So I don't want to suggest we're declaring victory by raising that guidance by a small amount. We're reflecting the realities we're seeing in spite of -- or despite still seeing some pretty challenging situations around commodity pricing and supply chain throughput.

Got it. All right. Thanks for that. And then this question, I know it's getting -- I think way ahead of ourselves clearly at the moment, but I guess how do you see the sort of like the Goldilocks scenario for the Food Group moving forward regarding inflation. In other words, like is it better to have the rate of inflation moderate even if costs stay at elevated levels, given a lot of the pricing is now getting better in place? Or starting to see actual deflation, which can bring with -- its own set of challenges to manage as well?

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Okay. I got you. Okay. I appreciate it. Thanks very much.

Thank you. Our next question will come from David Palmer with Evercore ISI.

And we could do like a multiple-choice version of this call.

It would really make things easier if you don't mind. And they only have two choices. So, you can go to four.

Right, right. None of the above. One of the things I was wondering about is, as you're getting further into the year, you might have visibility into this as we experienced the second wave of inflation and look back at some of the friction costs you might have had with the employee outages, you talked about with foodservice, we get to the end of fiscal '22, how much of the friction costs do you think you will have had that might be easy comparisons for your gross margins? And then, in terms of pricing timing versus input inflation, we're hearing a lot about that. That could be another thing that you're looking back on as a favorability item. Some of that might actually be coming at because we've had another wave of inflation that had because of some pricing to catch up. But is there any way to quantify those two friction points or drag to gross margins for fiscal '22?

We're working through all of that. And I would say there is both puts and takes. In a bit of reverse order, you're quite right to observe that -- inflation has come in waves and I think we had -- we were in a pretty good spot prior to the invasion of Ukraine, and then we saw another wave of inflation, which will require further pricing movement. So, I think one of the interesting facts has been the wave pattern of the price level movements throughout the last year. Second, you were also quite right in saying there are improvements in the supply chains as we come off of some of the COVID costs. But a fairly meaningful extent some of those have been replaced with other costs around lack of ingredients that we have had to effectively in my script. I called it to triage to prioritize different products to sub-optimize our mix in order to move product or to ship product where it is rather than where it supposed to be. So, say in my comments is that things are getting better, but they are not too bright yet. So, we do have some opportunities to improve margins. We obviously do expect them to improve with efficiencies, but some of that is being offset by upstream supply chain challenges.

I mean even if you were to talk about this, sequentially, to those friction costs, how do you -- how would you express the pricing versus input cost mismatch and the forward versus what we saw in the quarter?

Well, I don't want to add more quantification at that level beyond what we have embedded in our guidance. So what I would give you is directionally, we are continuing to see them improve where we can control it, and the problems seem to be moving upstream. So it just - it changes the way we manage them because what we are primarily doing is making sure we've got sourcing in the right position because I think we have managed well once the ingredients come into our factory and get them through our DC. So it just changes our behavior a bit. But beyond giving you the guidance number we've given in the aggregate, I wouldn't want to get into trying to parse out what does the immediate future look like for ingredient shortages versus pricing or efficiencies.

Thank you. Our next question will come from Chris Growe with Stifel.

I just wanted to ask you on the foodservice division. And just to understand kind of the pricing there. I think you've been pushing through some more aggressive pricing, I think even kind of beyond the green-based pricing, as you -- for things like transportation logistics and I think that's sort of should start to pick up a little bit and help you overcome some of the incremental inflation in that business sort of to pick up a little bit in the third quarter or is that already coming through by chance, just want to get a sense of how that's phasing through the year?

You're 100%, thinking about it correctly. The -- we've seen substantial increases in costs and non-pass through aspects of our cost structure and you highlighted one of the biggest ones in transportation. So, we started pricing that around the first of the year on through the first quarter, but the real impact of that doesn't flow until our fiscal Q3.

Okay, thank you. And then I'm just -- there's -- I know there's a bit of a timing element around the debt-for-equity exchange with the remaining BellRing shares. Is there a rough timeframe for when that can or will happen later this year?

The only timing we provide. So, it could be anytime within 12 months.

Thank you. Our next question will come from Michael Lavery with Piper Sandler.

Thank you. Good morning. I just wanted to touch on foodservice margins and make sure to understand how that unfolds. And I know you gave some comments in your prepared remarks, but just thinking maybe through the rest of this year and a little bit beyond partly wondering you've said before that you think a return to normal margins probably wouldn't come until fiscal '23. I guess it's a little further out, obviously, but anything can change? Would that maybe we can it still happen in fiscal '23, you have to get there and it was a little bit better in this quarter than we thought. Are you ahead of track in terms of how it may go? Just kind of an update on how that probably unfolds.

Yes. Let me make sure I'm clear on what I said or at least intended to say. We expect to get back to pre-pandemic levels of profitability on a run rate basis by Q4 of fiscal '22. So...

Okay. Great. It went a little fast, and so I wanted to -- I didn't -- I wasn't sure if I caught that and I wanted to just make sure that I heard that right. That's great.

Yes. So, that is not a change that's just reinforcing what we had said previously. We do see a bit of margin improvement as our mix shifts to the higher value add specifically pre-cooked product, and we do anticipate that there will be some long-term volume impairment and some of our smaller categories around travel and perhaps office cafeterias representing 1% of the business, relatively small amount. So, we fully expect to have profitability levels back to the 2019 levels in Q2, and barring something surprising go into '23 with that expectation to reflect as a run rate.

Sorry. I might have misheard you just now you said the 2019 levels in -- did you say Q2? Or do you mean Q4?

Q4.

Yes. Okay. Great. And then just on the Weetabix business. Your organic growth there was good and it was pricing driven, but just curious how the volumes have held up maybe in the last months into the third quarter. Just trying to understand how the U.K. and European consumer is holding up? Is that, are you seeing a slowdown there yet? Or how do we think about the rest of the year for modeling that segment?

We have not seen a meaningful slowdown in volumes, yet. But what we are expecting is that there could be some shift from branded to private label of which we have a good position in both. So, there could be some relatively modest margin dilution if that shift occurs with the consumer under some pressure from both energy and food costs.

Thank you. Our next question will come from Jason English with Goldman Sachs.

I just I want to dig in a little bit more into the impact of avian influenza on your results right now. You're reaffirming how much in the last quarter that sort of back half Q4 run rate for profitability in Foodservice is what you thought would be before, but it seems like you should be selling a lot of a market-based price. I think you were selling 15% grain stock at marketplace price pre-AI, you're probably signed at least 10, which would seemingly unlock a decent [indiscernible] opportunity. Why is your profit outlook for the back half not changing?

We are procuring more of our eggs now on a spot basis with some of the losses and volume that have occurred -- loss of supply volume that have occurred to date. So the effect to date has been negligible. There are some obvious puts and takes as pricing changes in the second half that could add some incremental support to that, and there are frankly some incremental risks if we lose more supply. So what we have attempted to do is give you guidance that is largely consistent with our guidance pre-AI. Our AI events to date have a negligible impact. And then to the extent AI takes a course that is materially different from our expectation or elevate prices beyond where it is, we could have some different puts and takes around it.

Still, go worse. So, it's better to put some buffer in there, but just to make sure I understand the math right, you were buying -- you were selling 15% of your eggs all green procured at market you've lost 5% in supply some you should still at a minimum be selling 10% of your grain stock out at market-based?

No. We've lost -- with the second farm, we've lost about 10%.

Got it. Okay. So now that surplus has shrunk to 5%. Okay. Understood. And then real quick, you mentioned we're going on a year now of you've seen losses on the value tier from Malt-O-Meal and private label. You mentioned some MOM distribution gains. Can you expound upon that? And whether or not based on the sort of the sequential improvement you've seen plus the distribution gains, are we potentially at an inflection point for that consumer brands business in terms of the value tier moving higher?

We believe so. We have seen a meaningful expansion of total distribution points in both mass and grocery. We do expect that the inflation rate will start to create some movement within category towards more of a value orientation. But to-date it has been modest going back to your first point, I'd say around November-December we saw the -- and since November-December, the trajectory has been a slow move upward to the right.

Thank you. Our next question will come from Bill Chappell with Truist Securities.

Just following up on Jason's questions, I mean -- and this maybe goes over to 8th Avenue. Is the sense that private label and value is on an uptick or bouncing off the bottom? We're just trying to understand, there have been some positive signs, but I don't know if that's a start of a trend or if it's too early to tell.

I think the answer is we're too early to tell, but it certainly has stopped getting worse, which is step one of improving. So, we do have some cause for optimism in both our ready-to-eat cereal portfolio as well as within 8th Avenue from a volume perspective. Within 8th Avenue, and I think broader private label, the challenge has been more of the cost inflation, but volumes have not been as big of a problem certainly of late.

That's good to hear. And then, Jeff, I think you talked about labor issues on the side dish capacity. Is that not just for that business but for all the business? I mean, are you seeing the labor picture pick up where you can get to full capacity across the businesses? Or is that a lingering problem?

The answer is a little bit of both is that on a macro basis, it's much better. But we have some specific locations where we just have a real sticky problem, which I would offer, becomes more an issue of geography and changing some of our hiring practice than it is a macro labor imbalance. I think the macro labor imbalance has improved. But we still do have some very specific local issues that we're working through.

Thank you. Our next question will come from Ken Zaslow with Bank of Montreal.

Two questions. One is we've been through this AI before, but when you think about your long-term model, does AI have any impact on your earnings power in 2024, '25? Or is this whatever happens, either positive or negative, it's simply just temporal? Or do you think there's something that changes your algorithm or longer-term thought process?

Well, I think if you consider the position that our business holds in its category, a disruption like this generally over time improves the quality of the business, because I think it highlights the value of our scale and our reliability because if you go into our customer base right now, the people that we are most working to make sure they are not affected, our customers going into this supply disruption. So I think it really highlights the value of being in the fold as a customer of a scale provider who can manage a situation like this with the most degree of alacrity and effectiveness. So I think while it's a situation that we certainly don't wish upon ourselves or anyone else, it reinforces the value of being a customer of ours.

The second question I have is, can you talk about your service levels and as your labor comes back, have you seen improvements in your service levels where they relative to where you want to be? And can you think about where are they expected to be say in six months or nine months or how do you think the progress happens?

Yes. I would say that right now, we are fortunate that we're being graded on a curve, that our service levels are, from a historical perspective, quite dreadful, but from a relative perspective across the CPG landscape, pretty decent. And that one of the more significant opportunities ahead is to get that customer fill rate back to historical norms. And it frankly starts with making sure we have ingredients coming in the door when we need them and where we need them to be.

And I'm going to slip in one more, I'm sorry. How is your innovation? Are you able to ramp up your innovation? Or is the ingredients keeping you from doing that? To what extent is there a real shortage that is changing your business structure? Or is it just it's more of a pain? And I'll leave it there.

Yes. It's a great question. And I would say it adds a bit of complexity to our innovation cycle because innovation, by definition, adds a little bit of complexity to our business, to our customers' business and to our procurement efforts. So we've had great success, for instance, in -- on the demand side of the Premier Protein cereal. And we've had some challenges in getting enough product. And that's just one example. I would say, in general, it's a mixed bag. But the supply chain conditions, and when I say that, I'm not talking about Post, I'm really talking about across the country in up and downstream, do make it marginally more difficult to effectively introduce new products. And we've got a good pipeline. We think we're in good shape in terms of introducing good ideas, but we need the execution side to now follow.

Thank you, ladies and gentlemen, this concludes today's event. Thank you for joining us. You may now disconnect.