Post Holdings, Inc. — Q2 FY2020 Form 10-Q
Reporting period: Three and six months ended March 31, 2020. Amounts are in millions of dollars except per-share data. This is a quarterly report; interim results are not necessarily indicative of full-year results.
Business context
Post operates five segments: Post Consumer Brands, Weetabix, Foodservice, Refrigerated Retail and BellRing Brands. BellRing’s results are consolidated, with 28.8% of its economic interest allocated to noncontrolling interests. The period was shaped by COVID-19: retail-channel demand generally benefited from pantry loading, while Foodservice demand weakened.
Key financial results
| Metric | Q2 FY2020 | Q2 FY2019 | Six months FY2020 | Six months FY2019 |
|---|---|---|---|---|
| Net sales | $1,494.2 | $1,387.8 | $2,951.0 | $2,799.1 |
| Gross profit | $438.8 | $451.3 | $910.3 | $877.8 |
| Operating profit | $153.5 | $186.3 | $349.5 | $480.2 |
| Net income (loss) attributable to Post | $(191.4) | $44.0 | $(92.2) | $169.6 |
| Diluted EPS | $(2.76) | $0.58 | $(1.32) | $2.26 |
| Cash from operating activities | — | $89.0 | $204.8 |
- Quarterly sales increased 8%; six-month sales increased 5%. Q2 gross margin was approximately 29.4%, versus 32.5% a year earlier; operating margin was approximately 10.3%, versus 13.4%.
- Q2 net loss was heavily affected by $224.6 of net swap expense, primarily a non-cash mark-to-market loss, and $60.0 of debt-extinguishment losses. Six-month swap expense was $163.2 and debt-extinguishment losses were $72.9.
- Six-month operating cash flow fell $115.8 year over year to $89.0. Capital expenditures were $117.5. Cash, cash equivalents and restricted cash totaled $1,196.6 at March 31, 2020, including $1,179.4 of unrestricted cash.
- At March 31, principal debt was $7,255.1 and balance-sheet long-term debt, net of specified adjustments, was $7,171.3. Post had $500.0 drawn on its $750.0 revolver and $228.2 of available capacity after letters of credit; BellRing had $80.0 of revolver capacity. Post repaid $150.0 on its revolver on May 5, 2020, increasing Post’s reported available capacity to $378.2.
Material changes and segment performance
- Q2 segment profit was $209.5, down from $224.7. Post Consumer Brands profit rose 11% to $92.4; Weetabix rose 19% to $28.0; Refrigerated Retail rose 14% to $30.2. Foodservice fell 50% to $23.8, and BellRing fell 20% to $35.1.
- Foodservice weakness reflected pandemic-related channel demand declines, $6.1 of inventory reserves, start-up and manufacturing costs, freight, and costs associated with a facility fire. Management reported that restaurants, education, travel and lodging were among affected channels.
- For the six-month comparison, 2019 operating profit included $127.9 of gains related to the 8th Avenue transactions and a cereal warehouse sale. Excluding those gains, management said operating profit declined $2.8, or 1%.
- Post issued $1,250.0 of 4.625% notes due 2030 and used proceeds to refinance debt, repaid its term loan and certain notes, and amended its revolving credit agreement. The debt actions generated substantial one-time extinguishment costs.
- Post repurchased 4.2 million shares for $429.1 during the six months, including 2.0 million shares in Q2. The company said it temporarily suspended repurchases in response to COVID-19.
Outlook, risks and contingencies
- No quantified company-wide earnings or revenue guidance is provided in the supplied filing text. Management expected retail demand gains and category trends might improve in the intermediate term, but cautioned that continuation was not assured. It expected Foodservice to remain exposed to lower demand and said it would manage costs more aggressively if weakness persisted.
- Management cited cash on hand, operating cash flow and available credit as expected sources of liquidity, while noting uncertainty and the possibility that additional financing or covenant waivers could be needed if cash generation weakened. The company drew $500.0 on its revolver to strengthen liquidity and reprioritized spending and capital projects.
- Key pandemic risks include reduced Foodservice demand, employee absences, operating and health-related costs, supply-chain disruption, facility interruptions, and uncertainty in capital and commodity markets. Other stated risks include high leverage, interest and currency movements, commodity costs, competition, litigation and impairment of goodwill or intangibles.
- Post remained a defendant in egg-product antitrust claims brought by three opt-out plaintiffs. The company had accrued $3.5 at March 31, 2020; it stated that the remaining cases could still result in a material adverse outcome. Other proceedings were not expected by management to be material in aggregate.
- The company reported that it complied with its disclosed Post and BellRing leverage covenants at March 31, 2020. It also reported effective disclosure controls and no significant change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether retail demand gains persist and how quickly Foodservice demand recovers, including the effects on segment profit and inventory reserves.
- The cash and earnings effects of swap valuations and settlements, debt refinancing, interest expense and the company’s substantial debt load.
- Liquidity after the subsequent $150.0 revolver repayment, ongoing operating cash flow, capital spending and any resumption of share repurchases.
- Potential outcomes and reserve adequacy for the remaining egg-product antitrust claims, as well as any COVID-related litigation or supply commitments.
- Comparability of results given BellRing’s IPO and consolidation, prior-year 8th Avenue divestiture gains, and the large non-cash and debt-related items in the current period.