Post Holdings, Inc. (SJM) Earnings Call Transcript & Summary

Welcome to the conference call and webcast of Post Holdings acquisition of Rachael Ray Nutrish, Nature's Recipe and Other Select Pet Food Brands from The J.M. Smucker Company. Hosting the call today from Post are Rob Vitale, President and Chief Executive Officer; and Matt Mainer, Chief Financial Officer and Treasurer. Today's call is being recorded. [Operator Instructions]. It is now my pleasure to turn the floor over to Jennifer Meyer, Investor Relations of Post Holdings for introductions. You may begin.

Good afternoon, and thank you for joining us on today's conference call to discuss post announcement of our acquisition of Rachael Ray Nutrish, Nature's Recipe and Other Select Pet Food Brands from The J.M. Smucker Company. With me today are Rob Vitale, our President and CEO; and Matt Mainer, our CFO and Treasurer. Rob will begin the call with a brief presentation and afterwards, we'll have a question-and-answer session. The press release and slides that support these remarks are posted on our website in both the investors and the SEC filings section at postholdings.com. In addition, the release and slides are available on the SEC's website. Before we continue, I would like to remind you that this call will contain forward-looking statements, particularly the expected timing of the completion of the acquisition, the expected funding sources of the acquisition and the expected financial contribution of the acquired business. These forward-looking statements are subject to risks and uncertainties outlined in the press release and in our SEC filings 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 more information on these non-GAAP measures, see the details in our press release. With that, I will turn the call over to Rob.

Thanks, Jennifer. Thank you, everyone, for joining us. So hopefully, you all have a deck that we posted to our website this morning, so I'm going to speak from that. So just turning to Page 1, disclaimer, disclaimer, disclaimer, disclaimer. Page 7, so I'm very excited to share with you that Post has agreed to purchase from The J.M. Smucker Company, this basket of iconic pet food brands. They're anchored by Rachael Ray Nutrish. In addition to Nutrish, we're acquiring Nature's Recipe, 9Lives, Kibbles 'n Bits and Gravy Train. We're paying $1.2 billion in a combination of cash and stock, such as Post will remain leverage-neutral at approximately 5.2x. More specifically, we will deliver $700 million in cash and $500 million in new shares. We expect to close early in our third fiscal quarter. It's been a number of years since we last made an acquisition of this size. We have long considered pet a natural extension for our buy-and-build strategy. However, so far, we have not been able to identify an opportunity at a reasonable price that provides sufficient scale to matter and upon which we could build. We think this is a compelling opportunity that nicely fits the bill. At nearly $1.4 billion in revenue, focused on mainstream and entry premium price points, we have enough scale to matter and to build upon. In terms of purchase multiples, we are acquiring this business for approximately 8x adjusted synergized EBITDA. That's net of the expected tax benefits of $120 million. You all know the carve-out routine. First, we estimate a theoretical stand-alone P&L and then we estimate synergies. On that basis, we are acquiring approximately $100 million in adjusted EBITDA, and we expect by year 3 to deliver $30 million in synergies. We anticipate margin opportunity to follow from additional investments in manufacturing. Once we get through the onetime integration costs, we expect the acquisition to be cash flow accretive after considering the share issuance. Those onetime costs are in the neighborhood of $75 million. As I mentioned, this transaction is leverage neutral to Post, we want to retain ample capacity for M&A or even to buy back the shares we are issuing. The balance of the purchase price is delivered in new Post common equity. Slide 8 shows the brands I just listed and their respective contribution to sales, but also highlights that we are acquiring 3 manufacturing sites and a distribution center. Most importantly, I'm honored to welcome nearly 1,100 new colleagues to Post. Slide 9 is interesting. You all know pet is a great category. Like many others, it is really a series of price-driven subcategories. In recent years, premium and super premium have seen terrific growth, frankly, at the expense of some of the brands we are buying. More recently, mainstream and entry premium have gained traction as consumers have shifted to value. We expect this to persist for some time. Hopefully, over time, we will expand into additional price points. Slide 10 puts this acquisition into the framework we have shared with you many times in terms of our acquisition targets. You all know that Post tends to value cash flow reliability over growth and our capital allocation strategy leads towards more modest organic and substantial inorganic growth. This opportunity quite nicely ticks the boxes of what we look for investments. The right-hand side of the slide shows the cash flow lift. Again, please recall, we will issue approximately 5.4 million shares. In terms of synergies, Slide 11 shows the key buckets. First, we shipped to the same places and the heavier weight of pet nicely complements the bulkier cereal product and enables us to drive and deliver more efficiently. We expect to leverage the administrative functions of post-consumer brands, IT, finance, HR and legal to get better leverage from these functions. You know we skew towards focus over maximum efficiency. We believe the dedicated commercial team and a shared administrative function is the best of both. Meanwhile, we expect procurement synergies as so much of both portfolios are grain-based. Slide 12 is aimed at reminding you of our core skill at acquiring footholding categories and building around them. In the past decade, we have been disciplined in our acquisition strategy, expanding into new categories, segments and geographies for the right assets. At the same time, we have monetized assets opportunistically in our pursuit of creative value and driving levered returns for our shareholders. We like much about this opportunity. The cash flow dynamics, the potential to expand margins, the synergies. However, what is really exciting is the optionality potential it creates. Perhaps we add to it and further leverage its strength, perhaps it becomes a stand-alone platform or business someday. We look through the narrow lens of how do we create value for you and for each other and try to extend upon what you see in these pages. Slide 13 also lays out our expected organizational structure after closing and as a reminder of the way we build platforms for success. We expect pet to be managed under Post-consumer brands and its current President, Nicolas Catoggio. Finally, Slide 14 summarizes our strategic and financial rationale. We are very excited about this acquisition. My interest this evening was simply to share the what, how and why a Post moving to pet. And at this point, I will turn the call back over to the operator for questions.

[Operator Instructions] And we will take our first question from Andrew Lazar with Barclays.

A couple of things. So I guess, first off, Rob, you mentioned some of the benefit that some of the brands you're purchasing have been receiving recently, I think, from consumers maybe trade down a bit or are looking for a little more value in the pet food space. It seems to me there's been a lot of debate about how much of that is truly trading down versus some of the more premium brands in the space, you're really just not having enough capacity. And that's clearly benefited some of the brands that you're buying at least for, as you said, some period of time. I guess how did you incorporate that and how transitory that may or may not be in the way you thought about sort of valuing this transaction? And then I've just got a follow-up.

Yes. So we looked at the amount of capacity coming online, which is pretty well documented and expressed that in the number of years that, that will take to consume at the growth rates that we expect. And we think that if there is some reversal of the recent trend, that will be transitory as we see more benefit from value-seeking and the use of that capacity that is coming online. We think it's only a couple of years of capacity given the growth rate of the category at that brand price point.

Got it. And then I know over the last year or so, Smucker created a separate pet sales force, right, separate from its main retail grocery sales force. I guess, how will that transfer over to you? Will you have a separate sales force from the current Post consumer brands piece in ready cereal? Or will they be the same because they are selling into the same -- or a lot of the same channels, but how will you structure the sales piece of this?

Yes, great question. And I tried to address that a bit in my prepared remarks. We believe that it's important to have a dedicated sales force. What we are trying to do is to find the right equilibrium between sharing the functions like finance, IT, legal, HR, et cetera. And that can be shared across that consumer platform, but having dedicated teams for sales, marketing, manufacturing -- Q1 that I didn't mention was logistics, we would share logistics because we think that's a key bucket of synergies. But we like Smucker believe that there's real value to having a dedicated sales force despite the fact that there is overlap in the customer base.

Great. And the very last thing would be, it's well documented that under Smucker's ownership, the Nutrish brand specifically has -- it struggled, right, to find -- sort of find its footing and it's like a brand that, as you mentioned, it's kind of not mainstream. It's not as premium as some others. The brand equities, I guess, just had -- there was some complexity, some additional perhaps SKUs and subcategories that made it a little more complex. When you look at this particular brand, the larger or the assets that you're buying, how do you think about where the opportunity is going forward that maybe wasn't completely optimized under the sort of current ownership? And [ are you ] comfortable with that?

Well, and as you can imagine, I don't want to go into the details of brand strategy in this forum. But what I can tell you is that, the way you described it, also fits honey bunches of oats. And I think that the learnings that we have from that experience and the experience of managing the totality of the Post portfolio going back to 2011, I think extends very nicely to the pet segment, both from the brand composition, the degree to which those brands have been focused on, the competitive set that the brand competes with, with the key difference being one of growing category and one's not. So we feel very comfortable given our history and heritage and our ability to make that transition with Rachael Ray Nutrish. I think I overlooked one of your questions about whether that sales force was coming from Smucker's, and the answer is in part. So we will take part of that sales force and build upon it.

And we'll take our next question from Jason English with Goldman Sachs.

So I'm trying to square. We got 2 companies here, right, J.M. Smucker and Post, both for that disclosures on this one. And we're trying to triangulate the numbers out here. Based on the dilution that Smucker's put out, I'm backing into an EBIT of around $100 million and EBITDA, probably close to [ $1.70, $1.75 ], I mean it's fast on those math. So it's potential for error. That's -- but that number is obviously a substantial difference from the $100 million that you're throwing out as a starting point, pre-synergy. Is that -- I mean, I can't believe that it's $75 million to stand up the other half of the sales force and whatever else you have to add. What am I missing? Or maybe just like my numbers are wrong, which is fine, tell me that, too.

No, that's what I was alluding to with respect to the process of creating these stand-alone, is that, obviously these brands have contribution to their current parent. They have been a stand-alone cost structure, which is what I characterize as $100 million, and then we will apply whatever infrastructure we have to get back to a number higher than that over time. So there is incremental costs related to standing up the sales force. We would anticipate some incremental marketing spend. There are some dis-synergies initially as a result of transition services agreements but we would expect to synergize back to a higher number over time.

Okay. Okay. So the math is kind of right. Just take it spread, and that's the incremental cost. The capacity utilization in the 3 manufacturing facilities you're acquiring, where does that stand?

It's high. We think there's some opportunities to create some latent capacity. But right now, it's operating very near capacity.