The St. Louis-based company posted a 12% operating income decline for its Post Consumer Brands segment – branded and private label cereals – at $72m for the first quarter ended December 31, 2017, down from $82.9m in the same period a year ago.
Net sales increased 1.9% to $456m.
Excitement in bagged cereal category
According to Robert Vitale, president and CEO of Post Holding, the company felt the impact of General Mills entering the bagged cereal segment last year – with both negative and positive effects.
“A competitor as effective as General Mills entering the bag category matters to us … I’ve commented on this in the past that it validates the bag as a packaging format that historically has been viewed as more of a value with less obvious quality,” said Vitale in a conference call to analysts.
“We frankly think that a more vigorous innovation pipeline, some more vigorous advertising and some more vigorous behavior from the category leaders potentially had some short-term implications for us.
“But long term, it is helpful in creating excitement in the category, and we’re by no means above riding coattails.”
Overpromotion diminished value
Similarly, despite Weetabix consumption being in line with the market, the UK Weetabix segment posted a 1.2% decrease in net sales to $99.7m.
Segment profit was $16.8m and adjusted EBITDA was $25.6m.
“The price realization was unfavorable as we overpromoted,” said Vitale to explain the business’ weak quarter.
“Promotions have grown too frequently and diminished their value in driving incremental sales. We have chosen to pull back some promotion and incur some near-term volume loss in order to reestablish the consumer proposition of our promotions.
“Ultimately, just like in the US, we need less frequency and more depth in order to avoid trading dollars between base and incremental.”
Exceeding expectations
Overall, the cereal maker posted revenue of $1.4bn; operating profit of $164.5m; net earnings of $294.9m and adjusted EBITDA of $281.6m in the period, topping Street forecasts and exceeding Wall Street expectation.
“We expect the balance of the year to be more favorable from a promotional calendar perspective,” said Vitale.
“However, recall that this year we expect more impact from commodity inflation, and we are making incremental brand investments. We also expect the competitive intensity in cereal to remain high. This is all reflected in both our initial 2018 guidance as well as our updated guidance.”
Restructuring
The company’s Private Brands business – nut butter, fruit and nut, pasta and granola – saw a whopping 47% increase in operating profit to $8.4m from $5.7m, while sales increased 5% to $114.3m from $108.7m.
Highlights
- Net sales of $1.4bn
- Operating profit of $164.5m
- Net earnings of $294.9m
- Adjusted EBITDA of $281.6m
- The company expects to complete the acquisition of Bob Evans Farms – refrigerated potato, pasta and vegetable-based side dishes, pork sausage and frozen convenience food items – on January 12, 2018.
Post has announced it will explore a range of alternative structures for this segment, including an initial public offering (IPO), a partnership with a private equity firm, a sale or a strategic combination.
Return to growth
Elsewhere in the business, Michael Foods – egg, potato, cheese and pasta products – saw a return to growth, with operating income growing to $74.9m compared to the loss of $71m in the same period a year ago. Net sales in the quarter increased by 7% to $577.1m from $539.8m.
The Active Nutrition segment – protein shakes, bars and powders and nutritional supplements – reported a drop in operating income to $19.8m from $24.9m, while sales increased to $186m from $153.9m.
Post management updated its fiscal year 2018 adjusted EBITDA range to be between $1.22bn and $1.25bn.