ST. LOUIS — Results in the North American cereal business of Post Holdings, Inc. were soft in the first quarter of fiscal 2018, reflecting greater competitive intensity that put pressure on the company’s Honey Bunches of Oats and Malt-O-Meal bag cereals.
Operating income for the Post Consumer Brands segment totaled $72.9 million in the first quarter ended Dec. 31, 2017, down 12% from $82.9 million in the same period a year ago. Net sales increased 1.9% to $456 million.
“We expect the balance of the year to be more favorable from a promotional calendar perspective,” Robert V. Vitale, president and chief executive officer, said during a Feb. 2 conference call with analysts. “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.”
The competitive intensity in the ready-to-eat cereal market includes the entry of General Mills, Inc. into bagged cereal. Asked to quantify the impact of General Mills’ entrance into bagged cereal, Mr. Vitale said: “A competitor as effective as General Mills entering the bag category matters to us and has an impact. I think long term, the impact is kind of mixed. It certainly validates the bag. I think 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. But when you see some of these box brands enter the bag category, we think there will be some positive carryover into the aggregate bag section. 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.”
Overall, net income at Post Holdings totaled $291.5 million in the first quarter, equal to $4.42 per share on the common stock, up sharply from $98.4 million, or $1.42 per share, in the same period a year ago. Net sales increased 15% to $1,433.1 million from $1,249.8 million.
Elsewhere in Post’s business, the company’s Weetabix segment posted a profit of $16.8 million in the first quarter on sales of $99.7 million. Although Weetabix consumption has been in line with the market, Mr. Vitale said the first quarter was a weak one for the U.K. Weetabix business.
“The price realization was unfavorable as we overpromoted,” he said. “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 U.S., we need less frequency and more depth in order to avoid trading dollars between base and incremental.”
Volumes and margins for Michael Foods have improved, contributing to sales growth and a return to profitability in the segment. In the first quarter ended Dec. 31, operating income at Michael Foods totaled $74.9 million, which compared with a loss of $17 million in the same period a year ago. Net sales in the quarter increased 7% to $577.1 million from $539.8 million.
“We appear to be back on the steady growth trajectory that preceded avian influenza,” Mr. Vitale said. “We’re excited about bringing the Bob Evans food service business onto the Michael platform. We now have leadership positions in value-added eggs and refrigerated potatoes. The conversion from fresh to refrigerated potatoes at food service is the same value proposition that Michael has so successfully sold in eggs, and we expect that conversion rate to accelerate.”
In the company’s Active Nutrition business, operating income fell to $19.8 million from $24.9 million, while sales increased to $186 million from $153.9 million.
Operating income in the company’s Private Brands business, which comprises nut butter, fruit and nut, pasta and granola, increased 47% to $8.4 million from $5.7 million, while sales increased 5% to $114.3 million from $108.7 million.
During the conference call, Mr. Vitale said Post is exploring a range of alternative structures for the Private Brands business, including an initial public offering, a partnership with a private equity firm, a sale or a strategic combination.
“There are significant consolidation opportunities within Private Brands, and we believe the best structure for pursuing these opportunities is outside our full ownership,” he explained.
Asked to elaborate on the company’s opportunities for its Private Brands business, Mr. Vitale indicated there is “a real opportunity” to be a consolidator in the private brands.
“We think category selection is critical, but the opportunity is meaningful,” he said. “I think the other reality we face is that in order to pursue that opportunity, we need to be set up to do frequent, smaller transactions, whereas Post is now more oriented toward fewer, larger transactions. So we think there’s a disconnect between our engagement and the capital allocation and the opportunities that exist. So we want to try to structure a company that allows direct capital access, a highly engaged team. And we have a great leader in Jim Dwyer (president and c.e.o. of Private Brands), who’s excited about executing this opportunity.”