Post Holdings - Q3 2023
August 4, 2023
Transcript
Operator (participant)
Good day, welcome to the Post Holdings Quarter Three 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star 11 on your telephone, and you will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I will now like to hand the conference over to your speaker today, Daniel O'Rourke, Investor Relations. Please go ahead.
Daniel O'Rourke (Director of Investor Relations)
Good morning, thank you for joining us today for Post's Q3 fiscal 2023 earnings call. I'm joined this morning by Rob Vitale, our President and CEO, and Matt Mainer, our CFO and Treasurer. Rob and Matt will begin with prepared remarks, and afterwards, we'll answer your questions. The press release that supports these remarks is posted on both the Investors and the SEC Filing sections of our website and is also available on the SEC's website. As a reminder, this call is being recorded, and an audio replay will be available on our website at postholdings.com. 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 the 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. Finally, this call will discuss certain non-GAAP measures. For a reconciliation of these non-GAAP measures to the nearest GAAP measure, please see our press release issued yesterday and posted on our website. With that, I will turn the call over to Rob.
Rob Vitale (President and CEO)
Thank you, Daniel, and thank you all for joining us this morning. We had a really terrific quarter, and we expect a strong finish to fiscal 2023. This morning, I'm going to be a bit more prescriptive than usual as it relates to how we think about our business trajectory 1 year out. We realize that between adding the pet business and our outsized food service performance, we are making for a challenging model. Let's start with our pet acquisition. You can infer from PCB's reported margins that pet food margin realization is exceeding expectations. In fact, contribution has well exceeded our underwriting case. There are 3 reasons. First, changes in factory leadership and behaviors within our factories have enabled us to improve service levels and rebuild customer inventories. Second, our G&A assumptions are proving to be conservative.
Last, we have not yet begun to invest in brand rehabilitation. While we are not going to give specific pet guidance, it is fair to say our expectations for its contribution have increased in the short term and meaningfully more so once we move past full integration and synergy realization. Recall our three-tiered approach to evaluating this acquisition. We said if we can increase margins, it will prove to be a good investment. Our margin opportunity is greater than expected and already starting to hit the P&L. The second tier was brand rehabilitation. In 2024, we will start to reinvest some of the margin upside and seek to revitalize these brands. That was investment success, tier two. Finally, we are building this over the long term as a platform for inorganic growth. Related to inorganic growth, I am very proud of this team's integration efforts.
Going back all the way to MOM Brands, TreeHouse, Private Label, Peter Pan, and now Pet, they have developed a real proficiency at delivering sustainable synergies. The other contributor to outsized results this quarter was food service. The business continues its terrific performance. Ignoring the outsized performance, baseline is performing extremely well. Volumes grew 3% and mix continues to shift towards higher value-added products. In tandem, the volume growth and favorable mix produce a sustainably higher level of EBITDA than pre-COVID. We estimate this to be approximately $90 million per quarter prior to the impact of ready-to-drink protein shake manufacturing, which will come online in the Q1 of fiscal 2024. On top of a strong baseline, we delivered outsized performance. Matt will provide some detail on its drivers and the trajectory to normalization.
Last night, we raised our adjusted EBITDA guidance to $1.18 billion-$1.2 billion. Back to my comment about helping you model by being more prescriptive. While our FY24 planning is in the preliminary stages, we expect to show modest EBITDA growth next year with our current guidance as the baseline. We expect to be well-positioned for FY25 as we realize synergies from the pet acquisition, continue to improve supply chains, and make incremental investments in marketing. The step-up in marketing is not limited to pet. We are stepping up marketing spend across categories, including US and UK cereal and the Bob Evans brand. I want to be as clear as possible that in anticipating growth next year, we are including seven more months of pet results and normalizing food service. Those are the significant offsets.
Hopefully, the outlook for 2023 and these preliminary comments around 2024 give you the ability to appropriately factor recent M&A and current year performance into your models. Turning to ready-to-eat cereal, there have been questions lately about volume resiliency in the face of 2 years of stacked pricing. In fact, category pounds were down 3.9%. We attribute this to lapping Omicron, a shift to away-from-home breakfast consumption, and most significantly, the March reduction in SNAP benefits. Omicron and SNAP are non-repeating, and as a result, we tend to think of the category as mean reverting to a pre-COVID 0%-2% decline. We are also seeing a notable shift to value price products. Our shipment volumes this quarter declined 5.7%, but half of the volume decline was a result of Peter Pan shipments lapping the temporary market withdrawal of the Jif brand.
On a consumption basis, we grew sequential dollar share in cereal to 19.9%, and Peter Pan has grown 0.5 share point on a 2-year basis. Refrigerated retail had a mixed quarter. Supply chains have markedly improved over last year and have enabled product continuity and margin expansion. On the negative side, we continue to see pressure from Private Label impacting volumes, and we are responding with our first television advertising in 2 years. We fully expect to see this brand resume its growth as we drive incremental households and expand distribution, both supported by reengaged marketing. Weetabix is in a tough macro environment, with U.K. consumers facing food, energy, and housing inflation well ahead of the U.S. The business is being well managed, and we are investing in the brand for the long term.
In fact, against the backdrop of strong company-wide quarter, we are increasing marketing in Weetabix to enter 2024 in stronger shape. In terms of capital allocation, we continue to weigh M&A, deleveraging, and share buybacks against each other. We have been aggressive purchasers lately. Since the announcement of our pet acquisition, we have open market repurchased approximately 60% of the amount of shares that we issued to J.M. Smucker, all while keeping our leverage ratio on a downward trajectory. In closing, we remain quite confident in our recent portfolio moves, and we continue to see momentum building in our business. With that, I will turn the call over to Matt.
Matt Mainer (CFO and Treasurer)
Thanks, Rob, good morning, everyone. Q3 consolidated net sales were $1.9 billion, and adjusted EBITDA was $338 million. Net sales increased 22%, driven by the newly acquired pet food business. Excluding this acquisition, net sales increased 4%, driven by pricing actions in each segment. Foodservice saw increased volumes as consumers continued to show a preference for eating out during breakfast hours. Volumes in our retail businesses decreased as pricing elasticities ticked up and shifted volume to our Private Label offerings, although not enough to offset declines in our branded products. Our supply chain performance and customer order fill rates continue to improve. However, we still have pockets of opportunity in both. Inflation moderated across the business in the quarter, especially in freight costs.
Turning to our segments and starting with Post Consumer Brands, excluding the benefit of the pet food acquisition, net sales increased 4% and volumes decreased 6%. Average net pricing, excluding pet food, increased 10%, driven by pricing actions. We saw strong volume growth in Private Label cereal, which was offset by declines in peanut butter and branded cereal. Segment adjusted EBITDA increased 28% versus prior year as we benefited from the contribution of the newly acquired pet food business. Moving over to Weetabix, net sales increased 7% year-over-year. The British pound was nearly comparable quarter-over-quarter, causing just a nominal foreign currency translation headwind of approximately 50 basis points. The increase in net sales was attributable to significant list price increases and was partially offset by unfavorable mix towards Private Label biscuit.
Volumes decreased 5% as growth in UFit extruded products and Private Label biscuit was not enough to offset declines in branded products, which were driven by inflation-related elasticities. Segment adjusted EBITDA decreased 26% versus prior years. Lower volumes and higher input and warehousing costs outpaced our pricing actions. We continue to expect the challenging macro environment in the UK to keep our margins compressed into 2024. Foodservice net sales and volume grew 8% and 3%, respectively. Revenue growth continued to outpace volume growth as revenue reflects the effect of our timing and our commodity pass-through pricing model and our temporary AI price premium. The benefits of our pricing dynamics were magnified by the combination of our abnormally low inventory level at the end of the Q2 and a temporary collapse in market egg prices in May and June.
This market collapse resulted from the post-Easter demand pullback, coupled with the continued recovery of national layer population following avian influenza. It would likely take another AI event to have a similar price dynamic the opposite direction. As a reminder, such events historically give rise to incremental pricing. Our AI pricing tapered off at the end of Q3 and is winding down, which is a nominal tail in Q4. In addition, market egg prices quickly recovered by early July. As we sit here today, the business on a go-forward basis is running in line with normalized run rate that Rob discussed. Refrigerated retail net sales and volumes decreased 6% and 11%, respectively. The decline in net sales was driven by lower volumes and was partially offset by increased average net pricing in the portfolio.
side dish volumes decreased 10%, reflecting price elasticities and a customer shift to Private Label. Segment adjusted EBITDA increased 25%, primarily benefiting from pricing actions to offset significant cost inflation, favorable style costs, and improved manufacturing performance across our network. Reinstating advertising and promotion spending versus the prior year was an offset to these benefits. Turning to cash flow, in the Q3, we generated $282 million from continuing operations, which is up significantly, sequentially and versus prior year, driven by improved profitability and a decrease in net working capital. We ended the quarter at net leverage of 4.8 times, which is down from the 5.1 pro forma for the April closing of our pet transaction. Moving over to capital allocation.
Capital expenditures were approximately $70 million in Q3, driven by continued progress on the new protein shake co-manufacturing facility,
Rob Vitale (President and CEO)
... which is slightly delayed, though, into Q1 of next year. In addition, we repurchased $1.9 million of our shares at an average price of approximately $87 per share and retired $50 million of our debt at an average discount of 13%. In the month of July, we spent an additional $60 million to repurchase 700,000 shares, reducing our common shares outstanding to approximately 61 million. To summarize, since the closing of the pet transaction, we have been able to buy back 4% of our shares outstanding and still reduce leverage by three-tenths of a turn. With that, I will turn the call back over to the operator. Thanks for joining us today.
Operator (participant)
Thank you. At this time, we will conduct the question and answer session. As a reminder, to ask a question, you will need to press star one, one on your telephone and wait for your name to be announced. To withdraw your question, please press star one, one again. One moment while we compile the Q&A roster. Our first question comes from Andrew Lazar with Barclays. Your line is open.
Andrew Lazar (Managing Director and Senior Equity Research Analyst)
Good morning, Rob and Matt, how are you doing?
Rob Vitale (President and CEO)
Good morning, how are you?
Andrew Lazar (Managing Director and Senior Equity Research Analyst)
Great, thanks. Maybe to start, Rob, I was hoping to get maybe your perspective on just some of the key dynamics at play in the industry right now. You know, on the consumer side, a number of companies have mentioned, consumers are stretching their budgets. You know, on the other hand, it, it appears they've yet to see, other companies anyway, yet to see much in the way of trade down to Private Label or, or switching out of categories. You know, on the customer side, we've heard about some inventory destocking at retail, as supply chains sort of get back to normal. We've heard that branded competitors are getting more promotional, but there's sort of mixed sentiment regarding the level of return of promotions. Some say promotions are up year-over-year, but still below 2019 levels.
Others are saying promotions have largely returned to 19 levels. I'm just trying to get a sense of maybe what you're seeing in this regard and sort of how you're expecting the environment maybe to play out over the next, you know, 6 to 12 months.
Rob Vitale (President and CEO)
You always get me in trouble with these questions, Andrew, I'm gonna fall into the trap anyway.
Andrew Lazar (Managing Director and Senior Equity Research Analyst)
I appreciate it.
Rob Vitale (President and CEO)
You know, here, here's how we think about the state of the consumer right now. You have an increasingly bifurcated consumer, where we have still, you know, call it $500 billion of excess deposits compared to pre-COVID. At the same time, you have pretty significant increases in credit card debt. You know, if you call that a 1/3, 2/3 relationship between the top and the, the bottom, as that rate of excess deposit amortizes, you're gonna see a shift down in consumer spending, you know, all the while having unemployment seemingly stay at a fairly attractive level, attractive from a macro perspective, not necessarily an inflation comment. That leads to a, you know, 12-18 month horizon of probably a weakening consumer.
Inflation, unemployment is not gonna get better, deposits are not gonna get higher, and spending, particularly if you include the resumption of student loan payments, is gonna get more challenging. We think the net consumer position is likely to be weaker, not stronger, and that that bodes well for shifts to value-oriented products, which we're already starting to see, and we expect to continue. That then suggests that certainly you're gonna see some more promotional activity and a bit more pressure on pricing, offset by the normal things we've managed for the last decade plus.
Andrew Lazar (Managing Director and Senior Equity Research Analyst)
Okay. Got it. Thanks for that. I think initially with the pet food acquisition, you were looking for a contribution of annual sales of about $1.5 billion and annual EBITDA of about $60 million. Are you-- I guess, are you at a point where it's early still, obviously, in the integration, but where, where you're at a point where you're ready to either sort of update that, or how do you see those numbers playing out now, given it, it seems like, while early, things are starting to break in, in a pretty favorable way pretty quickly?
Rob Vitale (President and CEO)
We've got the business combined with grocery, we've got pet cereal and peanut butter under the Post Consumer Brands segment. You know what we're gonna be able to share with you, of course, with another quarter, is a plan for 2024, and then you're gonna start to see the changes in the segment. Obviously, the lion's share of the changes in the segment are driven by the pet acquisition. We're not gonna give specific updated guidance on pet because it is part of a larger segment, but it, I think, will be relatively easy to track the progression over the next couple of quarters. Could you restate the numbers that you started with? Because I think the way you said that may have been just the 2023 effect and not the actual annual.
I, I may have misheard you, but what numbers did you throw out?
Andrew Lazar (Managing Director and Senior Equity Research Analyst)
I think it was $1.5 billion in sales.
Rob Vitale (President and CEO)
Yeah.
Andrew Lazar (Managing Director and Senior Equity Research Analyst)
yeah, the EBITDA of $60 million.
Rob Vitale (President and CEO)
No, no.
Andrew Lazar (Managing Director and Senior Equity Research Analyst)
Which was-
Rob Vitale (President and CEO)
No, EBITDA, was $100 million.
Andrew Lazar (Managing Director and Senior Equity Research Analyst)
Yes, I think that was just the piece from.
Rob Vitale (President and CEO)
Okay
Andrew Lazar (Managing Director and Senior Equity Research Analyst)
... for partial, partial year, yes, but $100 million on a full annualized basis. Yeah.
Rob Vitale (President and CEO)
Correct.
Andrew Lazar (Managing Director and Senior Equity Research Analyst)
No, thanks for that. I guess the, the last thing would just be, you know, as, as some companies in the industry are starting to lap pricing, at least so far, it's early, you know, the, the volume picture is maybe coming back a little bit more slowly than I think some would have maybe anticipated. You know, just looking at the mechanics of, you know, how you lap pricing and whatnot. In, I guess, in your consumer business, are you at a point where you can see, you know, a trend developing yet where volumes are either sort of coming back mechanically as you would have expected as you lap the pricing, or, or are things maybe a little bit slower in some of those consumer areas, like what we've seen from some others? Thanks so much.
Rob Vitale (President and CEO)
No, I think our pricing, well, our, our volume dynamic is coming back very much consistent with our expectations. I think the... You know, I called out SNAP in my prepared remarks. I think that you can see where that caused a bit of a blip in volume consumption, so we are not seeing any real surprises based on our own expectations. Again, the only, the only surprise in the quarter has been strength of pet margins as we start this journey with pet.
Michael Lavery (Managing Director and Senior Research Analyst)
Great. Great, good to see you. Thanks so much.
Rob Vitale (President and CEO)
Thank you, Andrew.
Operator (participant)
One moment for our next question. Our next question comes from David Palmer with Evercore ISI. Your line is open.
David Palmer (Senior Managing Director)
Thanks. Good morning.
Rob Vitale (President and CEO)
Hey, David.
David Palmer (Senior Managing Director)
It, it sounds, it sounds like pet is giving you more confidence to guide on FY24 as you are today. Is it, is it really all pet that's giving you more confidence? I'm, I'm specifically digging into if there's something in Foodservice that, that could be sustaining above that base case of that $90 million per quarter plus the $10 million or so you might get from co-packing. Any thoughts there? Thank you.
Rob Vitale (President and CEO)
Pet is certainly a contributing component of our comfort level in giving you some sense of 2024. You know, let me be completely transparent on that. Had we not just had the, the twin events of adding pet and having quite an outsized performance year to date in Foodservice, we wouldn't be talking about 2024 just yet. That's not our normal cadence. What we are trying to do is, try to be respectful of the challenges you all face with the complexity that we sometimes create and give you a little bit more of our thinking as it relates to a period of time, a bit further out than we would normally do so. In terms of the components, we, we do feel good about pet, but we feel very good about most of our business.
We think that there's going to be a strengthening position in our refrigerated business as we engage with advertising. We've invested heavily in Weetabix at the expense of Weetabix's current year performance. We are positioned nicely going into 2024. It would be nice to see some macro strengthening there. What we can control, we are well controlling. Our Foodservice business, even outside the pricing dynamics of AI, is in very attractive shape. We've long talked about the investment we made in pre-cook capacity. We made a heavy investment in pre-cook capacity right ahead of COVID, which for a couple of years looked questionable.
Now it is paying off in spades as we see a higher mix towards value-added products and recall that the mix in value-added products from highest to low is a 4 to 5 times increase in the contribution to fixed overhead. The business is performing well. The, you know, in each business, yet there's room for improvement. We have some manufacturing underperformance in Michael Foods. We have the challenges that we've already articulated in Weetabix and in Bob Evans, and, you know, we can always do cost improvement within our network within PCB. Despite the strength of the year, we feel very confident that we can continue to build upon it and improve our trajectory.
David Palmer (Senior Managing Director)
That's, that's all very helpful. Just a quick one. I, I think probably investors are most nervous about volume assumptions by any food company these days.
Rob Vitale (President and CEO)
Sure.
David Palmer (Senior Managing Director)
You know, I'm just wondering, what sort of volume assumptions, particularly with Consumer Brands and refrigerated retail, are you thinking about for fiscal 2024? Thanks.
Rob Vitale (President and CEO)
We gave you the category assumption that we're looking at of a 0%-2% decline. You know, again, we're not through our planning process for 2024, so that's a pretty high-level category call. We're not ready to give you where we're thinking about potatoes and other categories yet, because we haven't gotten into the details of that assumption, but I would expect that to be more positive, and that's more of a controllable on our side than a category comment, because that's the area where we haven't marketed. I think you're probably most interested in, you know, a large category like ready-to-eat cereal, and we think it's set down 0%-2%.
David Palmer (Senior Managing Director)
Thank you.
Rob Vitale (President and CEO)
Thank you.
Operator (participant)
One moment for our next question. Our next question comes from Michael Lavery with Piper Sandler. Your line is open.
Michael Lavery (Managing Director and Senior Research Analyst)
Thank you, good morning.
Rob Vitale (President and CEO)
Hey, Michael.
Michael Lavery (Managing Director and Senior Research Analyst)
Just wanted to come back to Foodservice. You mentioned the, the mixed benefit, and you touched on some of the things that, that have really driven the lift in the quarter. If that mix shift is more sustained, how much different is that than the $90 million base case run rate? You know, could that continue and continue to add a lift? Is your assumption that it doesn't? Can you just help us maybe think about the, the mix piece and, and what to expect going forward?
Rob Vitale (President and CEO)
Well, I think the best thing I can do is refer you to our investor deck, in which we attempt to normalize that, go back to the $90 million per quarter baseline, add in a potential $20 million for ready-to-drink shakes, adjusted by the fact that it doesn't all come on board day one of the new fiscal year. Then we, we call out a 3%-4% growth rate in that segment, and that's a, that's a 5-year model that we've published, and it's on our website and, you know, readily available. I think that's the best way for you to think about the impact of both volume growth and mix to higher value-added product.
Robert Dickerson (Managing Director and Research Analyst)
so some of that mix improvement is baked in already, I guess, is really what I'm trying to get at. Is that the right way to think about it?
Rob Vitale (President and CEO)
It is. Because the volume growth is well below that, but the volume growth is leveraged by the impact of mix.
Robert Dickerson (Managing Director and Research Analyst)
Gotcha. Thanks for that. On the share repurchases, are you able to give any color on how much or whether or not Smucker was involved in that? And just if their position is changed from where it was when the deal would have closed?
Rob Vitale (President and CEO)
We are not.
Robert Dickerson (Managing Director and Research Analyst)
Okay. Thanks so much.
Rob Vitale (President and CEO)
Thank you.
Operator (participant)
One moment for our next question. Our next question comes from Bill Chappell with Truist Securities. Your line is open.
Bill Chappell (Managing Director)
Thanks. Good morning.
Rob Vitale (President and CEO)
Hey, Bill.
Bill Chappell (Managing Director)
Hey, Rob, just going back to ready-to-eat cereal, I'm just trying to see how you think this movie plays out over the next couple of years. I mean, I understand you're seeing volume growth, 0%-2%, but I guess the worry is that all the players will now struggle to grab share of volume, that pricing gets more, you know, competitive, promotional levels get back to 2019 or even earlier levels. You've held up very well there, but I just trying to figure out, you know, does that torch the whole market? You know, do you feel like this time is different?
You know, I'm just trying to kind of understand from a, a pricing standpoint, more than a volume standpoint, how you see the, the, the market playing out in the next 12-18 months.
Rob Vitale (President and CEO)
Yeah, I mean, it's, it's a good and perhaps central question to how you think about this category going forward. You know, the reality is, we don't know. We, we tend to be disciplined in the way we behave. You know, we look at, we look at different market scenarios and try to make sure that we're behaving and responding in the manner that is most productive for us. We don't spend a lot of time trying to anticipate what those market scenarios may be. You've got, you know, a change in the competitive landscape coming with a, you know, not necessarily a new competitor, but a, a competitor organized in a new fashion that's going to introduce some uncertainty, don't know.
you know, the category is 100 and whatever it is, 130 years old. We've been through many different waves. It, you know, over time, seems to work its way out, but could there be periods of greater promotional activity? Certainly. I, I, you hear me say mean reversion a lot lately. I tend to think all of these things have a pattern towards mean reversion, and I would lump this in the same bucket.
Bill Chappell (Managing Director)
Got it. No, and as always, I appreciate your candor. In terms of the plans, though, to, I think you had said, step up marketing, not just on pet, but across, across the board on the brands. I mean, how does that help? Does, but I'm talking again about ready-to-eat cereal. Is that necessary in terms of, you know, there have been a lot of brands that have popped, popped into the category, there's going to be more noise out there, and you need to do that, or is it just a, a kind of across the board, we need to, to support our brands with a, a higher level of support?
Rob Vitale (President and CEO)
No, it was, it was frankly more a, you know, a luxury in that from a company-wide perspective, we are, you know, well in excess of some of our internal estimates and felt that, you know, we, we, we tend to lean into opportunities to make longer term investments when we have a situation like this, and sometimes in the opposite, we'll pull the other direction. You know, given the strength of the business and, you know, some of the challenges Weetabix faces and some of the challenges Bob Evans has faced with lack of advertising, we wanted to lean in a bit more aggressively than we otherwise might have. Necessity or, or luxury, I think sometimes is a bit blurry, but it felt like more of a luxury given the performance of the portfolio.
Bill Chappell (Managing Director)
Great. Thanks so much for the color.
Rob Vitale (President and CEO)
Thank you.
Operator (participant)
One moment for our next question. Our next question comes from Robert Dickerson with Jefferies. Your line is open.
Robert Dickerson (Managing Director and Research Analyst)
Great. Thanks so much.
Rob Vitale (President and CEO)
Sure.
Robert Dickerson (Managing Director and Research Analyst)
Hey, how's it going? Rob, I just want to touch on Weetabix profitability. Clearly, you know, a little compressed in the quarter. I think you said the remarks, probably stay a bit constrained as you kind of head into next year. Maybe you just comment on kind of what are the core drivers of that compression, and then, you know, like, how do you kind of view the, the, the return to kind of, you know, prior profitability margins, just, I guess, within the region? Thanks.
Rob Vitale (President and CEO)
Well, the single biggest contribution towards the dilution in the margin is a shift towards Private Label. We are the dominant provider of Private Label, but we, it's not margin parity. We're keeping volume within the biscuit category, but losing some profit. I think in order to restore that profit, we need to do what we are doing, which is lean heavily into marketing. You know, instead of pulling anything back in a, in a time of a bit of a challenge, we are going the opposite way, which makes the appearance of the margin challenge worse. What we are trying to do is set the brand up well. You know, what we anticipate will be an eventual normalization of the macro environment in the UK.
When the consumer is ready to reengage, we are there, having supported it, it being the brand all along. You know, I think we weather the storm, we keep our investment level where it needs to be, and we prepare for normalization.
Robert Dickerson (Managing Director and Research Analyst)
Okay, perfect. Thank you. I guess just secondly, I'm trying to touch on the points we haven't discussed yet. Refrigerator retail, you know, you break out the categories in the release. A few of those categories seem to be a bit more volume pressured, let's say, relative to other parts of your business. At least from my perspective, we've seen some, you know, kind of volume pressure, a bit more outsized in other areas of frozen, let's say, versus kind of center of the store. Is there, you know, anything you think is driving that pressure, just, you know, outside of just the kind of, you know, standard issue shift to Private Label? Do you think consumers might be, you know, steering a bit more away from kind of higher price point frozen items?
I'm just trying to gauge why the volume there is maybe more pressured than elsewhere.
Rob Vitale (President and CEO)
Well, I think let's focus mostly on our side dish business, which is the core of the franchise. You know, along with everyone else, we took considerable price the last two years. At the same time, this is the segment that had the most challenging supply chain two years ago, and it is the segment that has had the most improvement in supply chain over these last two years. We, we were in a position, you know, the last 18 months or so, well, I mean, the 18 months prior to the last six, I should say, in which we had poorly performing supply chains, price escalation, and lack of advertising support because advertising made no sense given our inability to support incremental product within our supply chain. That's not a great position for growing a brand.
We've now fixed the supply chain. We've now fixed the lack of marketing support, or we are in the process of doing so. You know, pricing is normalizing as some of our competitors have now priced. I, I, I feel optimistic that the problems in that area were, you know, a combination of self-inflicted and macro supply chain problems that are behind us. It will take a little bit of time to prove that out as we enter 2024 and see the impact of the marketing, the impact of the improved supply chain and, and the better parity pricing. Those are the reasons to be optimistic about the segment. I think it's less about a major consumer shift than it is about the trajectory over where we've been the last 2 years.
Robert Dickerson (Managing Director and Research Analyst)
All right, super, makes sense. And then I guess just lastly and quickly, you know, fully realize, you just completed the pet acquisition, but I feel like I always have to ask, you know, just kind of general appetite for, you know, other opportunistic, transactions, kind of, you know, given, kind of given overall market environment.
Rob Vitale (President and CEO)
Well, we're very interested. We are, we are looking at things now. You probably heard Matt Mainer say our leverage ratio is 4.8, so we're in a very attractive position to, you know, look at external opportunities, buy back shares, or, you know, if nothing else, just continue to generate cash and delever. I, I think the environment we're in favors us because if you look at. You know, I think I've shared this before, we, you know, we tend to compete with private equity, and private equity is in a less favorable position than a year ago, with SOFR being, you know, 5.5%, and the spreads being 5% on top of that for senior debt. We have a cost capital advantage that I think could play into our favor, and I think demonstrably has done so with Pet.
I think part of the reason we were able to be as successful as we were in Pet was the, you know, the paucity of competition for an asset like that. You know, we will, we will always be active, at least in looking and hopefully selective in acting.
Robert Dickerson (Managing Director and Research Analyst)
Perfect. Thank you. Pass it on.
Operator (participant)
One moment for our next question. Our next question comes from Jason English with Goldman Sachs. Your line is open.
Jason English (Managing Director)
Hey, good morning, folks. Thanks for talking.
Rob Vitale (President and CEO)
Hey, Jason.
Jason English (Managing Director)
Hey there. Congrats on the quarter, obviously just with some, some overearning in the Foodservice business. I want to come back to that. You guys said that you're now back to more of a normalized earnings level. The last time we went through this volatility, we, we overshot on the upside, followed by a bit of an undershoot on the downside, as the egg prices remained depressed for a while as we replaced the flock with much more productive younger chicks. Why is that not the case here? What is, what is the risk of, you know, undershooting on the back end of this? Why are the conditions different that wouldn't cause that to happen? Thank you.
Rob Vitale (President and CEO)
Yeah, the last time we went through this, the issue was more about the balance between grain-based and supply-based, and we were closer to balance this time. We don't see the same risk persisting for an extended period of time. We, we will always have some risk, but we think the risk is a very manageable amount of risk as we look into 2024. The other meaningful difference between 2015 and 2023, 2024, is the shift in our business to much higher priced and higher value-added segments of our product mix.
Jason English (Managing Director)
... Got it. Okay, and back to refrigerated retail with side dishes, as you point out, the, one of the growth engines of the business is not so growthy today. I think this is the Q2 in a row of Private Label pressure. I imagine there's 2 more quarters to go, at least, to cycle this, but I guess that's my question: Is it just 2 more quarters? Is, like, this a change at one major retailer who's pushed in? Or is there something on the supply chain side where there's a new supplier out there supplying this, and we've got one retailer on board, and there's likely to be another to follow and another to follow?
Could this have duration, this encroachment on Private Label, or is it a one and done, ride our four quarters, cycle it through and back on the other side, back to growth?
Rob Vitale (President and CEO)
In order for it to take legs and expand meaningfully, you would, as in the category, need additional capacity. I mean, there's always the potential for it if someone's gonna add capacity, but that would be a fairly significant gamble, particularly at a time where we are becoming, you know, more effective in our own supply chains and more aggressive in our advertising. I think that to answer the first part of your question, the advertising is effectively starting now-ish. You know, it's been a couple weeks, there certainly will be a lag. I would not be surprised to see some further weakness this quarter and start to improve in the first part of next year. Hopefully, we'll see some changes in the rates, but, you know, it's not, it's not gonna turn on a dime.
Jason English (Managing Director)
Okay. Last question for me, and I'll pass it on. On your, your consumer brand side, I believe in the key, you disclosed that inflation's still a headwind. I think it was a $15 million or so this quarter. I, I could be mistaken. I'm away from my computer right now. The spot costs, everything we look on a cost curve, would suggest that that should turn deflationary as we kind of wrap this year and go into next. Is that consistent with what you're seeing, or is there any reason to think that the inflationary pressure from an ingredient commodity perspectives could be more prolonged?
Rob Vitale (President and CEO)
Jason, you're a little bit hard to hear. I didn't hear what business you were asking about. Could you somewhat repeat the question?
Jason English (Managing Director)
Yeah, yeah, I'll take it from the top. I'll try to speak a little louder. I apologize. I'm outside on the AirPods, which can be annoying. In your consumer brand segment-
Rob Vitale (President and CEO)
Consumer
Jason English (Managing Director)
inflation is, yeah, inflation is still eating away at profitability, but our own cost curves, I think everyone's looking and saying, "Gosh, it's just a matter of time before this turns, deflationary from a cost perspective." Is that realistic, or are there offsets we don't appreciate, and what's, what's the cadence as you look forward? Thank you.
Rob Vitale (President and CEO)
Yeah. Yeah, our entire basket of commodities is certainly not deflationary and is modestly inflationary. I think I would characterize what we're seeing as a disinflation trend rather than a deflation trend, and that's what we are anticipating.
Jason English (Managing Director)
Okay. Thank you. I'll pass it on.
Rob Vitale (President and CEO)
Thank you.
Operator (participant)
One moment for our next question. Our next question comes from Matt Smith with Stifel. Your line is open.
Matt Smith (Director and Senior Equity Analyst)
Hi, good morning.
Rob Vitale (President and CEO)
Matt.
Matt Smith (Director and Senior Equity Analyst)
Wanted to follow up on the commentary about the egg business. The improved product mix and balance sourcing help insulate risk on the back end of this AI cycle as conventional egg prices reset. I wanted to ask if you're seeing any trade-down from your customers back to less value-added products to take advantage of that wider price gap to conventional shell eggs in this environment?
Rob Vitale (President and CEO)
Zero.
Matt Smith (Director and Senior Equity Analyst)
Okay.
Rob Vitale (President and CEO)
Once you-
Matt Smith (Director and Senior Equity Analyst)
That was quick.
Rob Vitale (President and CEO)
Once you make that switch, it's very difficult to go back because of the implications on your labor model.
Matt Smith (Director and Senior Equity Analyst)
Okay, thank you for that. Maybe if I could follow up on the commentary about refrigerated side dishes and the Private Label outperformance. We've seen Post benefit from a, a, a tiered value structure in several of your categories, whether it's, you know, cereal comes to mind here. Do, do you see any advantage to pursuing a similar type of strategy in refrigerated retailers? The strength of the brand of Bob Evans and, and the relatively low penetration of Private Label differentiating factors there.
Rob Vitale (President and CEO)
I think there's a number of differentiating factors. Let me start with the answer of yes. I think there is always an interesting opportunity to be had with having multiple tiers within the price points of the category. The difference between cereal and the refrigerated side dish category is one of maturity. You know, the cereal business is quite mature and tended towards excess capacity, which opened up opportunities around multiple price points. Whereas historically, the side dish category has been earlier in its product life cycle, much more on a growth curve, and has tended towards lack of capacity, which crowded out different price points.
I think, I think the balance you have to strike is where you are on the product life cycle, where you are on the capacity curve, and how you wanna play in the different price points within those two dynamics.
Matt Smith (Director and Senior Equity Analyst)
Okay, thank you for that. I, I appreciate the time this morning. I'll pass it on.
Operator (participant)
Thank you. We've reached the end of our Q&A session. Thank you for joining us. You may now disconnect.
Rob Vitale (President and CEO)
Thank you all.