Welcome to Post Holdings Third Quarter 2021 Earnings Conference Call and Webcast. Hosting the call today from Post are Rob Vitale, President and Chief Executive Officer and Jeff Zadoks, Chief Financial Officer. Today's call is being recorded and will be available for replay beginning at 12 p. M. Eastern Standard Time.
The dial in number is 1-eight hundred 585-eight thousand three hundred and sixty seven and the passcode is 9,633,789. At this time, all participants have been placed in a listen only mode. It is now my pleasure to turn the floor over to Jennifer Meyer, Investor Relations of Post Holdings for introductions. You may begin.
Good morning, and thank you for joining us today for Post's 3rd quarter Fiscal 2021 Earnings Call. With me today are Rob Vitale, our President and CEO and Jeff Sadduks, our CFO. Rob and Jeff will begin with prepared remarks, and afterwards, we'll have a brief question and answer session. The press release that supports these remarks is posted on our website in both the Investor Relations and the SEC Filings sections at postholdings.com. In addition, the release is available on the SEC's website.
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 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 a reconciliation of these non GAAP measures to the nearest GAAP measure, see our press release issued yesterday and posted on our website.
With that, I will turn the call over to Rob.
Thanks, Jennifer. Good morning. Thank you all for joining us today. In total, our results for the quarter were largely in line with expectations, but that belies considerable volatility in the environment and in our results. Bellring outperforms as demand for our core shake product continues to grow rapidly.
Meanwhile, the balance of the Porsche portfolio was a bit soft as we continue to navigate through very challenging macro factors such as shortages in labor, transportation and packaging as well as the timing of cost inflation versus pricing recovery. We expect the current environment to persist through the Q4 and to have as we enter fiscal 2022. My comments on outlook assume that we do not have a major economic disruption arising from the Delta variant. Despite the challenges, we expect full year results to be largely consistent with our guidance, albeit with a different mix. And as you have seen, we lowered the top end of the guidance range from $620,000,000 to 610,000,000 dollars Post consumer brands had a soft volume quarter largely attributable to what we believe is a temporary consumer shift towards premium purchasing.
The Post branded products performed in line or better than the category. Post branded products now have a market share of 12.5%, driven primarily by exceptional performance of our Pebbles brand. However, we saw weakness in our value portfolio, which includes mom branded bags and private label. We believe recent increases in discretionary income have produced a trade up effect. We expect that to normalize and we further expect that cost reduction enabled by our recent acquisition of 2 cereal plants from TreeHouse will provide us further differentiation opportunities in the value segment.
Our biggest challenge this quarter was in our refrigerated retail segment. I expect that to be the case in the Q4 as well. While demand remains strong, most notably on Bob Evans dinner sides and sausage, manufacturing constraints resulting primarily from labor availability have reduced internal capacity. While we've expanded our use of external supply chain partners, they too face similar challenges with labor and come at a higher cost. The combined manufacturing network was not able to service the full customer demand in Q3 and will further pressure Q4 and the holiday season.
Last, we continue to see extraordinary volatility in SAU pricing. We've taken steps to offset inflation led by significant pricing, but of course pricing lags cost. Foodservice continued its trek to recovery with solid sequential gains. Setting aside uncertainty around the Delta variant, we remain extremely encouraged by the progress. We continue to look to 2023 for full recovery to baseline 2019 with continued progress in 2022.
Margins are lagging volume recovery as a result of product mix within channels, overall channel mix, labor pressures and the timing of inflation recovery. Anecdotally, we have 22 pre cooked egg lines, including the 3 we built in Norwalk immediately prior to the pandemic. Currently, we cannot staff more than 17. As a result, we are having to allocate demand to our capacity. As you may imagine, this creates inefficiencies in overall cost absorption.
Weetabix just keeps rolling along another solid quarter. We tried to add something fairly significant to it, but maintained our pricing discipline we were outbid. We will keep trying to expand their purview. We see less labor pressure in the U. K, but an equal amount of transportation challenges and a greater level of challenges in obtaining packaging materials.
We took guidance down at eighth Avenue. While our retained investment there is not material, the option value of growing the business remains important to us. In short, our outlook was predicated on an expansion of our Alabama facility to meet strong peanut butter demand. A combination of labor challenges at capital equipment manufacturers, our own labor shortages and overall poor execution has delayed the expansion. We incurred approximately $7,000,000 in unusual costs as we are working to remedy this particular issue in an accelerated fashion.
In addition, cost pressures on manufacturing are hitting across the network and will be ongoing in the Q4. We are aggressively taking price, but it will not be effective until October. Meanwhile, eighth Avenue did close on the Ronzoni Costa acquisition and is off to a fine start. As you saw, Bellring continues its terrific performance and I will let Darcy provide details on her call. In short, we are navigating a challenging environment reasonably well.
The pandemic and the public policy reactions have stressed our supply chains and produced some really unusual results around consumer behaviors, labor availability, commodity volatility and so forth. We believe many of these challenges are transitory and that the most likely planning scenario for 2022 is a continuation of elevated price levels and a flattening of the rate of inflation. Regardless of the transitory or permanent nature of some of these items, we are aggressively attacking productivity opportunities. Additionally, we are creating more bench strength in management to enable greater resource deployment when we do face bespoke issues within our supply chain or elsewhere. And finally, we expect to see mean reversion across categories with respect to value shoppers.
Turning towards capital allocation. We've been active in M and A. In addition to the TreeHouse assets, we also acquired the Eggbeaters brand from Conagra in the Q3. Meanwhile, to maintain appropriate leverage, we were not active in share repurchases this quarter. This quarter, we closed on the IPO of Post Holdings Partnering Corporation.
We are encouraged by the volume of opportunity we are seeing and are optimistic about executing a transaction that results in value creation for both Post and PHPC shareholders. Last night, we announced our intent to fully distribute our position in Bellring Brands. We consider this a natural evolution in the already remarkable Bellring story. It will enable Post shareholders to choose greater exposure to Bellring if they so desire. Operationally, this is a non event.
Bellring will continue to be managed exactly as it is today with its strong team led by Darcy Davenport. We have a base case plan of distribution, but it could be impacted by changes in market conditions during the pendency of the transaction. Therefore, we will provide these details as we approach the actual distribution timing. With that, I will turn the call over to Jeff. Thanks, Rob, and good morning, everyone.
In the Q3, we continue to lap prior year COVID impacts. Our cereal and refrigerated retail are lapping strong volume lifts, while our Foodservice business is lapping significant declines in demand for its products. Consolidated net sales were $1,600,000,000 and adjusted EBITDA was $302,600,000 for the 3rd quarter. Net sales increased 19% compared to prior year and included $78,500,000 from our recent acquisitions. Net sales also reflects the pass through pricing of commodity cost increases in our foodservice business.
Turning to our segments and starting with Post Consumer Brands. Net sales and volumes both declined 11%. Combined, the Private Label Cereal and Peter Pan acquisitions contributed $38,000,000 in net sales and provided an 8 60 basis point benefit to the volume growth rate. The sales and volume declines in the cereal business primarily resulted from lapping COVID related increased at home consumption in the prior year, while our exit of certain low margin business accounted for approximately 300 basis points of the volume decline. Volumes were also pressured by demand softness in the value sub segment of the category to which our portfolio over indexes.
Pebbles continues to be a bright spot growing 10% year over year despite the challenging comps. Average net pricing improved 1.2 percent driven by favorable product mix, partially offset by a higher trade rate. Recall, we virtually eliminated promotions in the prior year in light of the elevated demand. Adjusted EBITDA decreased 23% compared to prior year, but is roughly flat to 2019 and was pressured by volume declines, unfavorable fixed cost absorption and freight inflation. While we were largely able to offset commodity cost inflation quarter with continuous improvement and other cost reductions, we have implemented base price increases, which will benefit the 4th quarter.
Weetabix net sales increased 10%. This growth was driven entirely by a stronger British pound to U. S. Dollar exchange rate. Volumes decreased 2%, flapping COVID related increased net home consumption and the participation in a government backed food program in the prior year.
Partially offsetting these declines was growth in private label, new product introduction and drink products. Adjusted EBITDA declined 7%, driven by the volume decline, lower realized average net pricing and modest raw material inflation, partially offset by the favorable currency exchange rate. Our foodservice business saw net sales and volume growth of 80% and 56%, respectively, as we lapped significantly lower away from home demand in the prior year. As I mentioned earlier, revenue growth outpaced volume growth as revenues reflect the impact of our commodity cost pass through pricing model. Although we saw year over year growth this quarter, total volumes remained below pre pandemic levels.
Volume growth this quarter was constrained by below normal service levels in our supply chain, driven by labor and freight shortages. We expect this pressure to continue in the 4th quarter and constrain our recovery trajectory. Adjusted EBITDA improved to $60,000,000 driven by the higher volumes. Average net pricing increased, but was only able to partially offset increases in grain and freight costs. We expect the price cost relationship to progressively improve as our pass through pricing catches up with grain cost increases.
Results also benefited from improvements in contribution margin and fixed cost absorption, which like volumes remain below pre pandemic levels. Refrigerator retail net sales and volumes decreased 12% 10%, respectively. The volume declines resulted from reduced side dish and sausage service level, primarily driven by labor shortages, as well as lapping COVID related increase at home consumption in the prior year. Average net pricing improved for side dish, sausage and cheese products as a result of price increases taken late in the Q3. Adjusted EBITDA decreased to $33,000,000 and was negatively impacted by the lower volumes, significantly higher sow, cheese and egg input costs, increased freight and higher manufacturing costs, which resulted from supply chain inefficiencies.
Bellring net sales and adjusted EBITDA increased 68% and 83% respectively. Performance was strong for both Premier Protein and Dymatize and the year over year comparisons also benefited from lapping unfavorable COVID impacts in the prior year. Premier Protein sales increased 65%, benefiting from distribution gains, strong velocities, promotional activity and higher average net selling prices. Diamatized net sales increased 98.5%, driven by distribution gains, strong velocities and favorable mix. Higher freight and raw material costs drove a decline in segment gross margins.
You can hear further detail about Bellring's results on their conference call later this morning. Turning to cash flow. We had a strong quarter generating $233,000,000 from operations, including $72,000,000 from Bellring. We had favorable working capital trends and benefited from the timing of interest payments, which are lower in our 1st and third quarters. Our net leverage at the end of the 3rd quarter, as measured by our credit facility, was approximately 6.1 times.
Keep in mind this excludes the value of our Bellring stake. With that, I'd like to turn the call back over to the operator for questions. Operator?
Our first question is from the line of Andrew Lazar with Barclays.
Good morning, everybody. Good morning.
Rob, I guess I want to start off. I know you talked about this Bellring share distribution is kind of the natural evolution, which makes sense. I wanted to get a better sense from you also on what type of advantages or benefits this action would accrue ultimately to post shareholders as we go forward as you think about it?
Well, I think that to post shareholder let me be just ask for a clarification. You mean post shareholders after the transaction or post shareholders as of today? After the well, yes, I I guess a little bit of
both actually because I realize there's a bunch of things that can happen afterwards as well. But it gets to the sort of why now and what it is ultimately do for a post
shareholder? Yes. There's a I think there's 2 questions why, why now and what does it mean for the relative securities. And the why is kind of a natural evolution of something that we have been fairly transparent about for quite some time well before the IPO. But as you look at a portfolio of businesses with varying multiples sometimes and certainly in this case, the best way to reflect value is to allow for direct investment into that disparate multiple segment.
So in this case Bellring, which we produce with the IPO and that the IPO was always a step towards a second step and this is the natural second step which will allow us fullest distribution of shares, get the liquidity needed into those shares, allow it to be as aggressive as it ought to be with respect to using its own currency independent from post objectives. So there's many reasons to execute it on it Bellring perspective. During dependency and as upon the distribution, I would say from a post shareholder perspective, they get exactly what they have today simply 2 different pockets. It's a reallocation of value, not a change in value in terms of giving post shareholders exactly what they already own. Prospectively, after the transaction, I think it allows for some simplification of the Post business in terms of reporting, perhaps some deleveraging depending on the execution of the transaction.
But I think the primary benefit is clarity and transparency for the Post shareholders.
Got it. And then I guess with yesterday's announcement, it naturally gets me thinking a little bit about potential next steps and what it means for Post going forward. For instance, on a sum of the parts basis, Post current valuation, for some time now has placed a pretty severe discount on, let's say, your foodservice business relative to similar businesses. And so I'm trying to think about next steps in terms of what might need to happen to propose to be able to create further value right through portfolio change. Are there areas where you feel like you need more scale or less scale?
And I don't know exactly where I'm going with this other than I know you typically think several steps ahead and I'm just trying to keep up.
I think you give us too much credit. We're just trying to execute the transaction right in front of us. And what we will promise you is we will keep thinking about these things, but we're going to execute this one and then turn to the next one.
Okay.
Thanks very much.
Your next question is from the line of David Palmer with Evercore ISI.
Thanks. Good morning. Essentially the same line of questioning post this Bellring spin off. I know the stock is going to be much cheaper than even some of the center store grocery peers. But I know investors are going to be thinking about the top line growth and the long term top line growth and pricing power of the company and essentially wondering about whether there's sustainable profitable growth.
Of course, the value bid seems to be limited right now if people believe you're a value trap with regard to margin. So what are your what's your thinking about that? What would you say to reassure people that some of your core RemainCo businesses has that pricing power in growth? Thanks.
Well, I mean, it's a challenging environment. There's no question. But I think that if you look over a long period of time that we have solid brands, we have solid positions in our markets. We most of our businesses have good proxies that you can look to, to look to their pricing power and infer something about ours. And I would tell you that, we continue to believe that we have the ability to maintain and hopefully with some better execution expand our margins, but that proof will be in the pudding.
One business that I wonder about is the cereal business. Recently, we've seen some improvement by one of your Michigan based competitors has gotten some of its revenue footing there, at least in the scanner data. What is the outlook for serial? And do you feel like the pricing power is going to be there, the outlook for pricing is going to be healthy in that segment?
So I think the outlook for cereal is somewhat clouded right now by some unusual behavior. So if you look at the data going back to 2019 comparing it to 2021, I think at the category level you can get perhaps some false conclusions because if you strip out value, which is mostly us, the branded portfolios have done very well, including ours. We have grown substantially within our post portfolio over that time frame and gained share as I called out in my prepared comments particularly pedals. Where the category and again contributed mostly by us is seeing some headwinds is in this unusual behavior in the traditional value consumer. And we have hypotheses about that related to flips and discretionary income, all the things you already know about.
And we expect that to be transitory. And assuming that, that is transitory, we feel very good about the long term defensibility and slow profit growth and even slower volume growth of the category. But the one area we're focused on is what is really happening in that value consumer.
Yes. And I wanted to ask one last one on Foodservice. You obviously have a lot of exposure to the morning daypart that's been one of the more lagging dayparts for restaurants out there. If you had to have us track or think about your segments and exposure for that business and recovery path to par pre pandemic levels? What segments would you point us to in the coming quarters and the recovery path of each of those segments?
Thanks.
Well, I would look if you're looking for direct proxies, I would look at the big coffee shop operators, which of course are Starbucks and Dunkin. And then you could look at some of the restaurant chains like a Darden. And what we are seeing in that segment is very strong recovery. We are seeing some weakness in more of the independent operators who that segment that didn't survive the pandemic. And then we're continuing to see some weakness in travel and lodging, which is entirely consistent with where we expected to be at this point in the recovery curve.
So on balance, we're quite encouraged. We have not seen substantial weakness in the breakfast day part because of our commitment and partnership with each of those chains. We've seen good recovery in lunch and dinner in our potato business. So what is causing us just lingering recovery timing issues is the anticipated lag in travel and leisure. And of course, we have a big education business that we expect to come back in well this month and next month pending Dave.
Your next question is from the line of Michael Lavery with Piper Sandler.
Good morning. Thank you.
Can you just touch
on Howard's new role as COO? And what if any change this signals for maybe a transition from your holding company model to more integration?
Yes. In reverse order, I would say it doesn't affect the business model. We view that as something that is sacrosanct, which is the ability of strong operators to manage their business with sufficient autonomy to be close to the consumer, close to the customer and to make fast real time decisions. So we're not changing that model in IOTA. What we are trying to do is to take the operational talents that Howard has and apply them to some bigger challenges, which are finding ways across the independent business platform and this could potentially also include de SPAC partners to improve, whether that's improved costs through better collaboration on buying, whether it's to have improvement in sales execution through the way we look at specific customer relationships or to share ideas across that platform.
There are very substantial long tail projects that we think will be considerably value added, but need operational direction with a very strong operator like Howard from the center. So a further example is supply chain. As you've seen, not only post but across the segment, we've had real challenges with supply chain all year. And many of those problems have common core issues that in a time of challenge like this can be better served by coordination rather than separation. So what we're trying to do is create that bench strength, so that we can have an additional level of resources to deploy against situations like that.
And then to think longer term about how can we look at our supply chains, preserve the independence, while driving some benefit of collaboration and cooperation. I'm not exactly sure what the difference is between those 2. And then lastly, we like every other company are looking at our overall approach to data analytics and IT, which are long tail projects and saying where are we on that journey from adequate to state of the art and where do we want to be. So projects like supply chain, IT transformation, better coordination among the companies, additional bench strength are all what that transition was aimed to address. But it is not in the slightest way an attempt to change the business model because we firmly believe in the delegated model with very strong operators controlling their individual destinies.
That's really helpful color. Thank you. And can I just add a follow-up on cereal? You've mentioned before the decision to exit some of the low margin private label business. And so on the surface, it might make the TreeHouse private label acquisition a little bit unexpected.
Can you just maybe compare and contrast how those are different and what some of the rationale that the thinking is right to do that?
A good portion of the business we exited was hot cereal as opposed to the ready to eat cereal that we acquired with TreeHouse. So we didn't share the cost opportunities that will result from synergizing the treehouse plants. It was a very one off line of business that we largely exited. Then there were some specific accounts that we just we're not making any money on.
Okay, great.
Thank you very much. And lastly, Michael, there was timing. At the time, we didn't have the opportunity to execute against TreeHouse. Got you.
All right. Thank you.
Your next question is from the line of Chris Growe with Stifel.
Hi, good morning. Just had a question for you if I could first on the follow-up on the Bellring distribution. You had mentioned Rob that you have a base case scenario. Does that base case, I'm sure we won't get the exact details of that today, but does that incorporate using all the levers or all the potential opportunities you have to distribute shares? So split off shares, spin off shares, did you expect to incorporate all those in your distribution of the shares?
Well, I would say we expect to consider all those. What we actually execute against is market dependent.
Okay. Got it. And then as a follow-up, we've been hearing about labor issues from Post in parts of your business even before the pandemic. And I guess I'm just curious, is it come to a head to the point that I know I've talked to you before about it, but is there capital you can deploy maybe at a more aggressive rate that would allow you to be less reliant on labor and fix some of these issues in say foodservice or refrigerated retail that have seemed like they've lingered even for a while?
You're quite right. And the answer is yes. And that's what I was referring to. When I suggested that whether it's transitory or not, we know it's a lingering issue because exactly as you point out it predated the pandemic as well. So I'm losing clarity on what year.
But right before going into the pandemic, we had started a process of scouring our capital expenditure projects to try to lower some of our IRR thresholds given the argument that capital was very cheap and labor increasingly dear. So we have been going through that process for some time of identifying those opportunities. Because of the pandemic that got delayed, we didn't want to be implementing capital projects. At the same time, we were trying to meet the surge demand. And now we are facing an entirely different dynamic of challenges just in getting capital goods out of the countries in which they tend to be manufactured, getting them into the U.
S. And moving them around. So your premise is dead on. We've been challenged in executing for what seems to be a bit of a game of whack a mole in terms of the nature of the problem, but we hope are close to the end of that and can deliver upon that productivity.
Is that a multi year effort? Is there a lot higher CapEx as a result of that? Not getting numbers, but just to get perspective on that.
No. It's a bunch of small projects. Okay. But it's many small projects not single big ones.
Okay. And just one follow if I could or one final question which would be just to understand and I don't know if it's possible to answer on a general basis for the business rather than going through each business. But from like a PNOC standpoint, your pricing net of your costs and we realize there's still obviously the lag in the egg business as an example. But where you can control that, do you expect pricing to be mostly caught up with inflation as you exit fiscal 2021?
Yes. But I think the comment I made in my script was that there's 3 scenarios. We either see inflation, disinflation or plateau at current levels and we're planning plateau. So if that is the scenario that develops, yes, but I don't feel terribly confident. We know the tea leaves any better than anybody else.
Okay. Thank you for your perspective. Thank you.
Your next question is from the line of Rob Dickerson with Jefferies.
Great. Thank you so much.
Rob, just kind of a general question going forward.
Hey, Rob, your phone is picking up. I'm not able to hear you.
Can you hear me now?
Yes. That's better.
Okay. Sorry about that. Yes. Rob, I just wanted to ask kind of your general thoughts or let's say perspective on how you think about the total value of post inclusive of Active Nutrition Bellring on some of the parts, right? I mean, this is obviously something we've talked about, we've all talked about for some time.
As we think through kind of the distribution of the incremental Boehmren shares kind of post distribution. I'm just wondering kind of how you think of some of the parts post distribution and kind of how that value starts to come into post shareholders with the actual distribution, if that makes sense.
That's Yes. It makes total sense. And I hope my choice to avoid the question makes equal sense. We are going to kind of show you our wares and let you figure out what they're worth rather than try to tell you what they're worth. So we obviously have thoughts on the matter and try to act to increase it, but we don't want to be in the practice of telling the market what we think it's worth.
All right. Fair enough. And then just through the distribution, there's obviously an exchange of shares. It seems like in the base case there is a special dividend that would be forthcoming. It sounds like that as you put the written in the release would be used for debt pay down.
On a go forward basis though, if there's incremental cash, again, as we spoke to the South before and given kind of where the stock price is even on the open today, one could argue it's a bit undervalued still, kind of just thoughts on sort of general go forward M and A vis a vis ongoing buybacks? That's it. Thanks.
Yes. I would answer that with the way I've answered it historically, which is to say those two activities compete with each other and compete with deleveraging as capital allocation choices. And our disciplines will be no different than they have been historically. We'll look to determine our comfort level with leverage where we are in the overall refinance market, Assuming we're comfortable with that, which we are, we would then look at the landscape of M and A opportunities and compare them to what we think the opportunity is in our own shares and make that decision damn near every day. So that's not no change in the way we think about capital allocation as a result of the spin.
All right. Great. Thank you.
Thank you.
Your next question is from the
line of Bill Chappell with Truist Securities.
Thanks. Good morning.
Rob, I'm having a tough time and
I mean this carries over from even TreeHouse yesterday or early this week. Is the whole kind of unusual change or shift to away from private label or value brands in a short period of time? And in particular, you think of your mom brands, but you're basically saying behavior change that people who have been buying bags for years years all of a sudden got a stimulus check and decided to go up to boxes and brands. So it doesn't really make a whole lot of sense. So if you could any further color you could give And then any thoughts on have you seen that change as we've moved further away from the checks?
Do you expect it to carry on at least through the rest of the year? Any color would be great.
Unfortunately, we're painting this picture without a whole lot of color because your questions you're raising are ones we raise as well because it is an odd situation and we're dealing in the realm of hypotheses and speculation rather than real data right now. I think if you look at traffic patterns during COVID, there were some traffic patterns away from channels that are bigger users of value products towards typically smaller outlets. And Bill, I'm giving you speculation now.
No. Anything else?
Certainly see a pretty rapid pullback as you see the blips in discretionary income. I thought I almost thought about stealing the chart that the slide that TreeHouse had and the impact on the Value segment, because I thought that was fairly illustrative of what we are seeing. So I think there are some channel issues. I think there are some consumer issues, but they feel transitory. And I always hate to use the word feel, but that's the best I got right now.
And I think that what we need is more data to see how this continues or doesn't continue. And meanwhile, our planning involves scenarios in which it persists longer than expected and scenarios in which it reverses fairly quickly, so we can be ready to meet whatever challenge faces us.
Got it. And I guess stay tuned on that. And I mean, yes, as best as anybody could. Again, I think it's unusual as you said. So we're just trying to figure it out.
Switching to eighth Avenue and I know it's a small investment, but it's also kind of in the way of shareholder improving shareholder returns is a similar opportunity like Bellring. I mean, do you feel like the business took some steps back this quarter? Because I know the numbers have been choppy over the past couple of years, but it felt like it was getting kind of back on plan and things were moving in the right direction over the past 2 quarters. So just help us understand like is this just operational supply chain issues that are quickly fixed? Or is this still a work in progress?
No. I clearly we took a step back. We had an expectation that we were going to complete the expansion of our Troy, Alabama factory, move the remaining equipment that we had gotten from the acquisition of the manufacturing agreement with ConAgra and be in a position to expand to provide a much higher level of output, which would even then still struggle to meet a pretty solid demand for our nut butter business. For a number of issues that expansion went very poorly, Part of it delays simply in getting equipment. Part of it delays driven by labor.
And part of it just some poor planning on our part. And we are now backed up in I'm going to say 3 to 6 months before we get to full capacity. And then there's going to be some catch up while we're rebuilding inventories and making sure we've got sufficient safety stock to comfortably meet customer expectations. So the core businesses in which we operate, I feel very comfortable about. I think our position within those markets or categories is very strong.
But we didn't handle the expansion well both for internal and external reasons and we need to fix that. And I think it will be fixed and I'm going to be more cautious than I have been from a time frame. I will say 6 months, but the business prospects I think are unchanged but delayed.
Okay. Thanks for the color.
Our next question is from
the line of Jason English with Goldman Sachs.
Hey, good morning folks. Good morning. A few quick questions for me. First on the Bellring announcement, I want to make sure I'm doing my math right. And I know there's a lot of moving pieces, so a lot can change.
But you've got a base plan out there that says you're going to retain somewhere around 19,500,000 shares. So I'm looking at the math suggesting that every post shareholder is going to receive around 1.2 shares of Bellring. A, is that math right? And B, you're talking about recapitalizing Bellring to issue a special dividend. Would it be imprudent to for a working scenario right now to assume that there's going to be somewhere around 3 turns of leverage on Valerien post that?
So what we have tried to do is set guardrails rather than intentions. And the guardrails that I would tell you is that the 19 500,000 shares is a maximum position that we can retain, but there is no obligation to retain that 19,500,000. So that's a choice. And the rationale for that is that in order to qualify as a tax free distribution, we have to distribute 80% of our position. So that's statutory.
We would not expect to take the leverage multiple of greater than the IPO level. The ultimate determination of what that is will be market based at the time of the transaction. So again, what we're trying to do is give you limits rather than direction because of the time involved in executing the transaction. There's enough potential changes in the market that we are going to be sensitive to changes in whatever happens in the market and respond accordingly. And as we approach timing, we'll give you far more detail about the actual mechanics of the transaction.
Okay. I appreciate that Rob. I definitely get there's a lot of moving pieces. So coming back to the base business fundamentals, I was hoping you could quantify a couple things for me. First, the lead lag on grain price and the pass through in foodservice, what was the deficit that you suffered this quarter on that?
And then secondly, you specified sales shortages due to low service levels because of labor and freight issues in both refrigerated and food service. Again, can you give us sort of size of the bread box? How big was the shortfall related to those? And how big do you expect it to be in the Q4? Thank you.
Yes. I'm going to break this up a little. In terms of some of the volume shortfalls particularly in Bob Evans, it's a bit hard to quantify because we did things like stopped advertising, stopped trying to expand distribution. So had we had more capacity, I think we could have had significantly better volumes. Our marketing has been working.
Our household penetration has been growing. Our distribution been growing. So I think it's a significant number, but one that would be very challenging to quantify. Because if you then look at our existing customers, what we did was we have an order and do not order SKU arrangement. So we don't we're no longer able to attract the do not orders.
So I'm going to give you descriptors rather than amounts within Bob Evans, but the descriptor is a significant amount of volume mess on Bob Evans versus what it could have been with additional capacity. And I will say significant is probably somewhere in the 5% to 10% range. On Foodservice, the PNOC calculation is with if you give me a fairly broad range of latitude in the quarter, it's probably $3,000,000 to $5,000,000
Got it. So not that substantial.
Well, on an annualized that it gets to be a pretty big number.
Sure. But we can't annualize that, right? I mean that's a catch up that you should close that gap this quarter?
Correct. But the way we're thinking about foodservice recovery is we're looking at quarter by quarter and annualizing.
Understood. Understood. Particularly applicable for revs.
Yes. Not for this particular issue,
I mean, just in general.
Yes. Yes. No, that makes sense. Awesome. All right.
Thank you all. I'll pass it on.
Thanks, Jason.
Our final question is from the line of Ken Zaslow with Bank of Montreal.
Hey, good morning everyone.
Hey, Ken. How are you?
Doing all right. I just circling back on just 1 or 2 questions. Everything's been asked to be honest with you. Going back to Chris' question, can you give some anecdotes of the creative solutions you're going to think about when you're trying to save labor going forward? And just from an anecdote, is it more automation?
Is it retooling some of the facilities? Just how do you think about that and giving a little bit more meat to the bone on that?
Yes. I mean it's not this is not anything all that creative. It's more about choices and internal capital allocation. It's driving automation, doing things like robotic processes, things that have that result in better execution, lower labor direct hours and potentially higher direct labor wages. So what we're trying to do is take out some of the more repetitive motions that become bottlenecks in the processes where we have the highest turnover and find a better solution for those kind of activities.
When you think about that from today to like 3 years from now, is there some sort of quantification of what you're trying to achieve in terms of reducing manual labor hours by X percent or just some sort of framework?
Not that I would want to go into in this kind of format. But certainly we are looking at the totality of the workforce and trying to make set objectives around it for that time frame.
Okay. And then just another follow-up question on inflation. Have you taken pricing across the entire portfolio? Are there any areas that you can't take pricing? And if you've taken the pricing, if you believe that inflation has leveled and just assuming that at this point, have you taken enough where by 2022 your relationship would be more in line and there would be no more compression on margins?
And I'll leave it there and I appreciate it.
I believe we have. The hedge is that some of these commodities are extremely volatile. The best example of that right now being Siles, they've gone from 25 to 75 to 50 to 85. So in your predicate that commodities are flat, the answer is a pretty firm yes. I would just question tell you to hedge that commodities are unlikely to be perfectly flat and some of them have a considerable degree of volatility.
So there is a it's not just the level, it's the shape of the curve. So a very fast movement in a commodity like Siles can put a little bit more pressure on margins for the time being until that long term stabilizes.
I agree with you on the inflation. I was just trying to figure out where you are in that time zone and how you did that. But I appreciate your candor. Thank you very much.
Ladies and gentlemen, that concludes the end of our Q and A session.
Great. Thank you all and we will talk to you next quarter. Bye bye.
Thank you all for participating in today's conference call. We ask that you now disconnect your lines.