Welcome to Post Holdings third quarter 2022 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 12:00 P.M. Eastern Time. The dial-in number is eight hundred-eight three nine-five six seven nine. No passcode is required. At this time, all participants have been placed in a listen-only mode. It is now my pleasure to turn the floor over to Matt Mainer, Investor Relations of Post Holdings for introductions. Sir, you may begin.
Thanks. Good morning, and thank you for joining us today for Post third quarter fiscal 2022 earnings call. With me today are Rob Vitale, our President and CEO, and Jeff Zadoks, our CFO. Rob and Jeff will begin with prepared remarks and afterwards we'll have a brief question and answer session. 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'd 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. 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.
Thank you, Matt, and thank you all for joining us. Post had a successful quarter. We are building momentum for the final quarter of the year and into next year. This is despite some lingering problems in our supply chains as well as historical levels of inflation. I'm gonna begin with some comments about margins. First, we have largely managed to offset the impact of inflation with pricing. Input costs remain volatile, and we anticipate additional inflation and additional pricing. We are confident in our ability to deliver the needed pricing. Percentage margins declined year-over-year, primarily resulting from the mechanics of our grain-based pricing model and food service, as well as a mix shift in our overall business portfolio. Within food service, EBITDA per pound grew nicely and is now on par with pre-pandemic levels.
EBITDA per pound is our primary KPI rather than percentage margin, as the latter fluctuates with the direction of pass-through pricing. The mix shift results from acquisitions that contribute on average lower margins, a shift to value within cereal, and the increase in food service as a percentage of total Post revenue. Each of these are margin dilutive. They are each attractively profit accretive. Last, and in this case least, we do continue to see elevated costs in our supply chains. With respect to our supply chains, the bad news is that they remain under stress. The good news is they continue to improve, albeit not in a straight line. We started the year expecting this basket of problems that fall under the umbrella of supply chain challenges to rapidly improve as the end of pandemic-driven stimulus increased workforce participation. The problem is both more nuanced and more blunt.
There appear to be more structural changes in the workforce that require creative solutions and productivity initiatives. Meanwhile, there are more glaring disruptions in geopolitical relationships that have long-lasting impacts on where we source. As a result, we expect supply chain improvement to be more steady and gradual, ultimately leading to better volumes as reliability improves and expanding margin as controllable cost management and productivity improves. North American cereal business continues to benefit from consumption strength in key brands like Fruity PEBBLES and Honey Bunches of Oats, as well as strength in private label and value. Our branded share reached 20% and total private label reached 6.7%. Recall we are by far the largest provider of private label ready-to-eat cereal. A recent innovation, most specifically Premier Protein cereal, has also been quite well received. Foodservice effectively navigated the impact of avian influenza.
We had predicted that by Q4 we would reach our pre-pandemic profit level. We will likely exceed that level and look to enter 2023 with momentum. Our risk to maintaining that momentum throughout the year is largely a function of continuing to improve our supply chain. We are still not fulfilling customer orders at an acceptable level. On the other hand, our refrigerated retail platform was hurt by AI, as egg cost increases could not be passed through quickly enough. However, the business made great strides year-over-year. Recall that last year, our supply chain limitations left us unable to build inventory ahead of the key holiday season. We've expanded our capacity with third-party manufacturers, and we are fully prepared for the upcoming season.
Leveraging third-party manufacturers comes with some margin pressure, and we expect that to reverse as we use internal capacity to support the growth of the franchise. This quarter, our side dish products grew volume over 10%. We expect attractive long-term growth as supply chain improvement enables us to reengage more aggressively in marketing the brand. Weetabix keeps chugging along despite a challenging consumer marketplace. The U.K. inflation rate has run ahead of the U.S. with particularly meaningful increases in core products like food and energy. Weetabix has been able to maintain sales and margin. It does appear that we will enter 2023 facing currency headwinds as it relates to Weetabix. As you all know, the capital markets have been choppy. We believe this plays to our long suit, an example being our recently completed bond tender that Jeff will discuss in more detail.
We continue to aggressively pursue M&A and in the last two years have completed six tuck-in acquisitions. We expect the volatile markets to lead to some larger opportunities. Obviously, we cannot predict if any will convert to acquisitions. We will remain disciplined on price regardless of market dynamics. Meanwhile, we continue to explore combinations for the SPAC. The weak IPO market has made execution more challenging. Here, too, we will remain highly disciplined in our efforts. We continue to believe in the elegance of the structure, but if the market timing is bad, we will not force an outcome. While we continue to focus on M&A, our capital allocation landscape is broader. In addition to the bond tender, Jeff will provide details on share buybacks. Lastly, recall that Post owns 19.4 million shares of BellRing Brands, which we expect to monetize within the next six months.
Before turning the call over to Jeff, I want to reiterate how encouraged I am with the sequential and the year-over-year progression of our business during 2022. We see good cause for optimism entering 2023, as well as longer term opportunity in both volume and margin as we continue to proceed to make progress on our supply chains. With that, I will turn the call over to Jeff.
Thanks, Rob, and good morning, everyone. Third quarter consolidated net sales were $1.5 billion and Adjusted EBITDA was $251 million. Net sales increased 22% and benefited from approximately $63 million of incremental sales from recent acquisitions, pricing actions in each segment and volume demand recovery in the food service segment. Internal and external labor shortages and supply chain disruptions continued this quarter, causing our per unit product cost to remain elevated. Customer order fulfillment rates improved, but were still well below optimal levels. Turning to our segments and starting with Post Consumer Brands, net sales and volumes increased 23% and 14%, respectively. Excluding the benefit from the private label cereal acquisition, net sales and volumes grew 16% and 7%, respectively.
Branded and legacy private label cereal average net pricing increased 8.8%, driven by pricing actions partially offset by unfavorable product mix. Pebbles, Honey Bunches of Oats, MOM Bags, Peter Pan, and legacy private label cereal drove the volume increase. Adjusted EBITDA decreased 1.3% versus prior year, primarily driven by costs related to ongoing supply chain challenges and increased employee incentive costs. Weetabix net sales increased 1% despite a significantly stronger U.S. dollar against the British pound, which caused a foreign currency translation headwind of nearly 1,100 basis points. Net sales benefited from the significant list price increases and sales from recently acquired Euclid Brands. These benefits were offset by unfavorable mix, reflecting growth in private label products.
Excluding the benefit from the Euclid acquisition, volumes declined 6% as growth from private label distribution gains and new products was not enough to offset declines in other products. Recall that the prior year period benefited from COVID-driven at-home consumption. Supply chain disruptions, most notably in packaging, transportation availability, and equipment reliability, continued to suppress volumes and pressure segment profit. Segment adjusted EBITDA was 2% lower than prior year, primarily because of the aforementioned foreign currency translation headwind. Food service business saw net sales and volume growth of 33% and 6%, respectively, lifted by distribution gains and higher away from home demand. Revenue growth continued to outpace volume growth as revenue reflects the impacts of pricing actions and the effect of our commodity cost pass-through pricing model. Although we saw year-over-year growth this quarter, total segment volumes remained below pre-pandemic levels.
Adjusted EBITDA grew 45%, benefiting from the volume recovery and improved average net pricing, which combined mitigated the impact of higher cost to produce. Refrigerated retail net sales increased 12%, while volumes decreased 3%. Excluding the Egg Beaters and Almark acquisitions and the divested Willamette Egg Farms business, net sales and volumes increased 10% and 2%, respectively. Pricing actions drove increases in average net pricing across all products. Side dish and sausage volumes grew 10% and 4%, respectively, while volumes in other product categories declined. Retail egg product volumes in particular declined from supply reduction from the impact of avian influenza. Adjusted EBITDA decreased to $30 million and was pressured significantly by dairy costs, egg costs due to avian influenza, higher manufacturing costs and increased rates.
Moving to capital markets transactions, in the third quarter, we purchased approximately 1.9 million of our shares at an average price of $76.43 per share. Year to date, we have repurchased approximately 3.8 million of our shares. Through the end of the third quarter, we completed a modified Dutch auction to purchase approximately $140 million in principal amount of our 4.625% senior notes due April 2030 and approximately $382 million in principal amount of our 4.5% senior notes due September 2031. We paid $450 million for these notes, reflecting a $72 million discount to par.
Net leverage at the end of the third quarter, as measured by our credit facility, was approximately 6.2x. On this basis, we expect to reduce leverage by approximately half the term once we fully execute the intended debt for equity exchange of our retained ownership of 19.4 million shares of BellRing. With that, I'd like to turn the call back to the operator for questions.
At this time, if you would like to ask a question, please press the star and one keys on your touch-tone phone. You may remove yourself from the queue at any time by pressing the pound key. Once again, that is star one to ask a question. Our first question will come from Andrew Lazar with Barclays.
Hi, Rob and Jeff.
Morning, Andrew. Hey, Andrew, we're only taking multiple choice this morning.
Yeah, exactly. I'll keep that in mind. First off, just with PCB, obviously, organic growth in the quarter, very strong and ahead of the category growth rate. Just trying to get a sense of the sustainability of this and the key drivers. I guess, what are you seeing on trade down and elasticities and things of that nature?
Well, obviously pricing is a big component, but we're also seeing good volume growth across our value portfolio with additional distribution in our MOM franchise as well as gains in private label. You know, we've been talking about this eventual term for some time, and it feels like it's here, stable and potentially building some momentum. It feels like that's an opportunity from a consumer trade-down perspective and a customer perspective. It feels pretty encouraging right now. Now, the inhibitor, of course, is supply chain execution because, you know, we could do more if we had more effective throughput.
Yep. You know, I know it's a bit early to discuss sort of, you know, detailed guidance for next fiscal year. I think previously, though, you know, it seemed like we could basically take the second half run rate of this year, annualize that, and then maybe add a little bit to get to sort of a preliminary look at what 2023 could sort of look like. I guess any reason to think dramatically differently at this point, one way or the other, just, you know, discrete things that we sort of know about that we should be aware of on that front?
There is no reason to believe different than you articulated, but the hesitation that I would have would be we have not gone through our planning and, you know, we wanna make sure we're where we need to be on inventory and productive capacity as we, you know, which we obviously have just done and anticipate doing in the second half of the year. You know, I think the swing factor is where do we get our supply chains as we enter 2023 and then move into and end 2023. I would say your basic premise is certainly intact.
Great. Thanks so much.
Thank you.
Thank you. Our next question will come from Chris Growe with Stifel.
Hi, good morning.
Morning.
Good morning. I'd like to start first, if I could, with the food service division and the profit came through at a very nice rate in the quarter. I guess I'm just curious as to what degree or if you can denote how much of this is like avian flu benefit. Then you made a comment about maybe having a little better run rate out of 2022 for food service. Just to get a sense of, like, what you're thinking there in terms of the benefit to profitability, I guess, from the pricing initiatives in this recovery in volume.
Yeah. The avian influenza benefit was roughly $10 million in the quarter coming out of our ingredients segment. If you go back to where we had expected to see the second half shape, our EBITDA expectation was about $48 million-$52 million third to fourth quarter, and the effect of that is gonna make it more like 50/50. You know, we'll keep that benefit and probably grow from there. There's very limited impact in the fourth quarter. We see stabilizing pricing, very effective work within our organization to get inflation passed through as well as decent demand, you know, despite some potential consumer weakness.
Okay. That's encouraging. One area that was kinda different to what I had expected, especially given some of the dialogue last quarter, was that refrigerated retail division. It sounds like you had, you know, a relatively optimistic or bullish outlook on the business. Certainly side dish volumes are very strong, but the EBITDA has been challenged. I guess, you know, is avian flu, it was one of the, you know, kind of the higher egg prices were one of the issues there. Is that, you know, kind of being mitigated now? I guess any other factors around the supply chain that you're aware of in terms of understanding the margin for that business and the EBITDA recovery we'd hope for there?
Yeah. I would say a handful of things. One is I think the estimates were a bit on the high side and not reflective of the third, fourth quarter delta. From our perspective, from an internal estimate perspective, there was a bit of a miss, but it was almost entirely attributable to AI costs being incurred at refrigerated retail from our food service business, so an internal transfer. In terms of the overall margin structure, I commented in my prepared remarks that as we seek to fix our supply chain, we've leveraged more third parties, and that has a temporary cost or a temporary percentage cost because we will now circle back and use internal capacity to support growth. We don't want to abandon the contract manufacturers.
We think they're a vital part of our ongoing supply chain and great partners. We are bringing down our internal absorption temporarily, and we will now rebuild it. The other aspect, of course, is that we focus a lot on side dishes because that's the real gem of the franchise, but that segment also contains our sausage business, which has more commodity volatility tied to sow pricing. We've done a nice job of bringing some more sophisticated pricing mechanisms to that market, but it is still a market that has some margin volatility. Albeit it's a small piece of the total business, but it can magnify some of the market volatility within that segment.
Okay. Thank you for that then. I appreciate it.
Thanks, Chris.
As a reminder, that is star one to ask a question. Our next question will come from David Palmer with Evercore ISI.
Thanks. I guess the question going, you know, as we look into the first part of fiscal 2023, I'm wondering how you're feeling about pricing net of commodities across the business. Then if you can break it out, thinking about supply chain friction costs that you might have incurred last year that maybe would be getting a little bit better by then.
Well, I would expect by the time we get to the beginning of 2023, we would have priced known inflation. So we would now be dealing prospectively with what changes from here and, you know, who knows what that will be. But, you know, I think what we've demonstrated is an ability to price what comes at us with ingredient input inflation. With respect to supply chain progress, I'm largely gonna echo what I said in my prepared remarks, is that, you know, rather than it being a binary event that we are solved, it's gonna be a more gradual process of grinding it out quarter to quarter. We think there's a fairly substantial margin opportunity as we do improve overall execution, both upstream and downstream.
We're not in a position yet to quantify it, having not completed our planning process for 2023.
That's helpful. With regard to the Post Consumer Brands business, you mentioned that there was some compensation impact as well as supply chain. Can you just sort of quantify? I would have expected a little bit better margins given the volumes that you're having there. Maybe you can give us a sense as to why what was driving the magnitude of the margin headwinds given the strong volume, and I'll pass it on.
Well, couple things. Mix is a big component of the PCB volume because as we shift from branded to more private label and value, while again, it's profit accretive, it is margin dilutive. We had some, you know, incentive lack of comparability. I think in the third quarter of last year, we didn't achieve some of our incentive targets, and in the third quarter of this year, they were achieved, so it's just a comparability issue.
Thank you.
Thanks, David.
Our next question will come from Jason English with Goldman Sachs.
Hey. Good morning, folks. Thanks for talking.
Hey, Jason.
We've been talking supply chain challenges, I think every quarter for a very long time here. It actually predates COVID, if we can zoom on your refrigerated business. You said today, like some of the challenges appear to be labor in nature, where you see like structural changes to the workforce, suggesting that you need to evolve your supply chain. Can you give us a bit more color around this? Can you give us a bit more size of the prize in terms of like what you're leaving on the table today because your inability to have everything humming so we can contextualize what the fixes could bring to your P&L? Lastly, can you touch on what it's all gonna cost?
Should we expect a surge in CapEx as you look to go in and maybe modernize or move equipment around or change where production is, whatever the solution set requires?
I'm gonna do that a little bit in reverse order. I think we are not going to require a surge in CapEx, but we may have a materially different mix of our CapEx from trying to be a bit more experimental to being very focused on asset reliability, maintenance, more, shift some of that mix from what has historically been a combination of growth and maintenance to a couple of years where we're highly focused on maintenance and asset reliability. With respect to the comments about workforce, what I would say is, you know, we've all heard this term, the Great Resignation. We've had our share of participation. The net result is that we have a generally less experienced workforce.
As you have a less experienced workforce, you have the indirect costs that inexperience can create. It doesn't require you know, major overhauls and costs. What it requires is, you know, more diligent training, development activities. You know, longer term, I think we then have the question of how do you think about productivity initiatives which, you know, could have answered your capital question. Is that answering your question?
It's not in a satisfactory way, but yes, in some. I mean, I'm hungry for details.
That's the best I can do.
I appreciate that. Yeah, I get it. Like, I want a lot of meat on the bone, and I appreciate that it's a really loaded question. It's definitely not appropriate for the call. I appreciate the effort and I look forward to having more conversations on it going forward.
Sure.
Ladies and gentlemen, this does conclude the question and answer portion of today's call. I would now like to formally close the call, and we thank you for your participation. You may disconnect at any time.
Thank you.