Post Holdings Inc (POST) Q2 2021 Earnings Call Transcript


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Post Holdings Inc (NYSE:POST)
Q2 2021 Earnings Call
May 7, 2021, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Welcome to Post Holdings Second Quarter 2021 Earnings Conference Call and Webcast. Hosting the call today from Post are Rob Vitale President and Chief Executive Officer; and Jeff Zadoks the 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 one (800) 585-8367 and the pass code is 3392864. [Operator Instructions] It is now my pleasure to turn the floor over to Jennifer Meyer Investor Relations of Post Holdings for instructions. You may begin.

Jennifer MeyerHead of Investor Relations

Good morning and thank you for joining us today for Post’s Second Quarter Fiscal 2021 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. 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.

Robert V. VitalePresident Chief Executive Officer & Director

Good morning. Thanks Jennifer and thank you all for joining us. We had a quite solid quarter despite some meaningful headwinds in the form of inflation and a fairly significant weather event. This morning I will briefly cover the quarter. I will give you an update on strategic activities and then comment on our second half outlook. This quarter the cereal category in the U.S. remained elevated from 2019 levels. Post branded products performed quite well but we saw some softness in our value products. Our aggregate share remained 19.5%. As you have heard from many reports we too saw cost inflation escalate faster than expected. We expect inflation to remain a lingering issue for the foreseeable future and we expect to maintain profit and margin levels through a combination of revenue management and ongoing cost reduction. In addition to cost pressure the deep freeze in the South caused some supply disruptions in our Georgia distribution center and our Arkansas plant but all in all a really solid quarter. Our innovation around protein and snacking has performed ahead of plan and we expect to accelerate distribution of each product. We have talked about more fundamental innovation. And hopefully these initial results will prove sustainable. Moreover I am quite pleased in the manner Peter Pan has integrated into Post Consumer Brands. Our legacy PCB team and our new colleagues from Peter Pan have done a great job. This bodes quite well for future tuck-in acquisitions. We have invested heavily in process improvement these last two years aimed at driving high ROIC acquisitions for this platform and we are active in reviewing such opportunities. I cannot say enough about the resiliency shown by our Foodservice team. This quarter we continue to track toward recovery in tandem with national mobility trends. We are currently tracking approximately 80% to 2019 on a volume basis. To return to pre-pandemic volume requires the trend to continue in QSRs and full-service restaurants plus we need three channels to heal. Education is the largest and we expect full recovery by January if not September. The other two are office and hospital cafeterias and business travel. We fully expect hospital cafeterias to reopen. The degree to which offices fully reopen and travel fully recovers remains uncertain. But we expect it to continue to grow from our current baseline. In general these channels are more profitable than average. Inflation is a short-term inhibitor on margins for this segment as its pricing model passes cost through on a 90-day lag basis. Therefore in periods of escalating costs we will see some margin pressure and the opposite is also true. Corn and soy meal have been dramatically inflationary in the second quarter and thus far in the third quarter. We expect that to moderate as the market turns to next year’s crop during our fourth fiscal quarter. The decision to not aggressively attack infrastructure costs during COVID has proven to be exactly the right course. We are currently challenged to meet incremental demand because of a severe labor shortage in key manufacturing locations. We expect the shortage to last at least through September as an and is incorporated into our guidance.

I am optimistic we will see continued recovery into fiscal 2022 reaching pre-pandemic profitability run rate sometime during the year. Our core Refrigerated platform the Bob Evans side dish business turned in a good quarter. Volumes for Bob Evans branded side dish remains strong and notably we have seen simply potatoes branded products return to growth. Favorable mix continues to drive gains and profitability. Despite these strong results bottom line performance this quarter was significantly pressured by input cost inflation particularly in South. This too is mostly a timing phenomenon as we use trade management to normalize margins but with the lag effect both in increasing and decreasing cost environments. This will remain a headwind through at least Q3. Weetabix continues to be a steady performer. Although the category softened during the most recent lockdown it remains ahead of the pre-pandemic period and Weetabix continues to gain share. Our new innovation leads into indulgence and is now on shelf with advertising beginning soon to support these launches. Our only disappointment is that we have not yet found the right acquisition for this team as we believe them capable of managing a larger business. You will have seen that BellRing raised its guidance for the year. We are quite pleased with the Q2 results and the outlook ahead despite the continuing ramp in input cost inflation. Finally 8th Avenue announced the acquisition of Ronzoni a quite attractive add on to its pasta business. It expects to pay $95 million for the business and should earn over $15 million in adjusted EBITDA once fully synergized. With respect to capital allocation priorities during the quarter we remained aggressive buyers of Post shares. We also completed the two previously announced acquisitions of Peter Pan and Almark. In general I would share that the M&A pipeline has considerably expanded. The pent-up demand from the low activity in 2020 and the potential for increases in tax rates seem to be pulling sellers off the sidelines. We are looking at opportunities across our business segments. As you know Post filed to raise a SPAC in February we expect it to launch early in April. Around the same time the SEC raised concerns regarding the SPAC market’s historical practice of accounting for warrants. We are indifferent to the accounting treatment so long as the treatment is accurate. In order to ensure accuracy we are taking some time to allow the issue to gain clarity. Once we are comfortable with the treatment we will proceed with the issuance. We continue to believe this is a great corporate finance tool for Post and we look forward to using it to grow our business. Yesterday evening we issued our second half adjusted EBITDA guidance of $590 million to $620 million with a modest favorability toward the fourth quarter. Incorporated into this guidance is a much higher cost inflation assumption than contemplated at the beginning of the year. Despite this cost elevation we continue to expect to deliver on our initial commitment to exit the year with strong momentum and we expect that momentum to continue into fiscal ’22. This is chiefly from recovery of both volume and margin and Foodservice as well as continued strong performance from the balance of the portfolio. With that I will turn the call over to Jeff.

Jeff A. ZadoksExecutive Vice President & Chief Financial Officer

Thanks Rob and good morning everyone. Second quarter marks the start of lapping the COVID-impacted periods in fiscal 2020. Our retail businesses are lapping strong volume lifts in March of last year. At the same time our Foodservice business is lapping more significant declines in demand for its products. Consolidated net sales were $1.5 billion and adjusted EBITDA was $263.8 million for the second quarter. Net sales declined 0.7% compared to prior year and included a 310 basis point benefit from our recent acquisitions of Peter Pan Almark and Henningsen. Turning to our segments and starting with Post Consumer Brands. Net sales and volumes declined 5.5% and 11.6% respectively. Peter Pan contributed approximately 340 basis points to the net sales growth rate and 400 basis points to the volume growth rate. The declines in the cereal business primarily resulted from lapping COVID-related pantry loading in the prior year. Volumes were also pressured by the intentional decision to exit certain low-margin business and broader category softness in value and private label cereal products. A bright spot in the quarter was the year-over-year sales growth for each of Pebbles Grape Nuts and Honeycomb despite the challenging comps. Average net pricing improved 7.8% driven by favorable product mix and lapping significantly higher sales of promoter product in the prior year. Recall we had promotional programs planned and in place in March 2020 prior to the initial pantry loading phase of the pandemic. Adjusted EBITDA increased 0.8% compared to the prior year and was pressured by serial volume declines freight inflation and higher labor manufacturing costs driven by COVID-related expenses. Weetabix net sales were flat compared to prior year. Average net pricing improved 1.6% and was offset by an 8.5% volume decline. Volumes were negatively impacted by lapping COVID-related pantry loading in the prior year a pull-forward of sales to the first quarter of 2021 ahead of the completion of Brexit and continued declines in bar and drink products resulting from reduced on-the-go consumption. Weetabix segment adjusted EBITDA decreased 3.1%.

A stronger British pound to U.S. dollar exchange rate resulted in an approximate 710 basis point tailwind to the net sales and adjusted EBITDA growth rates. Our Foodservice business continued to be impacted by COVID with net sales and volumes declining 2.4% and 11.1% 11.1% respectively. Combined our acquisitions of Henningsen and Almark provided a 750 and 330 basis point benefit to net sales and volume growth rates respectively. The overall Foodservice declines continue to reflect lower away-from-home demand. Although we saw a year-over-year and sequential volume growth in the month of March volumes remained below pre-pandemic levels. Adjusted EBITDA declined 25% to $41.2 million. As discussed last quarter we saw headwinds from the timing of ag commodity input costs versus the timing of repricing grain-based sales contracts. Results were also pressured by lost profit on reduced volumes and unfavorable mix higher freight costs and elevated manufacturing costs driven by COVID-related expenses and weak fixed cost absorption. Contribution margin and fixed cost absorption both improved in March but lag volumes remained below pre-pandemic levels. Refrigerated Retail net sales increased 0.8% benefiting from favorable mix and improved average net selling prices in side dish products. Volumes decreased 1.7% resulting from the decision to exit certain low-margin business and lapping COVID-related pantry loading in the prior year. Despite the difficult comparisons volumes for Bob Evans branded sides were nearly flat to prior year. Adjusted EBITDA decreased 11.6% to $42.5 million and was negatively impacted by much higher SAL and ag input costs and higher side dish manufacturing costs. BellRing net sales increased 9.6% and adjusted EBITDA decreased 2.8%. Premier Protein sales increased 8% driven by distribution gains planned incremental promotional activity and favorable product and customer mix. Dymatize net sales increased 28.8% driven by distribution gains and favorable mix. The decline in adjusted EBITDA resulted from expected higher input costs and freight costs and incremental promotional activity.

You can hear further detail about BellRing’s results on their conference call later this morning. Turning to cash flow we had a strong first half generating $162 million from operations including $74 million from BellRing. Our net leverage at the end of the second quarter as measured by our credit facility was approximately 6.2x. Keep in mind this ratio excludes the value of our stake in BellRing. Regarding capital markets activities during the quarter we purchased 1.6 million of our shares at an average price of $98.27 per share. On a year-to-date basis we purchased 3.3 million shares at an average price of $95.76 per share. Our remaining share repurchase authorization is $333.6 million. During the quarter we issued $1.8 million in principal value of 4.5% senior notes due in September 2031. The proceeds were largely used to redeem our 5% senior notes due August 2026. With these transactions our bond maturity ladder has been extended to 2031 and our first maturities are not until 2027. With that I’ll turn the call back over to the operator for questions. Operator?

Questions and Answers:

Operator

[Operator Instructions] Your first question comes from the line of Andrew Lazar of Barclays.

Andrew LazarBarclays Bank PLC Research Division — Analyst

Good morning everybody. Hi, thanks for the question. I guess first off certainly Foodservice results were certainly quite a bit better than we had modeled and perhaps others as well. I know that you talked about volumes obviously are still down year-over-year. I guess from a sales perspective I think sales were down about 5% versus on a 2-year basis versus 2Q of 2019. I don’t know if that’s a clean way of looking at it. But is that a run rate maybe that you see continuing through the back half? Or were there may be some one-off benefits that make the second half comparisons a little bit tougher again versus 2019?

Robert V. VitalePresident Chief Executive Officer & Director

No we would expect to see a continued recovery through the second half as volumes accelerate but I think it’s important to recall that with the price model that we have as we get this price through the same volume is simply generating higher sales dollars at potentially same profit level in 2019 because of the impact of the inflation. So I wouldn’t focus too much on the sales dollars given the compounding effect of the inflationary pass-through during those 2-year stack.

Andrew LazarBarclays Bank PLC Research Division — Analyst

Yes. Yes. Got it. Thanks for that clarity. And then it’s interesting a bunch of companies that have reported recently have kind of also a similar dynamic sort of a duality of at-home sort of trends eating trends have remained elevated in terms of consumption. But then the rebound maybe in a bunch of foodservice channels has been maybe somewhat more robust or faster than they would have anticipated. So there’s been this sort of benefit from sort of both of these things at the same time. I’m curious you’re kind of in a unique position to see some of that being that you straddle the fence on that. Are you seeing a similar dynamic? And I guess it’s a tough question but how do you see that sort of playing out from here? Because it would seem like maybe those two things can’t necessarily coexist in that way with that kind of strength longer term.

Robert V. VitalePresident Chief Executive Officer & Director

Well let me take that in reverse order because I think your premise is correct. I don’t think those two things can coexist unless we just see a very significant increase in total calorie consumption. It ultimately is a matter of geography unless there’s some meaningful change in consumption which seems unlikely. I think the challenge right now is we are literally on the point of most challenging comparability because of the last two weeks of March 2020 the first two weeks of April 2020. And I think the noise is at the maximum decibel level right now. So I think in order to really see a little bit of settling we just need a little bit of time. But my opinion and it’s an opinion not something at historical data is that we will see a shift away from home to a more pre-pandemic pattern. It won’t be an immediate shift but I think it will be a trend toward mean reversion over time.

Andrew LazarBarclays Bank PLC Research Division — Analyst

Yes. And it’s fair to say that obviously Post was hurt a lot more by the weakness in foodservice than it was helped by the benefit to at-home eating in terms of the severity and therefore maybe the opposite could well be true as you kind of move through this.

Robert V. VitalePresident Chief Executive Officer & Director

Well that’s embedded in all of our assumptions is that we should grow from here on because we are lapping the significant weakness in our away-from-home business and we expect that to be a more than offsetting whatever weakness may come out of our retail channel business.

Andrew LazarBarclays Bank PLC Research Division — Analyst

Yes. Thank you.

Operator

Your next question comes from the line of Bill Chappell of Trust Securities.

William Bates ChappellTruist Securities Inc. Research Division — Analyst

Thanks. Good morning. Rob just looking in particular at the cereal category and your business. I’m just trying to understand kind of how you see in a normalized world that growing. In the past it had done outperformed the peers in part because you’re focused on maybe indulgent kids and on kind of value bags. But it seems like if you walk through the aisle everything is indulgent now from all the players. And it seems like consumers have also traded up a little bit more in a good economy. So the value side is probably not as good. So I guess part one like do you see the ability to outpace the peers in the long term? Or is it a different game? And then part two do you need to reshuffle or do something to do you see the category kind of going back to normal too? I mean in terms of do you see the growth going back to pre-pandemic levels? Or do you think that the category is permanently elevated in terms of consumer trial continuing?

Robert V. VitalePresident Chief Executive Officer & Director

Yes. I’m going to repeat a little bit about what I said about us sitting precisely at the moment of the highest noise in comparability. So again this is prediction rather than analysis. But I would anticipate that when the noise declines. So we will see a category that is slightly elevated from pre-pandemic levels and continues that elevation for a protracted period of time. Now within that category I think like any big category it requires a constant process of renovation in order to stay competitive. And we are doing the same thing that we’ve always done whether it’s indulgence whether it’s value whether it’s protein or whether it’s extending our brands in other categories we need to do all of those things to maintain our competitive position and to hopefully expand that competitive position vis-a-vis the other players in the market. So I think the answer to the first part of your question is we certainly can’t rest on our laurels and say what we did pre pandemic is a playbook that will permanently work we have to recognize that the category changes and so must we.

William Bates ChappellTruist Securities Inc. Research Division — Analyst

So just as a follow-up I mean would you concede that the cereal category at least in the U.S. has turned into basically an indulgent category where I think 3/4 of it have chocolate or candy or something in there? And so I’m just trying to understand how do you compete there in kind of a me-too environment?

Robert V. VitalePresident Chief Executive Officer & Director

Well there’s no question. If you go back to 2019 when we were very early in the licensing of some more indulgent flavors. We led with Oreo and then extended it into some other similar brands that that has led to a proliferation if not saturation of that segment. So I think when that happens it opens up other segments in which to try to identify opportunity in. So it’s an ongoing process of identifying and executing against opportunity. But I would not I would certainly not dispute your thesis that the presweetened segment of the category has become more competitive than it was two years ago or three years ago.

William Bates ChappellTruist Securities Inc. Research Division — Analyst

Got it. Ill turn it over. Thank you so much.

Operator

Your next question comes from the line of Chris Growe of Stifel.

Christopher Robert GroweStifel Nicolaus & Company Incorporated Research Division — Analyst

Hi, good morning. I just had a question if I could first in relation to the Foodservice division. You’d mentioned Rob you’re back to like 80% of pre-pandemic levels. I think that was a volume comment. Would that be true for kind of where you are now? Or is that where you were in the quarter and it’s getting better? So I guess one question. And then I was also curious if given your comments on mix and input costs if you could give the same kind of gauge on profitability. So as we think about volumes recovery and that’s great but there’s elements of that business still have to recover like travel lodging and education is profitability say at 70% of pre-pandemic levels and obviously we can do that math for the quarter but I’m just trying to get a sense of how those two will sort of kind of progress going forward?

Robert V. VitalePresident Chief Executive Officer & Director

Yes. So let me start with your first question. The 80% number is an exit rate not a quarter rate. So if you go back and look at each of January February March it was a meaningful slope during the quarter. That is definitely not an exit rate. In terms of profitability there’s a variety of inputs during the quarter some of which will persist into the third quarter that are impacting margins. Among them are that the categories that I mentioned tend to be higher-margin categories predominantly because of the products that we sell there being higher value-added products like precooked eggs. So the rate at which those categories recover will drive margin recovery further. Second the nature of our pass-through model will always result in some incremental pressure in rising cost environments and less pressure in declining cost environment. So some of that second is timing. And then third is we have a very different labor situation than we’ve historically had and are starting to weave in some co-packers where we have labor limitations that are just too severe to manage through. So we’re managing in our labor model in a bit of a different manner which we expect to be a temporary situation but one that is having an impact on short-term margin structure.

Christopher Robert GroweStifel Nicolaus & Company Incorporated Research Division — Analyst

Okay. Thank you for that caller. And then just one other question would be that as I think about inventory positions for your business and really as it probably goes for both Retail and Foodservice are you in a situation where you can and therefore are building inventories at retail today to get back maybe to where pre-pandemic levels or levels that are appropriate for the business today?

Robert V. VitalePresident Chief Executive Officer & Director

I think inventory at retail is coming down a bit. I think inventory got a bit ahead of itself at retail in the first quarter and is starting to see some sell-through to bring it back down to probably taking a week or so out. At Foodservice of course the opposite is occurring and we’re seeing inventory builds across our distributor network.

Christopher Robert GroweStifel Nicolaus & Company Incorporated Research Division — Analyst

Okay. Thank you for your time.

Operator

Your next question comes from the line of Rob Dickerson of Jefferies.

Robert Frederick DickersonJefferies LLC Research Division — Analyst

Great. Thank you so much. So I guess just kind of a question more near term relative to long term. I mean it sounds like all the questions being asked and prepared remarks that kind of the summary is there’s some near-term cost headwinds in certain pockets of the business right? Therefore that pass-through dynamic could maybe pressure Q3 EBITDA relative to what it should be on a more normalized rate. And then as foodservice comes back especially given those higher-value mix drivers that if we’re looking forward into ’22 and we assume that the harvest plays out OK as you mentioned that we shouldn’t be thinking that there’s really margin pressure on this business kind of on a fundamental basis. It’s just really more the recovery the mix in the passthrough nature of commodity costs with labor. Is that I just want to sum it up because there’s moving pieces.

Robert V. VitalePresident Chief Executive Officer & Director

You summed it up quite accurately with one amendment you said limited number of baskets. I would say that that inflation phenomenon is pretty widespread touching each aspect of the at least domestic business. But certainly I think the core theme is that we appear to be at an inflation/inflection point and that in an inflection point like the one we seem to be in there will be some timing pressure on cost because of the timing relationship between pricing actions and cost actions. But in no way do we expect that to be a permanent structural change in the margin of the of any of our businesses.

Robert Frederick DickersonJefferies LLC Research Division — Analyst

Okay. Fair enough. And then just a clarification. I heard you say upfront I just I think I missed it. There was one business you thought could be a larger business right the management team is good continue to look for acquisitions. Can you just clarify that? And would you say that that area would be an obvious area of focus for kind of go-forward acquisitions?

Robert V. VitalePresident Chief Executive Officer & Director

The comment was related to Weetabix where I was suggesting that the only disappointment we’ve had in that segment is that we haven’t found the right additional business for them to manage in the form of an acquisition. We’re looking at a pretty robust M&A pipeline across the segments right now. So I didn’t mean to imply that that one was more or less probable to convert than any other. I was just suggesting that we’ve been looking for a longer period of time there without a deal and we would like to find something.

Robert Frederick DickersonJefferies LLC Research Division — Analyst

Alright. Fair enough. Ill pass it on. Thank you.

Operator

[Operator Instructions] Your next question comes from the line of David Palmer of Evercore ISI.

David Sterling PalmerEvercore ISI Institutional Equities Research Division — Analyst

Thanks and good morning. Curious as you’re looking forward to the back half of the fiscal year which hopefully coincides with the final stages of the reopen and perhaps a transition to higher inflation. What are the biggest variables you’re watching across your business the things that you can’t control but are important? I would imagine foodservice traffic is on the list but curious to hear what else? And then perhaps separately in terms of your own controllables or execution areas what are the things that you’re most focused on there in terms of setting yourself up for the next fiscal year? Thanks.

Robert V. VitalePresident Chief Executive Officer & Director

I think the first part of your question said uncontrollable. So if I got that right?

David Sterling PalmerEvercore ISI Institutional Equities Research Division — Analyst

Yes. Correct. Yes.

Robert V. VitalePresident Chief Executive Officer & Director

Certainly you articulated the biggest one which is the ongoing pace of reopening and any curveballs that could be thrown into what we at least are expecting to be a fairly straight line from here. Secondly we all have assumptions around what retail looks like but this is a situation which if you consider experience about pattern recognition we don’t have experience to know what happens post pandemic in a recovery like this. So we are making assumptions around retail buying patterns that could have some variability in them. So obviously that’s probably not very helpful. The big issues are what people buy in foodservice and what people buy in retail. Within our controllables I would say the biggest issue that we have outside of the normal exercise around making sure demand generation is where it needs to be is supply chain execution because our supply chains and I think this is more than just a post comment. I think it extends broadly across domestic manufacturing are being pressured not just by cost inflation and labor cost increases but by simply lacking workers to fill plants. So that remains a challenge that we are going to have to navigate through this long hot summer and is getting a lot of attention right now.

David Sterling PalmerEvercore ISI Institutional Equities Research Division — Analyst

Thank you.

Operator

Your next question comes from the line of Ken Zaslow of Bank of Montreal.

Kenneth Bryan ZaslowBMO Capital Markets Equity Research — Analyst

Hi, good morning everyone. Just a couple of questions. One is assuming that the commodities stay inflated for a little bit longer can you talk about the pace to which you’ll be able to take pricing in each of your businesses? And even in the consumer business where is your pricing power? What’s your revenue management opportunities there? Is it list pricing? What other levers do you have? I guess I take a little different perspective that I think commodities may stay a little bit higher for a little bit longer. Just kind of figuring out how you absorb this.

Robert V. VitalePresident Chief Executive Officer & Director

Yes. I’m not going to go too deeply into pricing tactics or thought processes. But what I would share with you is that the level of pricing is less important than the shape of the curve. So if we stabilize at elevated levels that dictates different behaviors than if the curve is consistently moving upward to the right. And broadly speaking what we are talking about are things like mix management ongoing cost reduction. All of the typical playbooks that I think you would be familiar with but I don’t want to get into the specifics of pricing decisions right here.

Kenneth Bryan ZaslowBMO Capital Markets Equity Research — Analyst

Okay. The second question is on labor. Which can you go through your division in where you see the biggest labor constraints? And do you think once the stimulus check runs out you will start to see an easing of that and production levels can get back to more normal levels? Or do you think that just bringing in labor is just going to be an ongoing challenge and you’re just going to have to navigate with that? And if so are you thinking about automation?

Robert V. VitalePresident Chief Executive Officer & Director

We do think that come September with the expiration of some of the extended unemployment benefits that we will see some easing of the situation. That’s why I characterize it as an issue to survive the summer. Going into the pandemic we had some pressure but not the pressure we see today on labor. And clearly the answer to a more systemic less transitory issue is ongoing productivity objectives that involve automation. But yes most of this we see as transitory. The balance we see as opportunity is to look at productivity in the plants.

Kenneth Bryan ZaslowBMO Capital Markets Equity Research — Analyst

And which divisions do you find to be the least affected by the labor and which one is the most? And I’ll leave it there.

Robert V. VitalePresident Chief Executive Officer & Director

It’s fairly widespread. I would say it’s more geographic where we have manufacturing plants through the upper Midwest and South which is Foodservice Refrigerated Retail and Consumer Brands.

Kenneth Bryan ZaslowBMO Capital Markets Equity Research — Analyst

Thank you.

Operator

Your next question comes from the line of Jason English of Goldman Sachs.

Jason M. EnglishGoldman Sachs Group Inc. Research Division — Analyst

Hi, good morning folks thanks for — me in. A couple of questions. So first despite the volumetric erosion and your U.S. cereal business profitability held up quite firm this quarter. Can you explain what the offsets were to that volume weakness to help shore up profitability? And then thinking forward I totally get the narrative on sequential margin improvement in Foodservice on leverage and price catch-up once you get through the third quarter. But it also looks like we’re probably going to have some cost pressure in the U.S. cereal business. Should we expect that margin improvement in Foodservice to be accompanied by margin degradation there? Thank you.

Jeff A. ZadoksExecutive Vice President & Chief Financial Officer

The answer to your first question is mostly mix. Where we’ve seen strength is in our legacy Post branded business and where we’ve seen some softness in the more value portfolio. So that’s an accretive margin mix. Secondly while it’s hard to predict exactly timing we don’t think structurally there will be a change in the margin outlook coming out of the cereal business but there could be some timing pressure probably more toward the end of the year than anything that would affect 2021 and we’ve obviously contemplated all of that in our guidance.

Jason M. EnglishGoldman Sachs Group Inc. Research Division — Analyst

Thank you. That’s helpful. And then in the press release you talked about some challenges with the value tier of your cereal business which I suspect is both oh I think you mentioned private label even aside from the contracts. But also [multi-meal] to a degree. We’ve kind of seen this broadly across the market where the value tier has been struggling in many categories. What do you think is driving it? And do you expect that to being revert back to normal?

Robert V. VitalePresident Chief Executive Officer & Director

I do. I’ve been a proponent of the argument that it was more a supply phenomenon than a demand phenomenon. Now that the supply chains are largely back to where we’re delivering within the normal parameters of customer fill rates I think that is going to be tested. And then I’m going to allow for the reasonable possibility that I’m wrong and that some of this has been simply more money flooding into consumer hands choosing to buy up. Again this is an opinion rather than database but I don’t believe that’s a permanent condition. I think that as that stimulus money flows through if that is resulting in consumer buy up that too is transitory and reverts to a normal buying pattern in which consumers see value and obviously as the quality of some of these value products continues to expand makes them a more competitive offering. I think that ultimately gets you back to a private label value segment largely in line with pre-pandemic levels even though right now it’s a bit off.

Jason M. EnglishGoldman Sachs Group Inc. Research Division — Analyst

Yes. I suspect you’re right.

Operator

[Operator Closing Remarks]

Duration: 38 minutes

Call participants:

Jennifer MeyerHead of Investor Relations

Robert V. VitalePresident Chief Executive Officer & Director

Jeff A. ZadoksExecutive Vice President & Chief Financial Officer

Andrew LazarBarclays Bank PLC Research Division — Analyst

William Bates ChappellTruist Securities Inc. Research Division — Analyst

Christopher Robert GroweStifel Nicolaus & Company Incorporated Research Division — Analyst

Robert Frederick DickersonJefferies LLC Research Division — Analyst

David Sterling PalmerEvercore ISI Institutional Equities Research Division — Analyst

Kenneth Bryan ZaslowBMO Capital Markets Equity Research — Analyst

Jason M. EnglishGoldman Sachs Group Inc. Research Division — Analyst

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