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Post Holdings, inc (POST) Q3 2021 Earnings Call Transcript

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POST earnings call for the period ending June 30, 2021.

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Post Holdings, inc (POST 0.12%)
Q3 2021 Earnings Call
Aug 6, 2021, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

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 one (800) 585-8367, and the pass code is 9633789. [Operator Instructions] It is now my pleasure to turn the call -- the floor over to Jennifer Meyer, Investor Relations of Post Holdings, for introductions. You may begin.

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Jennifer Meyer -- Head of Investor Relations

Good morning, and thank you for joining us today for Post's Third 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 section 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. Vitale -- President and Chief Executive Officer

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. The demand for our core shake product continues to grow rapidly. And meanwhile, the balance of the Post 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 fourth quarter and end 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 the 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 million to $610 million. Post Consumer Brands had a soft volume quarter, largely attributable to what we believe is a temporary consumer shift toward 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 non-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 to two 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 fourth quarter as well.

While demand remained 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 in the holiday season. Last, we continue to see extraordinary volatility in soft pricing. We've taken steps to offset inflation, led by significant pricing, but of course, pricing lags cost. Foodservice continued its track 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 precooked egg lines, including the three 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 and overall cost absorption. Weetabix just keeps rolling along, another solid quarter. We tried to add something fairly significant to it that maintained our pricing discipline, and 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 8th 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 million 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 fourth quarter. We are aggressively taking price, but it will not be effective until October. Meanwhile, 8th Avenue did close on the Ronzoni cost 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 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 toward capital allocation. We've been active in M&A. In addition to the TreeHouse assets, we also acquired the Egg Beaters brand from ConAgra in the third quarter. Meanwhile, to maintain appropriate leverage, we were not active in share repurchases this quarter. This quarter, we closed on the IPO 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 nonevent. 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.

Jeff A. Zadoks -- Executive Vice President and Chief Financial Officer

Thanks, Rob, and good morning, everyone. In the third quarter, we continue to lap prior year COVID impacts. Our cereal and Refrigerated Retail businesses are lapping strong volume lifts, while our Foodservice business is lapping significant declines in demand for its products. Consolidated net sales were $1.6 billion, and adjusted EBITDA was $302.6 million for the third quarter. Net sales increased 19% compared to prior year and included $78.5 million 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 million in net sales and provided an 860 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 subsegment 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% 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 was 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 this quarter with continuous improvement and other cost reductions, we have implemented base price increases which will benefit the fourth 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%, lapping COVID-related increased at-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 fourth quarter and constrain our recovery trajectory. Adjusted EBITDA improved to $60 million, 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. Refrigerated Retail net sales and volumes decreased 12% and 10%, respectively. The volume declines resulted from reduced side dish and sausage service levels, primarily driven by labor shortages, as well as lapping COVID-related increased 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 third quarter. Adjusted EBITDA decreased to $33 million and was negatively impacted by the lower volumes, significantly higher sale of 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.

Dymatize 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 million from operations, including $72 million from BellRing. We had favorable working capital trends and benefited from the timing of interest payments, which are lower in our first and third quarters. Our net leverage at the end of the third 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?

Questions and Answers:

Operator

[Operator Instructions] And our first question is from the line of Andrew Lazar with Barclays.

Andrew Lazar -- Barclays -- Analyst

Good morning, everybody. Rob, I guess I wanted to start off. I know you talked about this BellRing share distribution is kind of a 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?

Robert V. Vitale -- President and Chief Executive Officer

Well, I think that to Post shareholder -- let me be -- let me just ask for a clarification. You mean Post shareholders after the transaction or Post shareholders as of today?

Andrew Lazar -- Barclays -- Analyst

After the -- Well, yes. I mean, I guess a little bit of both, actually, because I realize there's a bunch of things that can happen afterwards as well. Because it gets to the sort of why now and what does this ultimately do for a Post shareholder?

Robert V. Vitale -- President and Chief Executive Officer

Yes. There's -- I think there's two 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 produced with the IPO. And that the IPO was always a step toward a second step, and this is the natural step, which will allow us full 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 a BellRing perspective. During the pendency and upon the distribution, I would say, from a Post shareholder perspective, they get exactly what they have today, simply in two 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.

Andrew Lazar -- Barclays -- Analyst

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's 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.

Robert V. Vitale -- President and Chief Executive Officer

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.

Operator

Your next question is from the line of David Palmer with Evercore ISI.

David Palmer -- Evercore ISI -- Analyst

Thanks, good morning. But 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 in 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 margins. So what are you -- what's your thinking about that? What would you say to reassure people that some of your core RemainCo businesses has that pricing power and growth?

Robert V. Vitale -- President and Chief Executive Officer

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.

David Palmer -- Evercore ISI -- Analyst

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 cereal? 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?

Robert V. Vitale -- President and Chief Executive Officer

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 Pebbles. Where the category, and again, contributed mostly by us, seeing some headwinds is in this unusual behavior in the traditional value consumer. And we have hypotheses about that related to blips 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.

David Palmer -- Evercore ISI -- Analyst

Yes. And I wanted to ask one last one on Foodservice. You obviously have a lot of exposure to the morning day part that's been -- one of the more lagging day parts 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?

Robert V. Vitale -- President and Chief Executive Officer

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 whatever happens around this Delta variant.

Operator

Your next question is from the line of Michael Lavery with Piper Sandler.

Michael Lavery -- Piper Sandler -- Analyst

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?

Robert V. Vitale -- President and Chief Executive Officer

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 and 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 leaseback partners to improve, whether that's improve 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 two. 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, where do we want to be. So projects like supply chain, IT transformation, better coordination among the companies, additional bench strength are all with 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.

Michael Lavery -- Piper Sandler -- Analyst

That's really helpful color. 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 than what some of the rationale, the thinking is, right, to do that?

Robert V. Vitale -- President and Chief Executive Officer

A goodly 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. So 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.

Michael Lavery -- Piper Sandler -- Analyst

Okay, great. Thank you very much.

Robert V. Vitale -- President and Chief Executive Officer

And lastly, Michael, there was timing. At the time, we didn't have the opportunity to execute against TreeHouse.

Operator

Your next question is from the line of Chris Growe with Stifel.

Chris Growe -- Stifel -- Analyst

Hi, good morning. I Just had a question for you, if I could, first on -- to 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? Do you expect to incorporate all those in your distribution of the shares?

Robert V. Vitale -- President and Chief Executive Officer

Well, I would say we expect to consider all those. What we actually execute against is market dependent.

Chris Growe -- Stifel -- Analyst

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, has it come to a head, to the point that, I know I've talked to you before about it, but is there a capital you can deploy maybe at a more aggressive rate that would allow you to be less reliant on labor and fix some of the issues in, say, Foodservice or Refrigerated Retail, that seem like they've lingered even for a while?

Robert V. Vitale -- President and Chief Executive Officer

You're quite right. And the answer is yes, and that's what I was referring to. When I suggested there 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 our -- close to the end of that and can deliver upon that productivity.

Chris Growe -- Stifel -- Analyst

Is that a multiyear effort? Is there a lot higher capex as a result of that not getting numbers but just to get perspective on that?

Robert V. Vitale -- President and Chief Executive Officer

No. It's a bunch of small projects, but it's many small projects, not single, big ones.

Chris Growe -- Stifel -- Analyst

Okay. And just one follow-up, if I could, or one final question, which will 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 '21?

Robert V. Vitale -- President and Chief Executive Officer

Yes, but I think the comment I made in my script was that there's three 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 key leads any better than anybody else.

Operator

Your next question is from the line of Rob Dickerson with Jefferies.

Rob Dickerson -- Jefferies -- Analyst

Great. thank you so much. Rob, just a kind of a general question. Going forward.

Robert V. Vitale -- President and Chief Executive Officer

Rob, your phone is breaking up. I'm not able to hear you.

Rob Dickerson -- Jefferies -- Analyst

Can you hear me now?

Robert V. Vitale -- President and Chief Executive Officer

That's better.

Rob Dickerson -- Jefferies -- Analyst

Okay. Sorry about that. Yes. So I'd like -- I just want 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 and sum 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 BellRing shares, kind of post distribution, I'm just wondering kind of how you think of the sum of the parts post distribution and kind of how that value starts to come in to Post shareholders with the actual distribution, if that makes sense.

Robert V. Vitale -- President and Chief Executive Officer

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.

Rob Dickerson -- Jefferies -- Analyst

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 in the release, would be used for debt paydown on a go-forward basis. So if there's incremental cash, again, as we spoke out before and given kind of where the stock price is on the open today. One could argue it's undervalued still, just thoughts on general go-forward M&A vis-a-vis ongoing buybacks. That's it.

Robert V. Vitale -- President and Chief Executive Officer

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&A opportunities and compare them to what we think the opportunity is in our own shares and make that decision (expletive) near every day. So that's not -- no change in the way we think about capital allocation as a result of the spin.

Operator

Your next question is from the line of Bill Chappell with Truist Securities.

Bill Chappell -- Truist Securities -- Analyst

Thanks, good morning. Rob, I'm having a tough time -- and I mean, this carries over from even TreeHouse yesterday or earlier 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, if you think of your MOM brands, I mean, you're basically seeing behavior change, that people who have been buying bags for years and 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 move 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.

Robert V. Vitale -- President and Chief Executive Officer

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 not a 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 toward typically smaller outlets. And Bill, I'm giving you speculation now.

Bill Chappell -- Truist Securities -- Analyst

No. Anything else?

Robert V. Vitale -- President and Chief Executive Officer

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 about the discretionary blip 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 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.

Bill Chappell -- Truist Securities -- Analyst

Got it. And I will, I guess, stay tuned on that. And I mean, yes, as best anybody could. Again, I think it's unusual, as you said, so we're just trying to figure it out. Switching to 8th Avenue, and I know it's a small investment, but it's also kind of -- in the way of shareholder -- improving shareholder returns, it's a similar opportunity like BellRing. 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 are moving in the right direction over the past two 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?

Robert V. Vitale -- President and Chief Executive Officer

No. 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 delay simply in getting equipment; part of it delays, driven by labor; and part of it is just some poor planning on our part.

And we are now backed up in, I'm going to say, three to six 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, our category 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 six months. But the business prospects, I think, are unchanged but delayed.

Operator

Our next question is from the line of Jason English with Goldman Sachs.

Jason English -- Goldman Sachs -- Analyst

Hey, good morning, folks. 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 19.5 million 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 first store working scenario right now to assume that there's going to be somewhere around three turns of leverage on BellRing post that?

Robert V. Vitale -- President and Chief Executive Officer

So what we have tried to do is set guardrails rather than intentions. And the guardrails that I would tell you is that the 19.5 million shares and say is a maximum position that we can retain, but there's no obligation to retain that 19.5 million. So that's a choice/and the rationale for that is that in order to qualify the tax for distribution, we have to distribute 80% of our position. So that's statutory. We would not expect to take the leverage multiple up 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.

Jason English -- Goldman Sachs -- Analyst

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 of 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 Foodservice. Again, can you give us sort of size of the breadbox? How big was the shortfall related to those? And how big do you expect it to be in the fourth quarter?

Robert V. Vitale -- President and Chief Executive Officer

Yes. The -- 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 stop the 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 has 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 track 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 miss 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 is probably $3 million to $5 million.

Jason English -- Goldman Sachs -- Analyst

Got it. So not that essential.

Robert V. Vitale -- President and Chief Executive Officer

Well, on an annualized, I guess it gets to be a pretty big number.

Jason English -- Goldman Sachs -- Analyst

Sure. But we can't annualize that, right? I mean, that's a catch-up that -- so you should close that gap this quarter.

Robert V. Vitale -- President and Chief Executive Officer

Correct. But the way we're thinking about Foodservice recovery is we're looking at quarter-by-quarter and annualized.

Jason English -- Goldman Sachs -- Analyst

Understood, understood, But particularly applicable for...

Robert V. Vitale -- President and Chief Executive Officer

Not for this particular issue, I mean, just in general.

Jason English -- Goldman Sachs -- Analyst

Yes, yes, yes No. That makes sense. Awesome.

Operator

Our final question is from the line of Ken Zaslow with Bank of Montreal.

Ken Zaslow -- Bank of Montreal -- Analyst

Hey, good morning, everyone. Just circling back on just one or two questions. Everything has 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 anecdotal, but is it more automation? Is it retooling some of the facilities? Just how do you think about that and just giving a little bit more meat to the bone on that?

Robert V. Vitale -- President and Chief Executive Officer

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.

Ken Zaslow -- Bank of Montreal -- Analyst

When you think about that from today to like three 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?

Robert V. Vitale -- President and Chief Executive Officer

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.

Ken Zaslow -- Bank of Montreal -- Analyst

Okay. And then just another follow-up question is on inflation. Have you taken pricing across the entire portfolio? Are there any areas that you can 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.

Robert V. Vitale -- President and Chief Executive Officer

I believe we have. The hedges that some of these commodities are extremely volatile. The best example of that right now being sows. 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 -- or 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 sows can put a little bit more pressure on margins for a time being until that, long term, stabilizes.

Ken Zaslow -- Bank of Montreal -- Analyst

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.

Operator

Ladies and gentlemen, that concludes the end of our Q&A session.

Robert V. Vitale -- President and Chief Executive Officer

Great. Thank you all, and we will talk to you next quarter. Bye-bye.

Operator

[Operator Closing Remarks].

Duration: 48 minutes

Call participants:

Jennifer Meyer -- Head of Investor Relations

Robert V. Vitale -- President and Chief Executive Officer

Jeff A. Zadoks -- Executive Vice President and Chief Financial Officer

Andrew Lazar -- Barclays -- Analyst

David Palmer -- Evercore ISI -- Analyst

Michael Lavery -- Piper Sandler -- Analyst

Chris Growe -- Stifel -- Analyst

Rob Dickerson -- Jefferies -- Analyst

Bill Chappell -- Truist Securities -- Analyst

Jason English -- Goldman Sachs -- Analyst

Ken Zaslow -- Bank of Montreal -- Analyst

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