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Edited Transcript of POST earnings conference call or presentation 2-Aug-19 1:00pm GMT

Q3 2019 Post Holdings Inc Earnings Call

St. Louis Aug 8, 2019 (Thomson StreetEvents) -- Edited Transcript of Post Holdings Inc earnings conference call or presentation Friday, August 2, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Jeff A. Zadoks

Post Holdings, Inc. - Executive VP & CFO

* Jennifer Meyer

Post Holdings, Inc. - Head of IR

* Robert V. Vitale

Post Holdings, Inc. - President, CEO & Director

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Conference Call Participants

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* Andrew Lazar

Barclays Bank PLC, Research Division - MD & Senior Research Analyst

* Christopher Robert Growe

Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Analyst

* Jason M. English

Goldman Sachs Group Inc., Research Division - VP

* John Joseph Baumgartner

Wells Fargo Securities, LLC, Research Division - VP and Senior Analyst

* Kenneth Bryan Zaslow

BMO Capital Markets Equity Research - MD of Food & Agribusiness Research and Food & Beverage Analyst

* Michael Scott Lavery

Piper Jaffray Companies, Research Division - Principal & Senior Research Analyst

* Timothy Scott Ramey

Pivotal Research Group LLC - Co-Head of Consumer Research and Senior Analyst of Food, Beverage & Nutrition

* William Bates Chappell

SunTrust Robinson Humphrey, Inc., Research Division - MD

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Presentation

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Operator [1]

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Welcome to Post Holdings Third Quarter 2019 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 Time. The dial-in number is (800) 585-8367, and the passcode is 5439278. (Operator Instructions)

It is now my pleasure to turn the floor over to Jennifer Meyer, Investor Relations of Post Holdings, for introductions. You may begin.

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Jennifer Meyer, Post Holdings, Inc. - Head of IR [2]

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Good morning, and thank you for joining us today for Post's Third Quarter 2019 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 Filing 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.

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Robert V. Vitale, Post Holdings, Inc. - President, CEO & Director [3]

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Good morning. Thank you, Jennifer, and thank you all for joining us to review our quarter. We had a solid quarter, and I will hit the key themes shortly. I want to begin with our outlook which we now estimate to range between $1.205 billion and $1.215 billion.

Using the midpoints of our guidance, we entered Q3 with a second half expectation of $629 million, with a cadence skewed to the fourth quarter. Our revised best estimate for the second half is a midpoint of $619 million, but the cadence flipped in favor of the third quarter.

With respect to the cadence change, the vast majority resulted from a pull forward of large orders in our Active Nutrition segment. This pulled forward about $5 million in adjusted EBITDA.

The $10 million decline in the second half midpoint estimate is driven by a number of modest contributors. First, 2 of our smaller businesses are incurring commodity headwinds totaling $4 million to $5 million. We expect this to be transitory, but it has persisted longer in 2019 than expected. Second, the weakening of the pound to dollar exchange rate has added $2 million to $3 million of pressure on excellent Weetabix results. And finally, across the segments, minor revenue misses and cost hits offset by some opportunity realizations netted another $5 million of EBITDA reduction. These costs are not systemic, but require tighter execution, particularly around our refrigerated supply chain.

Post Consumer Brands had a solid quarter. Consumption performance faced challenging comps as we lapped strong merchandising support and chose not to repeat certain low ROI promotions. Nonetheless, consumption dollars were relatively flat in tracked channels, and our branded market share reached 20.8%.

Although moderating, shipments continued to lag consumption. We had gross profit growth of nearly $8 million, but we chose to invest incremental gross profit in brand building and consulting expense oriented towards a comprehensive overhaul of our planning process. This is aimed at delivering a more profitable mix at the best cost. We expect the effort to produce modest benefits in 2020 and become more meaningful over time.

Michael Foods had a terrific quarter, with strong volume growth across products and channels. Synergy execution across foodservice and refrigerated retail businesses remain well on track. We expect to exit fiscal 2019 achieving approximately 60% of the synergy target on a run-rate basis.

I want to go a bit deeper than usual in refrigerated retail. We think of this segment as side dishes, both Bob Evans and Simply Potatoes; secondly, liquid eggs; and finally, our more commoditized categories of cheese, sausage and shell eggs.

Our side dish business continues with exceptional growth. We have lots of confidence in the potential for these brands. Our liquid egg business needs renovation and innovation. We have developed a new R&D strategy to leverage Michael's technical prowess and Bob Evans' retail strength, and we expect this to bring new energy to the category. The balance of the segment, cheese, sausage and shell eggs is approximately 1/3 of the segment and is declining as a percentage of the segment. As I mentioned, we see $4 million to $5 million of transitory headwinds for this portion of the business during the second half of the year.

Side dish manufacturing is currently underperforming as we transform it. Essentially, we are converting Bob Evans from a made-to-order system to a made-to-forecast system. This involves an IT migration for legacy Bob Evans plants. There are growing pains, but it will improve our customer service, ability to support innovation and margin. We expect the benefit to develop in 2020 and be fully realized in 2021.

Weetabix delivered great performance this quarter, with meaningful growth in pound sterling sales and adjusted EBITDA. However, currency impacted the top and bottom line growth rates by approximately 600 basis points.

Brexit preparations are gearing up again during fiscal Q4. We expect to rebuild working capital ahead of a new deadline of October 31. This includes modest incremental cost around additional storage and inventory builds. The impact of Brexit on us is mostly reflected in currency translation. We calculate adjusted EBITDA on an average spot basis. However, approximately 60% of the free cash flow we expect to repatriate over the next 2 years is hedged at a rate of $1.46 pound sterling to U.S. dollar, well above the current spot rate.

Active Nutrition had an excellent quarter, with strong shake consumption growth of 16%. All flavors returned to the shelf and market share in tracked channels reached 18%. Total distribution points have recovered at nearly all major customers and reached 95% of their previous high. During the quarter, shake inventories and safety stock reached desired levels. We now have adequate capacity to meet our near- to medium-term growth forecasts. During this capacity transition, we have learned -- leaned into margin over sales growth. With capacity now online, we can more aggressively reengage demand-branding efforts.

Looking forward, recall, I commented on $5 million of EBITDA pulled forward from the fourth to the third quarter. Coupled with the typical historical cadence of a lower fourth quarter, this will result in a sequential decline. I encourage you to evaluate the business based on a year-to-date performance rather than simply Q3 as a run rate.

Regarding the upcoming IPO, we have submitted an amended S-1 and remain on track for a fall execution. We will provide updates as the process unfolds.

You likely saw our press release that, pending an FTC review, our acquisition of TreeHouse's private label cereal business has been delayed. While we are disappointed, we remain committed to the transaction and expect a reasonably timely resolution.

To wrap up my comments, I would observe that 2019 looks to end very much in line with our long-term value proposition at essentially the midpoint of our initial guidance. Our cash generators generated cash, our growing businesses grew and at the midpoint of our estimate, we will have grown adjusted EBITDA in excess of 5%. [It doesn't mean] a perfect year. We have plenty to improve upon, but I'm generally quite pleased with the resilience of the business, and we continue to be well positioned to execute against strategic opportunities as they develop.

With that, I will turn the call over to Jeff.

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Jeff A. Zadoks, Post Holdings, Inc. - Executive VP & CFO [4]

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Thanks, Rob, and good morning, everyone. Our adjusted EBITDA for the third quarter was $315 million with consolidated net sales up nearly 3% year-over-year on a pro forma basis.

Starting with Post Consumer Brands, net sales and volumes increased 1.7% and 0.4%, respectively. Average net pricing improved 1.3% despite unfavorable mix primarily resulting from private label volume gains. Branded volumes were pressured as we lapped significant promotional support and new product introductions last year. Segment adjusted EBITDA was flat compared to prior year. Manufacturing performance improved as we lapped elevated costs in the prior year. However, this was offset by higher investment in advertising and consumer spending and incremental consulting expenses. Pricing fully offset year-over-year systemic inflation in commodities, freight and wages this quarter.

Gross profit margins improved compared to prior year and were flat compared to second quarter with conversion costs improving sequentially. We expect conversion costs to continue to improve albeit at a level higher than peak performance levels achieved last year due to wage inflation and mix changes across the manufacturing network.

Weetabix net sales increased 1% over the prior year despite an approximately 600 basis point headwind from currency driven by the weaker British pound. Average net pricing increased 11% year-over-year as we continued to lap our promotional strategy reset. Although segment volumes declined 3.4%, core Weetabix-branded volumes grew year-over-year for the first time since the second quarter of fiscal 2018. This growth as well as growth in private label biscuit volumes was offset by declines in exports in non-biscuit products.

Adjusted EBITDA grew in line with sales, as the favorable price-volume impact was partially negated by greater investments in brand building.

Net sales in the foodservice segment increased 3% with volumes up 2.7% driven by robust growth in both egg and potato products. Volume growth reverted to our long-term algorithm following a slowdown in second quarter growth stemming from weak QSR foot traffic in January and February.

A favorable price-cost relationship, volume growth, a greater mix of foodservice versus ingredient volumes and synergy realization drove year-over-year adjusted EBITDA growth of 24% for this segment. Additionally, results benefited from lapping $3.5 million of repair expense and margin on lost revenue resulting from precooked egg manufacturing disruptions in the prior year.

It's worth observing that our foodservice egg profit performance was strong despite low egg market prices. This reinforces our conviction in the reliability of the Michael Foods pricing model in various market conditions.

Refrigerated retail net sales decreased 3%. An 8.4% increase in side dish volumes was more than offset by volume declines in other products and lower average net -- selling prices in eggs.

Bob Evans-branded side dishes had great growth this quarter with volumes up 17% driven by strong velocities, distribution gains and a change in Easter timing. For the year-to-date period, Bob Evans-branded side dish volumes grew 13%. Segment adjusted EBITDA was pressured by unfavorable price-cost relationships within the more commodity-exposed product categories, including sausage, cheese and shell eggs. Additionally, higher side dish manufacturing costs weighed on results this quarter.

Net sales in our Active Nutrition business increased nearly 10%. Ready-to-drink shake net sales grew 19% with volumes up 13% driven by strong velocities and, in part, a pull forward of orders to the third quarter from the fourth quarter. Adjusted EBITDA for the segment grew 32.5%, benefiting from higher volumes, pricing and lower advertising and marketing expenses. Recall, the quarterly margins in this section -- in this segment fluctuate significantly depending on the timing of promotional activity and levels of marketing spending. For the fourth quarter, we expect greater investment in our promotional activities and marketing programs when compared to the first 3 quarters of the year. As a result, we expect fourth quarter adjusted EBITDA margins for Active Nutrition to revert back to historical norms of high-teens to low 20s.

Before we open up the call for Q&A, I would like to make a few comments on cash flow and capital transactions.

For the 9-month period in fiscal 2019, our cash flow from operations was approximately $505 million, with $300 million generated in the third quarter. As we expected, this was a significant improvement from the second quarter. The improvement resulted from the timing of interest payments, a slight decrease in working capital and sequential growth in performance across the business.

Regarding capital markets transactions, during the third quarter, we repurchased approximately 200,000 shares at an average price of $103.83 per share for an aggregate of $23 million. This brings our total share repurchases year-to-date to approximately 900,000 shares for $89 million. Our remaining share repurchase authorization is approximately $219 million.

Our net leverage at the end of the third quarter as measured by our credit facility was approximately 5x. In early July, we issued $750 million of 5.5% senior notes due December 2029. This was an opportunistic issuance with cash going to the balance sheet and had no impact to net leverage.

With that, I'd like to turn the call over to the operator for questions. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Andrew Lazar of Barclays.

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Andrew Lazar, Barclays Bank PLC, Research Division - MD & Senior Research Analyst [2]

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Two questions for me, if I could. First would be the additional color on some of the full year guidance changes and things. And as I think about it, it's not unusual for Post to sort of clarify and tighten the range on its fiscal 3Q call. I guess what's a little different about this one is it kind of comes on the heels of having done something similar about a month ago. So I guess I wanted to make sure I understand what might have changed since you tightened the range a couple of weeks back, and were those things that you couldn't see at that time? Or what changed in the interim and what does that say or not about sort of the visibility that you've got into the business at this point? And then I've just got a follow-up.

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Robert V. Vitale, Post Holdings, Inc. - President, CEO & Director [3]

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Sure. The biggest single contributor would be the reduction in the pound sterling. That's between $2 million and $3 million. We had a delay in a cheese opportunity from Q4 into fiscal '21. We have a bit more persistent weakness in shell egg prices. For the very small shell egg business we have in the course of a quarter it contributes a couple, $3 million. And then we've had the lingering underperformance in the refrigerated supply chain that we, frankly, made some decisions to move more fundamentally, but slower to fix, i.e., make a more comprehensive IT transition to bring this up to overall Post standards. So those 4 items really contributed to it.

The other thing I would just say is that roughly 40% of the period in time in question between when we gave guidance to year-end has now passed. And you look at the probabilistic assessment of a range, and we simply felt like given the amount of time that has passed and looking at some of the changes in commodities and upside, downside realizations, that the high end of that range was not currently likely. So we wanted to bring a bit more conservative perspective on the outlook of the year.

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Andrew Lazar, Barclays Bank PLC, Research Division - MD & Senior Research Analyst [4]

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All right. And then I guess more importantly -- I realize it's certainly too early to go into any specific guidance for fiscal '20. But I guess I'm just trying to get a sense of some of the things that you mentioned just earlier. Are any of those or some expected to be issues as we think about fiscal '20? And I ask because, obviously, consensus is looking for another solid year in terms of EBITDA growth next year, and there is incremental Bob Evans synergies, you'll have a new value-added egg facility up and running and the likelihood of the ready-to-eat cereal deal with TreeHouse. And so there are a number of things that certainly we can see that sort of, in theory, break your way. I want to make sure I've got those right, but then are there any other things worth calling out even just directionally as we think ahead either more positive or on the other side that we need to keep in mind at this stage?

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Robert V. Vitale, Post Holdings, Inc. - President, CEO & Director [5]

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No, I would say, it's largely steady as she goes, and I will call out 2 things largely, well, entirely beyond our control. The Brexit uncertainty as it relates to EBITDA translation, and I want to stress this is accounting over economics. We translate the current earnings on a spot basis, but as we actually repatriate them, we repatriate them under a cross-currency swap at a much higher level than current spot rates. But we aren't going to even begin to try to guess what's going to happen in terms of the pound market. Our long-term thesis, of course, is that once we get past the noise, it will mean revert. But what is going to happen early in the fiscal '20 is anybody's guess. The second, of course, is the timing of the resolution around the FTC review. We are actively engaged in responding to it, but we wouldn't want to try to guess exactly when that would be resolved.

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Operator [6]

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

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Jason M. English, Goldman Sachs Group Inc., Research Division - VP [7]

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I guess I'm going to zoom into your Active Nutrition business, if I could. Could we start with just an update on where you stand with the IPO plans, what the time line looks like, what should -- what we should expect in the next couple of months?

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Robert V. Vitale, Post Holdings, Inc. - President, CEO & Director [8]

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From a process and regulatory perspective, we're quite limited in what we can say around that. But what we can say and have said publicly is that we have now gone through, I believe, 2 amendments of the S-1. We're either on our second or third. That process has gone quite well. We expect to come to market, as we've said previously, early in the fall. That's either right before or right after our fiscal year. And I think as the calendar is shaping up, it's more likely to be right after the fiscal year and that, of course, is market-dependent.

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Jason M. English, Goldman Sachs Group Inc., Research Division - VP [9]

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Got it. And then the performance of that business, can you -- you quantified the EBITDA pull-forward. Can you quantify the sales pull-forward from the fourth quarter to the third quarter? And then in the press release, you highlight some challenges on the bar side of that business, and we certainly see that in the consumption data. Can you remind us what the portfolio mix is there? And how we should think about net growth all-in with those drags going forward? Is this sort of year-to-date mid-single-digit run rate, which looks sort of fairly consistent with what we see in the measured data, what we should expect? Or is there a glide path back to a more robust growth?

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Robert V. Vitale, Post Holdings, Inc. - President, CEO & Director [10]

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So in terms of your first question, we don't have the exact number top of mind on revenue, but generally speaking, there is about 25% flow through, so, call it, $20 million broadly. In terms of your second question, the business is largely -- there's 3 businesses embedded within our Active Nutrition segment. Dymatize, which is on an annualized basis roughly $120 million of revenue, flattish to modestly growing, largely powders and bars, not so much in tracked channels, so probably not what you're picking up. The vast majority of the business is ready-to-drink shakes, and I'm going to throw out a roughly 80% number in terms of the revenue. That's where all of the growth is. We, frankly, are de-emphasizing our bar business outside of Dymatize because we have not got a competitive position. We're pricing mostly in the value segment of the bars. We really think the future of the business is in beverages, and we continue to expect that sales growth will be double-digit sales growth. And once we go through a period of reengaging our marketing spend, margins will follow in line with sales growth.

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Operator [11]

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Our next question comes from the line of John Baumgartner of Wells Fargo.

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John Joseph Baumgartner, Wells Fargo Securities, LLC, Research Division - VP and Senior Analyst [12]

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Rob, wanted to touch on foodservice side. Last 2 quarters, you've seen some nice margin expansion there and maybe stronger than we would have thought given that pricing doesn't appear to be all that meaningful, and there's been some cost headwinds as well. Can you dig into that a little bit more in terms of the supportive factors? Is it mix? Is it predominantly cost synergies from BOBE? What's driving the strength there?

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Robert V. Vitale, Post Holdings, Inc. - President, CEO & Director [13]

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Yes and yes. I would say that Michael as a business is really firing on all cylinders right now. The management team is doing an extraordinary job. Our cost is good. Our mix is good. We've done an exceptional job of executing against the Bob Evans synergies. So I frankly don't have a whole lot to add to the way you answered the -- you posed the question because, I think, you've highlighted those issues.

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John Joseph Baumgartner, Wells Fargo Securities, LLC, Research Division - VP and Senior Analyst [14]

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Okay. And just thinking through Weetabix, pricing there is also pretty strong. Is that still geared largely towards that reprogramming effort with the consumer? Is it more kind of trying to recoup some of the FX impact there? I guess what's kind of driving that? And how is the elasticity holding up going forward do you think?

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Robert V. Vitale, Post Holdings, Inc. - President, CEO & Director [15]

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So the first part of your question, it's the former. It's the final lapping of the work we did on resetting the promotional strategy. The planning was begun in January of '18. Execution began that spring, so we're just now lapping over it. So that's gone exceptionally well. We are certainly not trying to price to FX. This is all local currency pricing that we're communicating, so then we're translating it back and filtering out the impact of FX. And elasticities have been -- responded extremely well. I would say, I think it's the flip side of the problem that originally was created, is that when promotional pricing got too aggressive, there wasn't a volume expansion. And when it pulled back, there wasn't a significant volume retraction.

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Operator [16]

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

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Christopher Robert Growe, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Analyst [17]

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If I can go back to just a point on Active. If there was a $20 million sales pull-forward, it would suggest that sales were largely flat in the quarter. I know you were rebuilding distribution. And it, obviously, even with the declines in bars, has been good, at least measured channel growth overall. Just wanted to get a little more color from you on the sales performance of Active, therefore, excluding that factor.

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Robert V. Vitale, Post Holdings, Inc. - President, CEO & Director [18]

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No. I think you're quite right. With the capacity constraints, the focus in the medium term has been making sure that we were able to fill the stable demand going into the quarter. We did see some declines outside of the shake business, and now we would expect to -- well, and the flip side of that is that we had a better margin structure because we weren't doing much to drive demand. Now the flip side of that will be true, and we expect to reaccelerate sales growth with some pressure on margins.

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Christopher Robert Growe, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Analyst [19]

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So it's the other businesses within that, that may be dragging down what looks to be some pretty good shake growth. Is that -- consumption growth, that is.

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Robert V. Vitale, Post Holdings, Inc. - President, CEO & Director [20]

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Correct. The consumption in shakes has remained very strong at 16%.

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Christopher Robert Growe, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Analyst [21]

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Okay. And then just a question for you on, I guess, refrigerated retail and some of the items you noted about the IT system and the processes and all that. Are we talking about incremental cost there? Or is this a weaker sales performance? Or how does that manifest in the P&L, if you will, whether that's in the fourth quarter or in 2020?

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Robert V. Vitale, Post Holdings, Inc. - President, CEO & Director [22]

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So it's not weaker sales performance. Let's take it piece by piece. The side dish business has grown exceptionally well, double digits across the portfolio. The liquid egg business is relatively flat. And then where we have had some volume weakness is predominantly in our cheese business. And as I commented, we've had some price weakness in our retail egg business, that retail egg business being very, very small. And I'm sorry, I should be more specific, retail shell egg. We have a strategic liquid egg business and a nonstrategic portion of that portfolio.

The challenge essentially, and we've talked about this in some of our meetings that we were going to make a determination as to how far to lean into integrating the supply chains between Michael and Bob Evans because they share a base product mix. The Bob Evans planning architecture was more of a made-to-order structure. So they didn't have a sophisticated demand forecast that then implicated a production plan and built inventory. So it was much more complicated customized orientation. We've made the decision to invest in -- mostly in IT so that we can move the Bob Evans process to more of a made-to-forecast model. And in terms of your question about the P&L, it's mostly capital flowing through IT. There will certainly be some consulting, and there will be some execution costs, but that will then ultimately expand the, if you want to call it synergy or cost reduction, I think that's largely semantics, opportunity on the refrigerated retail side as we get a better margin structure, better mix and better customer service.

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Christopher Robert Growe, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Analyst [23]

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Is the EBITDA weakness this quarter then, the capital? Is that -- or is that...?

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Robert V. Vitale, Post Holdings, Inc. - President, CEO & Director [24]

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Throughput costs. The factory, particularly the potato factories are doing a fine job keeping up with volume requirements, but the cost is higher than it should be.

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Operator [25]

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Our next question comes from the line of Bill Chappell of SunTrust.

(technical difficulty)

I am sorry. Our next question comes from the line of Tim Ramey of Pivotal Research Group.

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Timothy Scott Ramey, Pivotal Research Group LLC - Co-Head of Consumer Research and Senior Analyst of Food, Beverage & Nutrition [26]

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Couple of questions. One I'm holding in my hand a bottle of Premier Protein Clear and wondering about how widely that is rolled out and how successful that's been. And second, I certainly knew that shell eggs were not -- they were commodity, but I wasn't sure that they were noncore. Are you saying that they're noncore at this point?

(technical difficulty)

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Operator [27]

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And I do apologize. Please hold as we're having technical difficulties.

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Robert V. Vitale, Post Holdings, Inc. - President, CEO & Director [28]

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Hello, operator, is anyone still on the line?

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Timothy Scott Ramey, Pivotal Research Group LLC - Co-Head of Consumer Research and Senior Analyst of Food, Beverage & Nutrition [29]

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I am. It's Tim.

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Robert V. Vitale, Post Holdings, Inc. - President, CEO & Director [30]

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Tim, why don't you go ahead and ask your question and maybe -- hopefully there's more people, and we apologize. We have no idea what happened, but it took quite a while to fix. So fire away.

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Timothy Scott Ramey, Pivotal Research Group LLC - Co-Head of Consumer Research and Senior Analyst of Food, Beverage & Nutrition [31]

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Sounds good. I'll assume this is still a conference call and not a private conversation. So a couple of things. One, I'm holding in my hand an empty bottle of Premier Protein Clear that was quite tasty, and wondering, number one, how widely that's been rolled out, if that might have been part of the $20 million pull forward? Anything specifically to say on that one? And then I have a follow-up, too.

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Robert V. Vitale, Post Holdings, Inc. - President, CEO & Director [32]

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It has been rolled out to club. It is not part of the pull-forward. The pull-forward is entirely on the ready-to-drink shake business. And we think the Clear product is a great product, but it needs some work-around packaging and price point to get the same degree of success we've seen in other parts of the portfolio.

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Timothy Scott Ramey, Pivotal Research Group LLC - Co-Head of Consumer Research and Senior Analyst of Food, Beverage & Nutrition [33]

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Okay. And then, Rob, I was -- I think I heard you say that shell eggs are noncore. I certainly knew that they were commodity items, but I didn't really understand them to be noncore to the business. Did I understand that correctly? And why wouldn't it make sense to have a continuing presence in shell eggs? How do we now explain the Willamette acquisition, that type of thing?

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Robert V. Vitale, Post Holdings, Inc. - President, CEO & Director [34]

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So the core thesis of Michael Foods has been and remains value-added egg products. So in that definition, retail shell eggs is, by definition, off strategy. The Willamette Egg acquisition was fundamentally about providing a hedge against price volatility in the Midwest in the event of another AI event. I think the need for that hedge has mitigated with time. It's been a very good acquisition. There have been times where we've been significantly generating cash in that business relative to what we paid for it. But in no scenario are we looking to invest behind retail shell eggs as a reason to be. It is entirely, at times, a hedge. So when I say it's noncore, it more relegates it to hedging status versus building status.

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Timothy Scott Ramey, Pivotal Research Group LLC - Co-Head of Consumer Research and Senior Analyst of Food, Beverage & Nutrition [35]

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But not necessarily to-be-divested status.

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Robert V. Vitale, Post Holdings, Inc. - President, CEO & Director [36]

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Not necessarily.

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Operator [37]

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Our next question comes from the line of Bill Chappell of SunTrust.

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William Bates Chappell, SunTrust Robinson Humphrey, Inc., Research Division - MD [38]

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Well, I'm sure you had an incredibly astute and concise answer to my big grain pricing question, but could you give it to me again because I certainly didn't hear it and I'm not sure if everybody else did.

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Robert V. Vitale, Post Holdings, Inc. - President, CEO & Director [39]

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Can we repeat the question?

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William Bates Chappell, SunTrust Robinson Humphrey, Inc., Research Division - MD [40]

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Sure. So with where grain prices are going in your grain-based contracts, just trying to understand what pricing looks like for that business and kind of how it drives sales over the next 2 to 3 quarters with what you see kind of post harvest.

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Jeff A. Zadoks, Post Holdings, Inc. - Executive VP & CFO [41]

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Yes. So it was a long and drawn-out answer apparently. The methodology within the grain-based contracts is essentially a 90-day lag from the market. So there's some time to catch up on pricing with wherever commodities are going. So we would expect that we'll experience that lag but that we'll eventually catch up to wherever the markets land. As you follow them, you saw that it's spiked up and then it's come back down. A lot of speculation as to what the next government WASDE report will say about corn and wheat and soybean progression. But the model is designed to essentially follow the market on a 90-day lag.

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William Bates Chappell, SunTrust Robinson Humphrey, Inc., Research Division - MD [42]

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Got it. So it'll affect more as we go to 2020. The other question is just on the, I guess, noncore business, talking about 8th Avenue. Can you just give us a little more update of what's going on there? I understand it's still merging multiple businesses together and the kind of growing or integration pains of that. But obviously this is, I think, maybe the second cut on EBITDA for this year. So I was just trying to understand the outlook, especially as we go into next year.

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Robert V. Vitale, Post Holdings, Inc. - President, CEO & Director [43]

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Yes. The -- if you recall, 8th Avenue's 3 businesses that we're putting together as one delivery system: granola, nut butters and pasta. Granola and nut butters have essentially performed to plan throughout the year. We made an IT migration on pasta to the system that was driving the other businesses. We also lost some people. So between some disruption around IT visibility and people visibility, we lost some bidding efficacy and in some cases bid bit too high, some cases bid too low. And as you probably know, it's entirely a bid business. So it caused us some volume issues and, at the same time, we had some weakness in plant operations in our Minnesota factory. So the problems with 8th Avenue in fiscal '19, I would characterize as near 100% self-inflicted and around execution. We have worked closely with THL and, frankly, THL has taken a laboring oar in working on process improvement, and I think the partnership is working very well to work with the management team and get these problems corrected as we enter into '20. And I think we have very bright prospects both with respect to recovery, ongoing cost reduction and reasonably near term M&A that give us a lot of optimism for the long-term prospects for the business.

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Operator [44]

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Our next question comes from the line of Michael Lavery of Piper Jaffray.

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Michael Scott Lavery, Piper Jaffray Companies, Research Division - Principal & Senior Research Analyst [45]

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You mentioned some of the declines -- or that the cereal business had some declines on the license of cereals. Can you just give us a little more visibility on some of the puts and takes in that business? And how much were those in and outs? Or some of what we should expect looking ahead in terms of what might be a little bit of headwind or tailwind as more new items might be coming?

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Robert V. Vitale, Post Holdings, Inc. - President, CEO & Director [46]

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Well, I think if you go back and look at a little bit of the history of the category, we all know that presweetened has been the subsegment of the category that has performed best over the last decade or so. And about 2 years ago, there was a heavy move into licensed brands, and we were very early in it and took a leadership position with our Oreo licensed product. We then extended that into other products, most of which have done reasonably well. Oreo has done exceptionally well. And at the same time, some of our competitors took a similar approach to licensed product and, frankly, I think the subcategory has become too crowded and what you're seeing now is churn among some of these new licensed more fun flavors. So I think what we're going to see is a winnowing of the winners and losers in that. We have a number of SKUs that we think will be very successful in the segment, but there will be some across the category that need to move out. Otherwise, we're just churning. And it will be a headwind with respect to growth and volume, but it's a new segment that we expect to have strong sustainability going forward.

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Michael Scott Lavery, Piper Jaffray Companies, Research Division - Principal & Senior Research Analyst [47]

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That's helpful. And just back to Weetabix. You mentioned the, I think, it was $1.46 hedges you've had. Can you just give a sense of how far out those go? And is it the easy math that if it stays at around $1.22 or $1.23 or something that you would have that translational hit rolling in at some point?

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Robert V. Vitale, Post Holdings, Inc. - President, CEO & Director [48]

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The first part of your question is they go out 3 years. The second part, and I just want to be real clear because this does get complicated, the way we translate actual EBITDA does reflect the current spot rate. So if it stays at $1.20, it will be essentially where we are today. And it will have give and take from whatever is today, $1.22 and change. The economic reality is driven by the duration of that hedge. So as we repatriate cash, it comes in at a higher level, but the optic EBITDA number is at a spot basis. Is that clear?

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Michael Scott Lavery, Piper Jaffray Companies, Research Division - Principal & Senior Research Analyst [49]

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That's actually really helpful, but just to make sure to confirm, the actual cash is protected by the hedge, but what you report for earnings would be at any current spot rate.

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Robert V. Vitale, Post Holdings, Inc. - President, CEO & Director [50]

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Correct.

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Michael Scott Lavery, Piper Jaffray Companies, Research Division - Principal & Senior Research Analyst [51]

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And the 3 years, do you have rolling ones in terms of -- is it $1.46 all through 3 years? Or is there sort of layers of that, that it would vary?

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Robert V. Vitale, Post Holdings, Inc. - President, CEO & Director [52]

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So I'm going from recollection and would have to get into a little bit of our treasury, but I -- as I recall, there's 2 different swaps with different tenors. But we would -- I would need to get more detail to answer that.

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Operator [53]

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Our final question will come from the line of Ken Zaslow of BMO Capital.

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Kenneth Bryan Zaslow, BMO Capital Markets Equity Research - MD of Food & Agribusiness Research and Food & Beverage Analyst [54]

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I'll keep it short. Did you say the R&D effort that it has to go into the liquid egg? Can you talk a little bit about that? And also I think you also said that you're overhauling the planning process in your opening comments. Just wanted to know what those 2 meant and implications?

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Robert V. Vitale, Post Holdings, Inc. - President, CEO & Director [55]

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Sure. Actually, I think, I made 2 comments about planning. In my prepared remarks, I made a comment about our planning process in cereal. If you go back to having brought Post Foods and non-brands together, we first focused on cost reduction and bringing the teams together. Now we're trying to take that next level of sophistication to really improve our demand forecast because that then has implications around production planning. And the closer that is to the demand forecast, obviously, the better cost we get too. The same phenomenon is true in Bob Evans, but for a bit of a different reason. That reason being, coming out of a restaurant orientation and having built the business out of a sausage shop, it was more of a job shop made-to-order business. And what we're trying to do is get both of those platforms up to state-of-the-art demand forecast through production planning. So neither of those are new. The new information is that we are going further towards an integrated supply chain within our overall refrigerated retail and foodservice platforms so that there will be one delivery system with best execution. The R&D comment I made was we have terrific -- well, really unparalleled knowledge of converting egg commodities into interesting value-added products. And what we wanted to do is catalyze at retail. So we've taken people who have been predominantly oriented towards developing foodservice products and expanded that domain so that there's a retail component to it.

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Operator [56]

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Thank you. At this time, I'd like to turn the call back over to Rob Vitale for any additional or closing remarks.

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Robert V. Vitale, Post Holdings, Inc. - President, CEO & Director [57]

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Well, thank you for hanging with us this morning. We're going to have a post mortem to decide whether this is going to be something we just do once or develop it as part of our conference strategies for tough questions. But again, thank you, and we'll talk to you next quarter.

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Operator [58]

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Thank you, ladies and gentlemen. This does conclude today's conference call. You may now disconnect.