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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Welcome to Post Holdings' First Quarter 2018 Earnings Conference Call and Webcast. Hosting the call today from Post are Rob Vitale, President and Chief Executive Officer, and Jeff Zadoks, Chief Financial Officer. Today's call is being recorded and will be available for replay beginning at 12:00 PM Eastern Time. The dial-in number is 800-585-8367 and the passcode is 2992278. At this time, all participants have been placed in a listen-only mode.
It is now my pleasure to turn the floor over to Brad Harper, Investor Relations of Post Holdings for introduction. Sir, you may begin.
Thank you and good morning everyone, and thanks for joining us today for Post's first quarter 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. Our press release supporting these remarks is posted on our Web site in both the Investor Relations and the SEC filings section at postholdings.com. In addition, the release is available on the SEC's Web site.
Before we continue, I'd like to remind you that this call will contain forward-looking statements, which are subject to risks and uncertainties that should be carefully considered by investors as actual results could differ materially from these statements. These forward-looking statements are current as of the date of this call, and management undertakes no obligation to update these statements. As a reminder, this call is being recorded and an audio replay will be available on our Web site.
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 Web site.
With that, I will turn the call over to Rob.
Thanks, Brad. Thank you for joining us to discuss our first quarter results and our outlook for the business. I’m going to proceed a little bit differently this morning and reverse our normal order by starting with our guidance. Because we are adding Bob Evans, I want to ground you in the outlook as we move through each business.
Last evening we provided updated outlook for fiscal 2018 of $1.22 billion to 1.25 billion in adjusted EBITDA. This outlook includes Bob Evans and incorporates a modest increase in the low end of our prior legacy guidance. Our volume and pricing assumptions are largely consistent with our prior guidance with the exception of some softness in the U.K.
Across the business we're absorbing freight inflation in excess of our prior estimates that we're bringing into our guidance, all netting to a modest uptick in the low-end and no change to the high side. We closed Bob Evans on January 12, which leaves approximately 8.5 months of ownership during fiscal 2018.
Our guidance reflects an approximate 10% increase in Bob Evans adjusted EBITDA versus the similar timeframe last year, which is consistent with the growth trajectory of the business. Note that the Bob Evans business have significant seasonality with 33% to 35% to its EBITDA historically generated in Post's first fiscal quarter. Therefore this guidance excludes the peak quarter plus 2 weeks.
Last with respect to synergy realization, we're on track with Weetabix and have increased our expectation for Bob Evans. However, recall synergies for both transactions have modest Tier 1 realization peak in year two and have a third-year tale.
With that as context, let me comment on the first quarter performance of the business. Starting with Post's consumer brands, North American cereal results were soft as a result of lapping a quick start trade promotion last year. Additionally, the greater competitive intensity we highlighted last quarter put pressure on Honey Bunches of Oats and Malt-O-Meal bag cereal.
We expect the balance of the year to be more favorable from a promotional calendar perspective. However, recall that this year we expect more impact from commodity inflation and we're making incremental brand investments. We also expect the competitive intensity in cereal to remain high. This is all reflected in both our initial 2018 guidance as well as our updated guidance.
The integration of Weetabix North America into Post's consumer brands is proceeding smoothly, but the synergy realization is modest until late this year and into 2019. In our U.K Weetabix business, our first fiscal quarter is a seasonal low and assessing performance of cumulative six months of ownership is more relevant, nonetheless it was a weak quarter.
Weetabix consumption is in line with the market. However, the price realization was unfavorable as we over promoted. Promotions have grown too frequently and diminished their value in driving incremental sales. We have chosen to pull back some promotion and incur some near-term volume loss in order to reestablish the consumer proposition of our promotions.
Ultimately just like in the U.S., we need less frequency and more depth in order to avoid trading dollars between base and incremental. Meanwhile, we have an ongoing continuous improvement program aimed largely at reducing manufacturing waste. Our targets were not achieved this quarter. We’ve added strong leadership in both continuous improvement and supply chain and we expect to see measurable progress against these objectives in the second half of the fiscal year.
As expected, volumes and margins for Michael Foods have improved and we appear to be back on the steady growth trajectory that preceded avian influenza. We're excited about bringing the Bob Evans foodservice business on to the Michael platform. We now have leadership positions in value-added eggs and refrigerated potatoes. The conversion from fresh to refrigerated potatoes at foodservice is the same value proposition that Michael has so successfully sold in eggs, and we expect that conversion rate to accelerate.
Active nutrition had another solid growth quarter with net sales increasing 21% year-over-year. This brings me to private brands and our announcement in January. We've combined our private brands businesses which include nut butter, fruit and nut, pasta, and granola into one business.
We're exploring a range of alternative structures including an initial public offering, a partnership with private equity firm, the sale or a strategic combination. There are significant consolidation opportunities within private brands and we believe that structure for pursuing these opportunities is outside our full ownership. We will update you accordingly on further developments in this venture.
As I mentioned, we closed the Bob Evans acquisition in January. Our enthusiasm remains quite high. Our integration work has led us to increase our synergy estimates to $35 million to $40 million. We also increased our estimate of one-time integration costs for fiscal 2018 to approximately $30 million from our prior estimate of $25 million. These one-time costs also include Weetabix, but the increase is related to the incremental synergy at Bob Evans.
During the pendency of the transaction, Bob Evans achieved its revenue targets with double-digit growth from last year. However, it had unexpected COGS variance relating to greater than planned volume causing manufacturing bottlenecks.
You may have seen that we announced our move towards an integrated supply chain last week. We believe this move will eliminate the cost over just Bob suffered and will provide the potential for synergies above the revised target. We will update our target as we refine the estimates.
I want to close with a quick comment on share repurchases. During the quarter, we purchased approximately 700,000 shares at an average price of $78.01 for a total of $56 million. Our remaining authorization to repurchase shares is up $176 million. We expect to continue to have a balanced approach to share repurchases and leverage reduction.
With that, let me again thank you for your support, and I will now turn the call over to Jeff.
Thanks, Rob, and good morning, everyone. Adjusted EBITDA for the first quarter was $281.6 million in line with our expectations. Before detailing our business unit results, as a reminder, our segments are presented consistent with our fourth quarter 2017 presentation, and are not aligned with the organizational changes we announced a few weeks ago.
Beginning with Post consumer brands, net sales were $456 million. On a pro forma basis, net sales declined 4% compared to the prior year and volumes declined 2.4%. Volumes and sales were negatively impacted by shifts in the timing of promotional activity when compared to the prior year. Furthermore, volume growth from licensed products Malt-O-Meal bags and private label and government bid business was offset by declines of other branded products.
Post consumer brands adjusted EBITDA was a $109 million. Continued integration cost savings and reduced trade spending was offset by lower volumes, unfavorable product mix and higher freight expenses. Weetabix U.K net sales were $99.7 million, a pro forma decline of 1% compared to the prior year.
The pound sterling to dollar foreign-exchange translation rate was favorable compared to the prior year. However, this favorability was more than offset by unfavorable product mix, favoring private-label sales versus branded sales. Segment adjusted EBITDA was $25.6 million.
Turning to Michael Foods Group. Net sales were $577 million. Egg volumes improved again this quarter, increasing nearly 4%. Egg revenues were up 9% as net pricing increased 5%. Potato volumes and revenues both grew 12% with continued strength in the foodservice channel.
Michael Foods Group adjusted EBITDA was $113 million, a sequential year -- a sequential and year-over-year improvement of $14 million and $21 million, respectively. Adjusted EBITDA benefited from higher egg and potato volumes and improved net pricing, which was partially offset by higher freight expenses.
Moving to Active Nutrition, net sales were $186 million, a 21% increase compared to the prior year, and once again driven by growth in premier protein branded products. Dymatize sales performance also improved this quarter as strong online international sales growth offset ongoing weakness in the specialty channel.
PowerBar sales were soft as we continued to lap distribution losses. Higher shake volumes fueled growth in Active Nutrition adjusted EBITDA to $35 million. This was partially offset by protein input costs inflation and higher freight expenses.
Turning to private brands, net sales were $140 million, an increase of 5% compared to the prior year. Volume growth in tree nut butter and organic peanut butter was offset by declines for certain lower margin dried fruit and nut products. Net pricing increased nearly 7%, primarily related to mix and pass-through of input costs. Private brands adjusted EBITDA was $13.5 million, driven by favorable product mix with higher tree nut butter and organic peanut butter volumes.
Before we open-up the call for Q&A, I'd like to make a few comments on taxes, cash flow, and capital markets transactions. As a result of recently enacted U.S Tax Reform, we recognized the net one-time benefit of $263.6 million in the first quarter. This resulted in an estimated $271 million benefit from the remeasurement of our deferred tax assets and liabilities, and an estimated $7 million expense related to the one-time transition tax on unrepatriated foreign earnings.
Looking ahead, we expect U.S Tax Reform to result in a reduction to fiscal 2018 cash taxes of between $30 million and $35 million. Our U.S federal corporate income tax rate will be a blended rate of approximately 24.5% for fiscal 2018 and then 21% for fiscal 2019 and forward.
In 2019, we also expect the temporary loss of a modest amount of interest deductibility and the elimination of certain permanent deductions. While we’re not ready to quantify cash tax estimates for future years, we expect the ongoing benefit of tax reform to be significant and as you would expect we are actively reviewing opportunities to ensure that we are structured and tax effect efficiently as possible.
Cash flow from operations for the first quarter was $204 million and benefited from a change in the timing of interest payments. The vast majority of our interest is now payable at our second and fourth fiscal quarters. Regarding capital markets transactions, during the first quarter, we issued 1 million -- 1 billion in principal value of 5.625% senior notes. The proceeds were used to redeem our 6% senior notes and pay a portion of the consideration for the acquisition of Bob Evans. With this transaction our debt maturity ladder has been extended to 2028 and our first maturities are not until 2024.
The weighted average cost of our fixed-rate debt including interest rate swap hedges is 5.3% and comprises 84% of our total debt. The remainder of our debt fluctuates with LIBOR. This mix insulates our free cash flow from rate changes in the intermediate-term and the long-term nature of our amortization ladder affords us ample time to deleverage in a manner that will reduce our cost -- that will reduce the cost of our capital structure.
Giving full credit to the Bob Evans acquisition, pro forma net leverage at the end of the first quarter as measured by our credit facility was approximately 6x. We expect net leverage to reduce to approximately 5.5x by the end of the fiscal year.
With that, I'd like to turn the call back over to the operator for questions. Operator?
[Operator Instructions] Your first question comes from the line of William Chappell of SunTrust.
Thanks. Good morning.
Hey, Bill.
I guess, first question on Weetabix softness. Can you -- you said we, but I assume most of the promotions and everything was put in place before acquired the business -- there's barely a 6 to 9 months lag on that. Is that the right way to look at it? And, I guess, trying to understand how much of the softness was a surprise versus how much was just you haven't had a chance to really affect the business?
It's more of the latter. So just to give you a little context, the biscuit segment itself continues to modestly grow and as you know we are the leader in branded when we participate in private-label. But there has been some more pronounced shift in channel mix, more aggressive private-label that has put some pressure on average pricing. And I think we’ve -- to some degree unconsciously allowed the promoted percentage of volumes to creep up and coming in we determined that one of the things we need to address is that promotions creep in order to maintain the efficiency of the promotion versus just trading incremental dollars. But as you I think rightly point out there's a calendar on promoted -- on promotions planning that take some time to work through and even now we're still operating under prior planning. So it will take a couple of periods through really the balance of fiscal '18 now to make the necessary corrections on the promotions calendar and it will involve some near-term volume also, aimed at what we think is better promotional efficiency setting into 2019.
Okay. And then on private brands and the decision there, is there any -- maybe you’ve given some update on timing, is this fiscal year or could it go longer? And then also just maybe the thought behind -- I think you'd previously talked about the private brands segment, but pulling out the Dakota Growers business which is I thought more of a foodservice business, it seems like they’re kind of different businesses. So I’m trying to understand cobbling together decision behind that and then also timing when we'd hear more about this?
Sure. The timing would be towards the end of the fiscal year beginning of the next fiscal year is our target for having something done, so we'd likely announce something earlier than that. With respect -- let me give you again some context on the rationale. We think that there's a real opportunity to be a consolidator in private brands because of all the secular trends that are well-established. We think category selection is critical that the opportunity is meaningful. I think the other reality we face is that in order to pursue that opportunity we need to be set up to do frequent smaller transactions whereas Post is now more oriented towards fewer larger transactions. We think there's a disconnect between our engagement and the capital allocation in the opportunity that exists. So we want to try to structure a company that allows direct capital access, a highly engaged team and we got a great leader in Jim Dwyer who is excited about executing this opportunity. The specifics of the question about Dakota are really aimed at, one, Dakota is about half private-label and half foodservice, so it could really go either way. The inclusion in the Michael Foods Group has really had some benefits as we’ve driven the foodservice volumes. However, what we wanted to do by including it in private brands is really create additional optionality because it gives us options with capital markets, otherwise it wouldn't be existing because of the scale needed to enter that market. So it's more about some of the financial alternatives we are trying to create and the fact that Dakota can be a swing participant.
Got it. Thanks for the color.
Thank you.
Your next question comes from the line of John Baumgartner of Wells Fargo.
Hi. Good morning. Thanks for the question.
Sure. Hi, John.
I wanted to ask about the EBITDA margins at Michael, much stronger than we had expected. Can you walk through the moving parts there, I guess, given that you haven't yet even have the full benefit of the egg price recovery filtering through, how do you think about the business sequentially for fiscal '18?
Well, the first fiscal quarter it tends to be the high mark. So on a penny per pound basis and again we tend to not focus as much on percentage margin as with penny per pound because of the grain-based pricing mechanism. But on a penny per pound basis, it will likely be the high watermark. If you look at Michael's seasonality it's not hugely seasonal, but there's about 27%, 28% of the average EBITDA contributed in the first quarter. So that have some absorption benefits as it flows through fixed cost. So between a reasonably attractive market real success and cost control, real success in driving incremental volume on a grain basis. We had an attractive margin quarter. I think one of the things that could drive it further offset by some fixed cost absorption reduction as volumes come down just from a seasonal perspective is that we will start towards the end of the year to see some of the synergy flow through on both the Michael and the Bob side, very modest in fiscal '18, much more significant in fiscal '19.
In terms of migrating some of the customers to longer-term contracts in the Michael and the egg business, any initial indications of how that’s going?
Yes, it’s going well and it's anecdotal at this point. But we had two very large customers who have made the transition and it's largely gone at the cadence that we have expected. We've been talking about Michael with these expectations now for the better part of two years and I think finally we’ve got the ability to look backwards and say that the pattern we anticipated occurring two years ago has now fully cycled and that the grain-based profile is reemerging in with pretty good momentum.
Okay. And just on BOBE, a pretty nice bump up in the synergy target so soon in the process. Can you walk through the drivers of that? What’s kind of changed there on the call [ph] side?
The biggest increment comes from, generally speaking, supply chain. But one of the things that we were unable to do pre-closing for competitive reasons was to do any real procurement analysis. So the procurement opportunity was bigger than we expected. And as we have driven towards an integrated supply chain that unlocks both near and opportunities as well as some larger potential opportunities and we've not tried to quantify the larger potential opportunities because they involve capital allocation decisions that we've not yet made. We had an integrator work with us and did a very nice job of helping push us on identifying some synergies and I think when you look at our early assumptions which were frankly conservative and you look at the decision to go with an integrated supply chain, the combination of those two resulted in a lift in the estimate and to be fully transparent. If not for the fact that we have to spend a little bit more money this year to get those synergies, we may not have pulled them forward quite so quickly, but we're going to need to spend some money now in order to get them towards the end of the year and into '19.
Okay. And then just last to wrap up, over the past few years you work through some promo inefficiencies between MOM and Post in the cereal business. Now it sounds like you’re addressing that at Weetabix. For BOBE the sausage business receives about, what 60% of the trade promo dollars there and the list on that promo -- the list has become weaker in the measured channels in the last couple of years. How are you thinking about achieving promo improvement at BOBE? And is that already part of your synergy guide? Thank you.
Yes, so I would consider on Bob Evans the trade strategy to be fundamentally different than in the balance of our packaged goods business in that with such a volatile underlying commodity, that’s a means of being a adjustment valve for swings in the underlying commodity versus the attempt within the balance of our portfolio to drive incrementality. So I think it's a fundamentally different way of thinking about trade and one that I would not expect to change materially.
Okay. Thanks for your time.
Thank you, John.
Your next question comes from the line of Chris Growe of Stifel.
Hi. Good morning.
Hi, Chris.
Hi. If I could just ask a follow-up question on Weetabix and just to understand if you were to look at organic sales, I know you gave pro forma sales in the release, but I’m just trying to take out currency it may help better -- kind of illuminate what happened in the business. Was it down in the quarter then the -- kind of the underlying ex currency benefit?
Yes. So the volumes were down 2 or 3 percentage points, I don’t have it at my finger tips. But the currency impact was largely in the -- very latter part of the quarter. So I think while we're all thinking there is a big currency benefit, our guidance was predicated upon a 132, 133 conversion rate and for the fourth quarter that was largely intact. There was a lift from the prior year quarter of about $0.04, but the impact of the recent run-up in currency has been largely a late December phenomenon and its really gain momentum into January. So -- and I should add our guidance continues to be predicated upon a 132, 133 conversion rate. So inherently there's some cushion there. So I think we can overstate the impact of currency in the quarter we just ended.
Okay, got you. And then just to run it out, is there a seasonality factor that at all played into this quarter for Weetabix?
There's a modest seasonality factor, but I think there's also a impact of having last year been a year end and this year not being a year end, so that there was more pressure last year from the prior owner to pull forward into last December that we didn’t repeat. So, there's a little bit of a qualitative difference between our December and their December last year.
Okay. That makes sense. And then on the egg business, I’m curious that you mentioned you made a couple of conversions that have occurred there. How much of your volume broadly is sold at spot versus on a some kind of contract -- on a agreement based contract?
In general, we sell -- I mean historically we sell 25% of it on a spot basis. This year we're selling less than that on a spot basis. We are selling more like 10% on a spot.
Okay. And that -- those are -- that includes those that have already converted then, is that correct?
Correct.
Okay. And then just one final question on the cereal category. I guess, I'm curious if you’ve seen pressure, particularly on the MOM, on the bags from General Mills coming into category? And then just a broad question like can you gain market share you think in cereal this year with more of a comps in Q1 and things get better from here, it sounds like, but I wanted to see what your thought about that?
So, as I mentioned in my prepared remarks our promotional calendar was back loaded this year in contrast to last year. So we have a -- an optimistic outlook that some of the share losses from the first quarter would be regained in the balance of the year, but certainly the competitors effective as General Mills entering the back category matters to us and has an impact. I think long-term the impact is kind of mixed. It certainly validates the bag, I think I’ve commented on this in the past that it validates the bag as a packaging format that historically has been viewed as more of a value with less obvious quality. But when you see some of these box brands enter the bag category, we think there will be some positive carryover into the aggregate bag section. We frankly think that a more vigorous innovation pipeline, some more vigorous advertising and some more vigorous behavior from the category leaders. potentially have some short-term implications for us. But long-term it is helpful in creating excitement in the category and we're by no means above riding coattails.
Sure. Okay. Thanks a lot.
Your next question comes from the line of Andrew Lazar of Barclays.
Good morning, everybody.
Hi, Andrew.
Hi. Couple of quick things. One, active nutrition again performed very well in the top line against a tough comp, I think last quarter you’ve said you potentially expected the rate of sales growth to decelerate but have higher sales dollars on the year. But the sales growth rate obviously continued to clip along at a pretty nice pace. Is that something that was specific you think to the fiscal first quarter or is the pace just still at a pretty high rate and you would expect that to continue to go through the year?
Well, we continue to be pleasantly surprised by the rate of growth. We anticipated the dollar growth as you just indicated, but we just don't feel comfortable to extend that rate of growth and to perpetuity. In this case, I’m defining perpetuity fairly shortly. And we are looking more at what the dollar implication is, but again with every quarter we get pleasantly surprised by how well the brand is doing. So I'm kind of dancing around saying we’re very optimistic for the brand. Whether we can sustain this hyperbolic growth rate for more than a year or two, it's hard to say given the product lifecycle in this category. But we feel very optimistic that the gains will stick and that the a -- an attractive rate of growth will continue without trying to put too fine a point on what attractive means.
Got it. Okay. Thanks for that. And then on Weetabix in the U.K., if I’m understanding you right, it sounds like potentially we could expect over the next couple of quarters volume to weaken some, but potentially margins be a bit above sequentially where we saw them in the first quarter just as you shift off a little bit volume for more effective promotions, is that a fair assessment?
Well, that’s a fair assessment. But I would add to that assessment that part of that margin story will be getting our CI program more in line with our plan. So we had a weak delivery of our CI expectation in the first quarter. So it's a combination of better pricing, but equally significant is just driving that CI cost reduction that we have identified and think will flow through.
Got it. Okay. And then, just last on cereal. Obviously, you're getting some benefit on cash flow from tax reform, perhaps some of the major players, branded leaders in cereal will have a large benefit as well in cash and on the P&L. So, I guess, your -- the way you’re sort of budgeting and thinking through how you’re thinking this through the year in consumer brands. Do you feel like it takes into account what potentially some of these players could will do in the interim with some additional flexibility from tax reform? Again, we don’t know how much will be reinvested by the branded players against consumer promotion and branded innovation versus some near-term promotional or pricing activity. I’m just trying to get a sense of how, I guess, prudent and conservative being on that piece of the business?
Yes. Well, as you can anticipate we do multiple scenario analysis, so we’ve got various planning based on different predicates. I think we have -- we’ve tended to be conservative on guidance and we think we're continuing to be. I think the group will be in the pudding in terms of how aggressive competitors respond, but we think we’ve incorporated most realistic scenarios.
Okay. Thank you.
Your next question comes from the line of Jason English of Goldman Sachs.
Hey, good morning, folks.
Good morning, Jason.
Thank you for squeezing me in. I guess, I will pick up a bit where Andrew left off in terms of understanding the dynamics in the U.S -- U.S cereal space. Have you begun to see any shelf resets shrinking space for the category overall? And if so, how are you faring in those planned resets?
I think if you look over multiyear period, yes, in any one period the shrink is pretty small, but over the last five, six years it's probably about a 10% decline. We have fared pretty well. Our net real estate has expanded in that timeframe predominantly from bag?
How about more recently? I'm less focused on sort of the past and more focused on the now. Any implications on the forward, anything more dramatic you’re seeing this year?
None that affects us, and I don't know that I can tell you yet as it affects category as a whole, but we’ve not in the short-term seen anything shrinking our footprint.
And so back to more specifically to Andrew's question to the promotional aggression, we've clearly seen mills with a heavy, heavy investment posture in the category. You’re kind of signaling just based on cadence that your posture is going to become more aggressive as the year progresses. And I'm not sure what you're seeing from Kellogg, but it seems reasonable to assume that they ramp as well. How do you expect the category to behave? I imagine it's going to be some deflationary pressure and -- if you can give us any more context around sort of the specifics of what your planning assumptions are as we think about that business for the rest of the year?
Yes. I don't want to get into details around competitive reactions and planning assumptions because I don't want to talk about it in a form like this. But what I can assure you is that we have an array of variables that we assume move from both not just the two you named, but the other participants in the category as well. And we have responses anticipated to those, but I don't want to get into what the individual assumptions are around that other than to say that I think your general thesis of some price deflation, as you’ve seen this quarter is consistent with our expectation for the balance of the year.
Understood. Thank you. And then, two quick questions on Michael's interrelated. That 10% figure on spot for eggs, it that your expectation for the year or is that where you’re running for the quarter?
That’s -- were more quarter. The year could shrink a little bit more. It's probably not terribly far off for the year either.
Okay. That’s an encouraging data point, because it suggest that there's -- it's clearly a little bit of concern that given the spread between grain and spot egg prices right now that you may actually be back to an over earning period. And that this may be a high watermark, and once you convert customers back into contracts the EBITDA will have to slide lower and so you wait for sort of volume to grow into that. Is it fair to say that with only 10% of spot that we shouldn't be overly concerned about that right now?
Yes. I don't think -- as I mentioned, we have -- it is a high watermark for the year. We don't think there's a fundamental over earning situation as we have in 2016. If you extrapolate our earnings and fiscal for -- in our first fiscal quarter times 4, you get a pretty high number and it is comparable to 2016. But that's not the trajectory of the business because of seasonality. So we do not feel like we're in a situation similar to 2016.
Super helpful. Thanks, guys. I will pass it on.
Thank you.
Your next question comes from the line of Cornell Burnette of Citi.
Great. Thanks a lot guys. First question I had was just, if you can kind of marry some of your comments in terms of, perhaps, kind of seeing some type of price deflation in the cereal category with the fact that kind of freight costs are coming in higher than your expectations and are probably hitting everyone else in the industry. So I just wanted to know is kind of what’s the thoughts on people seeing higher cost perhaps keeping some of the competitors a bit more honest as the year progresses in cereal?
Well, so of your question is will some higher input costs drive more inflation versus anticipated deflation, we'd certainly be encouraged to see that. But I don't -- we’re not going to plan around that. We're continuing to look at our non-commodity cost and be aggressive in trying to take as much as we can and maintain our margin structure. But given our relative position in the category we take a more wait and see approach on that.
And then just generally can you give comments generally across a number of new categories within at least the retail space on just how you’re seeing the kind of pricing environment play out this year and perhaps how does it compare two years past?
Well, it's a very aggressive environment. I mean, you’ve seen the Nielsen report and -- we’ve got not this isn't broader than cereal, because private label has not been as strong as cereal, but we’ve got some encroached in our private label. We’ve got some competitive intensity. So it is a difficult pricing environment.
And then the last one is, I get where you’re coming from and everything like you said on Michael's is pretty clear. But perhaps on the previous earnings call, there is a mention that kind of fiscal 2Q would be a big quarter in terms of the year-over-year comparisons in total EBITDA and a lot of that was driven by Michael's which I think kind of last year fiscal second quarter is when it was hit the worst. Is it still the expectation that, kind of 2Q is one of -- it's not the biggest kind of quarter in terms of year-over-year delta in Michael's Foods growth, EBITDA growth?
The -- if you look at the cadence of this quarter, there has been some slight shift from the second quarter to the latter half of the year. We still expect as we talked about last quarter there to be sequential growth throughout the year. So I would say the growth is continues from Q1 to Q2 at a more modest rate than we had expected last quarter, but then we have a greater rate going from Q2 to Q3. So there's been a little bit of a timing shift.
Okay, thanks. And then just the last one on cereal. I know in the past you’ve talked about -- making some more higher consumer marketing investments this year. Just wanted to know what's the kind of the -- what’s in the base in terms of the year-over-year delta and consumer marketing spending? And kind of has that changed as perhaps, maybe your view on the category has shifted a little bit over the past quarter?
We’ve $25 million increase year-over-year just in cereal and then across the portfolio it was closer to $35 million. We have made a -- some very modest reductions in that outside of cereal. Cereal remains intact and we evaluate that on a constant basis.
Okay. Thanks a lot. I will pass it on.
Thank you.
Your next question comes from the line of Tim Ramey of Pivotal Research Group.
Thanks so much, Jeff and Rob.
Good morning, Tim.
Couple of quick ones here. On Michael's -- Michael, the cage free egg conversion, should we be thinking about that as also a capacity addition? How should we be thinking about volume or is that more of a just conversion?
No, that’s more of a conversion. I wouldn’t think about that, because what we did was we took the farm down and converted it.
Okay.
There is a modest increase in the productivity of the farm that we're replacing versus the farm that preexisted. But the -- it's more about capabilities and capacity.
Okay. Would you argue that the first quarter volume performance in the egg business was a high watermark as well?
Not on a percentage basis compared to prior periods. Just intra year.
Okay. And then on Bob Evans, the -- I had a $107 million number in my head as a base, so I don’t know if that’s actually what you’re thinking of as the base for EBITDA there. Is there an update on that number?
So it roughly flows through on that basis through the balance of the year, but the -- but if you looked on a historical basis because of some cost overruns related to very specifically the Lima facility they would not have gotten that. But on a perspective basis they’re in line with that.
Okay. And I was intrigued by the probiotic initiative at Kellogg in adult RTEs. You guys have some expertise with the supplement business, although maybe not probiotic specifically, did that cause any thinking caps to go on relative to innovation in RTE?
It certainly does. I think that we laud the efforts I think they talk about the microbiome and the impact on how to address gut heath more generally and I think a lot of the work they're doing in that area is encouraging and things that we spent time on as well.
Good. Okay. Thanks so much.
Thank you.
Your next question comes from the line of Ken Zaslow of Bank of Montreal.
Hey, good morning, everyone.
Hi, Ken.
Let me just start off. So even with the intensity in the cereal category, the logistic costs, all that, you guys obviously felt more comfortable with the outlook by at least raising the bottom end of the range. What was that predicated on?
General performance of the business, the degree to which we -- I think you know from our past behavior that we try to handicap more broadly in the beginning in the year and as we go through the year release hedges. So as the quarter passed and some of the assumptions came in and generally in line. There's obviously some puts and takes, we had some comfort to take out, some of the hedges.
Okay. And then as you integrate these businesses, it seems like the both of the businesses seems like there was some lack of better word management miscues, not by you guys, but by the previous owners of both businesses and then you guys can come in kind of rectify some of these somewhat shortfalls, is that included in how you think of the synergies or is that potentially an incremental opportunity of just kind of, hey, let's run these businesses a little differently than the previous owners?
So if I understand the question I would tell you the way we think about synergies is not -- we try to be intellectually consistent that synergies are on top of our underwriting case, so that to the extent we need to remediate something that's not a synergy as much as a correction to the baseline. So to the extend they were bottlenecks in manufacturing that one obvious early in the year and became obvious at the peak season, those are fixable growing pains. But the incremental synergy is not based on growing or expanding off of a reduced base, it's off of the original base. With Weetabix I think it's less about a change in synergy as it is just a change in a pricing strategy.
But would that not change the earnings power of both these businesses relative to your expectations? Is that not how to think about it?
Well, in the case of Bob Evans it will certainly do so. In the case of Weetabix, I think it will get it back in line with history and then the question is can -- will the synergies which are flowing through and will some of the improvements that we think are obtainable on the CI program, drive incremental performance over the baseline. We believe that will occur, but it's not going to occur until '19.
Okay. And then where are the opportunities for distribution gains in Bob Evans? Your don’t talk about that much, but it seemed like their previous strategy was to get distribution, you guys have a more extensive network. Where does that lead and just I one quick question after that. Thanks.
Yes, broadly the answer is in the western part of the country where the brand tends to be less penetrated.
And what’s the timing on that?
Its ongoing. They have been doing a nice job of gaining it pre-acquisition and it's -- their ACV growth is -- has been fairly consistent for the last handful years and we expect that to continue and to accelerate.
And then the last question, what prompted you guys to buy back stock? You don’t do that often. Just give us a little heads up on that and where is this going to?
Well, we thought and think that the price was attractive and chose to act on that. Not more complicated than that.
Okay. Thank you very much.
Thank you.
Your next question comes from the line of Brett Hundley of Vertical Group.
Hey, good morning, guys.
Hi, Brett.
I wanted to ask you about your updated BOBE synergy target. You gave us some good direction on just -- some modest benefits this year and then more meaningful into fiscal '19. I mean at this point in a vacuum should we just be thinking about the lion share of that synergy targets still being potential for that to be available in fiscal '19?
Yes.
Okay. And then I wanted to ask you about your NPE business and maybe separate out two comments if I could. So, number one, with the view that maybe the specialty egg market has built out a little too much, I was just curious how that might impact NPE if at all? And then related do you guys still think that you can deliver on your synergy target there as well? I think the bulk of that synergy was supposed to come this year, if I’m not mistaken?
Yes, and it has. So that business generated about $4 million in the quarter and we had -- when we bought it, it was generating about $9 million a year. So we're well ahead on our synergy targets for NPE.
Okay. Okay. And do you feel like any changes in the specialty market have affected you? It doesn’t sound like it.
No. I mean, we’ve been very successful with NPE and with our specialty acquisition in Willamette. So those have been nice accretive acquisitions for us.
Okay. That was good to hear. And then just my last question, Rob is just -- I probably know the answer to this, but when I think about new tax reform or just potential policy change in general, but mainly related to tax reform and some different changes there. And I think multiple years out, does that shift the company's stance on its asset strategy at all to may be more of a seller versus being a buyer before? Maybe I ask differently, I mean, does it change your views on leverage at all? Just be curious to get a comment from you?
Yes. So I -- when asked this question historically, our answer has been the changes in tax law have tactical but not strategic implications on where we take our business. The reality is that having accumulated this group of businesses over the last five or six years now is the natural time to start thinking about what is the optimal structure in a variety ways, irrespective of tax reform. So tax reform just adds a layer of entry to some of the corporate organization work we're doing and one of the evidence of that is our decision of private brands. So I think the tax reform -- first of all, I think we are -- we would much rather operate under a tax regime at 21% than 35% full stop. There are some mitigants to that, but I think that we have the planning ability and the creativity and conviction to work through that in a manner that allows us to win from tax reform.
Thank you.
Your next question comes from the line of Bryan Hunt of Wells Fargo.
Thanks for your time. A couple of my questions have been asked. I’ve got two left. One, I was working if you could just -- given the change in guidance, what your outlook is for kind of composite inflation on packaging ingredients and transportation?
So at our fingertips, we don’t have the percentages but the numbers are -- we're looking at an aggregate about $15 million of freight. The ingredient inflation year-over-year was about $15 million and cereal and another $10 million, so $25 million. So between the two, and those are the two big buckets we’re facing right now. We were looking at [indiscernible] million of cost absorption.
Okay. And then my second question is, when you look at the evolution of click and collect and delivery, it's bringing a new level of price transparency and maybe different levels of packaging to the industry overall. Can you talk about what that means for product innovation, price pressures from your competitors as well as maybe change in marketing tactics on a go forward basis?
Well, since I think you’re asking the question you kind of hit on the big ones. We have to think in an omni-channel basis and think about everything from the package form to the package size to the price point, deliverability. So I think what it requires is a -- going back to a LIBOR level and reconstructing the product form to fit the consumer who wants to move to that kind of shopping behavior. Now in the cereal at this point it is a very modest portion of the consumer. Where it's more important to us, at least in the short-term is in our nutrition business where we are pretty well-positioned by virtue of the price point and the product form. It's fairly high price point, works very well and in fact, online has been a very substantial growth vehicle for us in the last really two quarters, but particularly the fourth quarter. So I think it requires addressing all the things you raised and it also requires a different nuance from business based on customer behavior, temperature profile, price points, all of that.
Thank you for your time. I will hand if off. Thanks.
We have reached the allotted time for questions-and-answers. I will now turn the call to Robert Vitale for any additional or closing remarks.
Again, thank you all for joining us. We feel good about the way the year is shaping up, despite some challenges that we’re going to face in any portfolio of this size. And we look forward to talking to you again in May. So you all have a good spring.
Thank you for participating in the Post Holdings' first quarter 2018 earnings conference call and webcast. You may now disconnect your line and have a wonderful day.