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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 Third 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 pass code is 6892548. At this time, all participants have been placed in a listen-only mode.
It is now my pleasure to turn the floor over to Jennifer Meyer, Investor Relations of Post Holdings, for instructions. You may begin.
Good morning and thank you for joining us today for Post's third quarter 2018 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 and slides that support these remarks are posted on our website, in both the Investor Relations and the SEC filings section at PostHoldings.com. In addition, the release and slides are available on the SEC's website.
Before we continue, I would like to remind you that this call will contain forward-looking statements, particularly with regard to the completion of the proposed transaction with THL. These forward-looking statements 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 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.
Thanks, Jennifer, and thank you for joining us this morning to discuss our third quarter, a solid quarter with some puts and takes, as well as our announcement regarding our private brands transaction. I'm going to begin with an overview of this transaction. As Jennifer mentioned, a presentation is posted on our website and on the SEC's website, and I will be referring to it during my comments.
In January, we announced our plan to separately capitalize the private brands business to pursue a consolidation strategy. Yesterday, we announced that we have done that via partnership with Thomas L. Lee Partners, in which we have contributed our private brands business into 8th Avenue Food & Provisions. The presentation begins on slide 6, following the disclaimers. Slide 6 and 7 provide the transaction overview and its rationale for Post. The terms of the transaction call for 8th Avenue to pay Post $875 million. 8th Avenue will assume $625 million in debt. THL will provide $250 million and receive preferred equity. The common equity will be split 60.5% to Post and 39.5% to THL. THL will accrue an 11% PIK dividend. 8th Avenue will become an unrestricted subsidiary of Post, meaning that 8th Avenue debt will be non-recourse to Post.
Upon closing the transaction, Post's leverage ratio will be 5.5 times. This transaction results in Post returning 100% of its net investment in private brands, yet retaining a material ownership position. 8th Avenue will continue to be led by current President and CEO, Jim Dwyer. Post will appoint five of six directors. THL has governance rights over key decisions involving capital allocation and changes in management. This structure preserves Post's ability to tax-efficiently distribute its remaining position in 8th Avenue to Post shareholders. Most importantly, this transaction enables 8th Avenue management to focus solely on the private brands consolidation opportunities and it enables further direct access to capital.
We are quite pleased with this outcome and we are delighted to partner with a firm the caliber of THL. They have deep experience in building consumer platforms. Both Post and THL are fortunate to be supporting Jim Dwyer and his team. THL was a Michael Foods shareholder when Jim was CEO of Michael Foods.
Slide 8 provides the rationale for a standalone 8th Avenue. First, 8th Avenue has leading share positions in its categories. We believe significant share position is a critical factor in ongoing category selection. Its share positions, its strong customer relationships and its experienced management team well position 8th Avenue for successful M&A.
Second, we expect the integration of these existing businesses to produce cost synergies and create debt capacity. Expanded debt capacity and direct access to additional capital will help realize this strategy. And finally, THL brings strategic and operating resources to further aid 8th Avenue in reaching its potential.
In approaching this decision, we established our objectives as: generating meaningful proceeds for Post; maintaining as much control and equity upside as possible; and transacting in the most tax-efficient manner available. We compared a partnership with a private equity firm, to a carve-out IPO and ultimately elected to pursue this transaction. We believe this structure provides the optimal balance in achieving our objectives.
With respect to leverage for Post, slide 9 illustrates the impact of this transaction. Recall that upon closing the Bob Evans transaction in January, our ratio of net leverage to adjusted EBITDA was 6 times. At the midpoint of our current guidance of $1.23 billion and including a full year of Bob Evans, it is approximately 5.7 times.
The proceeds from the 8th Avenue transaction will be applied to our earliest maturities and further lowers our net leverage ratio to 5.5 times. Strong free cash flow and the 8th Avenue transaction contribute to this meaningful reduction in net leverage.
I look forward to your questions on this topic, but let me again share my personal optimism and excitement about working with Jim Dwyer and THL to build a substantially larger business.
Turning to the quarter, I want to highlight a few items. Our U.S. cereal business had solid sales gains and strong consumption, for transitory pressure on margins. The impact on pricing of a high level of new product introduction and unusual manufacturing challenges reduced gross profit by 570 basis points. I will expand on this.
Net pricing increased 0.4%. However, a high level of new product introductions pressured realized prices. First, we incurred high levels of new product introduction cost directly tied to distribution gains. More significantly, new products were heavily promoted, and as a result, our percentage of sales on promotion increased meaningfully and reduced the overall favorable mix benefit. We believe this promotional strategy is instrumental in supporting our new product launches. The customer support has been quite strong and we are optimistic about the products, but clearly this level of promotion pressured our current quarter margins.
The larger impact was in cost of goods sold, where we incurred $14 million of unusual costs. These include an unplanned shutdown at our Battle Creek plant, timing on the insourcing of co-manufacturing for our new peanut butter-based products, higher than planned plant start-up costs for new products, and inefficiencies around display module assembly. In aggregate, this accounted for 305 basis points of margin. We expect these costs to moderate in the fourth quarter, but not normalize until 2019. Systemic inflation in COGS drove $9.7 million or 210 basis points and incremental depreciation and amortization of $2.8 million drove 60 basis points.
Prospectively, we anticipate revenue management to offset systemic inflation. We expect gross margin in the fourth quarter to expand sequentially, but not reach first half margins until 2019. This amount of unusual noise overshadowed a strong brand performance, particularly with respect to our new products. Our dollar share reached 20.6% and our volume share reached 23.6% in the quarter.
Michael and Bob Evans both had strong quarters in terms of revenue growth, margin management and progress toward synergies. This performance is despite the quarter being hit by $3.5 million from the announced incidents at two precooked egg facilities. We continue to track to our increased synergy target and remain highly optimistic about this combination.
Active Nutrition continues to show substantial revenue growth and reach record margins. We expect to reinvest a portion of the margin expansion into marketing. Weetabix performance was consistent with our expectations for the quarter. Our promotional reset is having the expected result. Pricing is improving, partially offset by some volume declines. The UK market remains choppy and private label maintains momentum.
Finally, I want to make a comment on capital allocation. We've had exceptional free cash flow, both year-to-date and in the third quarter. As a result, we have been able to reduce leverage and acquire 2.9 million shares. We continue to favor a balanced approach with respect to our use of free cash flow.
With that, let me again thank you and I will now turn the call over to Jeff.
Thanks, Rob, and good morning everyone. As you saw in our press release yesterday, we updated our adjusted EBITDA guidance, narrowing the range and reflecting the impact of a fire and a water boil order in our egg business. Our fiscal year 2018 guidance is now $1.225 billion to $1.235 billion.
On a consolidated basis, our performance this quarter was consistent with our expectations, with adjusted EBITDA of $314 million and pro forma net sales growth of 6%. Post Consumer Brands pro forma net sales grew 2.2%, with volume growth of 1.8%. Volume growth was led by licensed products, Pebbles and government bid business, as Malt-O-Meal bags, Honey Bunches of Oats and private label experienced declines.
Post Consumer Brands adjusted EBITDA declined 8% compared to the prior year. As Rob discussed in detail, the segment experienced margin compression driven by elevated promotional activity and elevated manufacturing costs.
Weetabix pro forma net sales were relatively flat compared to the prior year, benefiting from a favorable pound sterling to dollar foreign exchange translation rate. Average net selling prices improved 1% behind reduced promotional activity. This favorability was partially offset by reduced volumes caused by our pricing reset. Segment adjusted EBITDA was $35 million, a sequential improvement from second quarter of $7 million.
Net sales in our Refrigerated Food segment increased 6.6% on a pro forma basis. Foodservice pro forma net sales increased 10%, with foodservice egg volumes increasing 6.6% and foodservice potato volumes increasing 9% on a pro forma basis.
On the retail side, pro forma net sales increased 0.8%. Retail side dishes grew volume 6% on a pro forma basis. Adjusted EBITDA for this segment was $109 million. Bob Evans continues to perform in line with our expectations, while the legacy Michael Foods business achieved meaningful year-over-year improvement, benefiting from higher volumes and improved net pricing, which was somewhat offset by freight rate inflation. Additionally, the quarter was negatively impacted by $3.5 million of repair expenses and margin on lost revenue related to our previously announced service disruptions at two precooked egg facilities.
While all lines were up and running at full production levels by mid-July, we expect an additional impact of between $1 million and $2 million in the fourth quarter as we build back inventory. This impact is before consideration of any insurance recovery.
Our Active Nutrition segment had another great quarter, with net sales growth of approximately 15% and adjusted EBITDA growth at 36%. Shake net sales grew 34%, driven by organic growth, distribution gains and new flavors. Volume growth and reduced advertising expenses more than offset mild inflation in protein raw material input costs and freight rates, resulting in a (13:02) record adjusted EBITDA of $47 million for the segment this quarter. While we continue to expect annual margins in this business to be in the high teens, we expect fourth quarter EBITDA and margins to be lower than third quarter, resulting from brand investment in the fourth quarter.
Our private brands segment grew net sales approximately 9%. Volumes increased 1% behind increases in fruit and nut, granola and nut butter. Private brands adjusted EBITDA was approximately $25 million, relatively flat year-over-year, and pressured by input cost inflation and an unfavorable product mix.
Before we open up the call for Q&A, I would like to make a few comments on freight cost, cash flow and capital transactions. We estimate rate increases for outbound and intra-network freight resulted in an aggregate freight expense increase of approximately $8.5 million in the third quarter and $25 million year-to-date. The year-over-year headwind in the fourth quarter is expected to improve slightly when compared to the third quarter, and is fully contemplated in our adjusted EBITDA guidance. Overall, second half freight cost inflation is trending to the high end of our previously mentioned range of $10 million to $15 million.
Cash flow from operations for the third quarter was $327 million, a record quarter. When compared to the prior year, we benefited from incremental cash flow from the Weetabix and Bob Evans acquisitions, as well as strong organic growth at Michael Foods and Active Nutrition. Cash flow also benefited from timing of interest payments and working capital, which we expect to normalize in the fourth quarter.
In the third quarter, we elected to make a $30 million accelerated voluntary cash contribution to our U.S. defined benefit pension plans, taking advantage of our strong cash flow and the tax benefit of being able to deduct the contribution at the 35% U.S. corporate rate prior to tax reform.
We were aggressive in executing share and bond repurchases this quarter, repurchasing 1.1 million shares for approximately $80 million at an average price of $77.28 per share, and repurchasing $149 million in total principal value of senior notes at an average discount to par of 4%.
The impact of our share repurchase activities is not obvious when looking at our diluted share count for EPS calculations because of the complexities of GAAP accounting. Taking into account outstanding common shares, convertible securities as if converted, and equity awards as if exercised or vested, our share count has shrunk by 5.8 million shares or 7% over the last two fiscal years.
With that, I'd like to turn the call back over to the operator for questions. Operator?
Your first question comes from the line of John Baumgartner of Wells Fargo.
Good morning. Thanks for the question.
Hey. Good morning, John.
Rob, question for you on the 8th Avenue news and, I guess, really about the optionality available in terms of its role as a consolidator. I think just given the leverage, which was I think higher than a lot of us were expecting, so how much of a hindrance do you see leverage to be? How are you thinking about the flexibility to source deals there? And then just thinking through deleveraging, just trying to reconcile that.
Yeah. I think about it in a sequential process. So, first, bringing these three companies together, which should realize some meaningful synergies and expand debt capacity by virtue of the greater level of starting EBITDA. Second, I would view it as opportunities to do some synergistic tuck-in acquisitions, which, by virtue of relatively lower purchase prices and synergies, should have the same effect, ultimately expanding debt capacity. But ultimately, I think you also have the ability to draw additional capital from outside sources once those two events have happened.
I think it's clearly a constraint to be managed, but I would harken back to we bought MOM Brands from a starting point of 6 times leverage. So, the ability to navigate, leverage constraints is something that we have demonstrated ability to do.
Okay, great. And then, just on nutrition, from a top line perspective, can you speak to the capacity situation at Premier, maybe the latest on the Dymatize efforts and also the plans going forward for PowerBar?
Well, the category, broadly, is tight with capacity. I think it's a pretty well-known phenomenon. The Tetra capacity remains quite tight across all users. So we are seeing some challenges in just managing the demand. And I think that we will continue to see that, given the strength of our demand. We could have had a meaningfully stronger volume quarter, but we're managing it aggressively, so that we make sure that we are fulfilling our service rates with all our customers and not overcommitting, but it's an ongoing issue.
With respect to Dymatize, Dymatize has stabilized, albeit at a certainly a lower level than pre-acquisition. And we are now making decent progress and selling Dymatize through traditional channels. Dymatize has been a long challenging story. And I think the challenges from a couple of years ago are well tread, so I won't repeat those. But that whole channel continues to go through turbulence, as it becomes much more an online channel and we see weakness in the core bricks-and-mortar segment of it. But where we do have meaningful strength is the integration of our sales effort into traditional mass and that seems to be gaining meaningful momentum.
And then just last, if I could, in cereal, you mentioned the uptick in promo spending there. And I'm kind of curious how that dovetails with the trade promo software and the analytics that you've been kind of working to improve. Is there anything in this approach now, this tranche of spending, that's different, where you think you'll get a larger ROI relative to past practices? I'm just curious on the efficiency there.
Yeah. I think the difference in this is it was specifically tied to new product launches and aimed at gaining trial. You would also note that we spent less on consumer marketing, so that what we are trying to do is reallocate funds towards direct in-store promotion and the vagaries of how that's counted for as it comes up in pricing as opposed to in our cost structure. So, I would compare it differently than ongoing promotion of mature products, because the attempt was to use it as a means of gaining trial, absent a heavy advertising campaign.
Great, thanks for your time.
Thank you, John.
Your next question comes from the line of Bill Chappell of SunTrust.
Thanks. Good morning.
Good morning, Bill.
Hey, Rob, I'm sorry, but help me understand 8th Avenue a little bit more, I guess, in terms of just going through this transaction. I would assume, I mean you already put the three companies together, and so you were going to get the synergy benefits from there. The company kind of trying to get leverage down to 5.5, there's never been a sense of urgency from Post to get leverage down quickly. I mean, I don't think there's any rush right now. And so, I'm just trying to understand, why not just wait for it mature a little bit further, or even just take it public? I still don't really understand why you wouldn't just do a standalone just IPO.
Yeah. So, the three companies, obviously, were Post businesses, but they were each different segments operating independently, as you may recall. Attune was in the cereal business. Dakota and Michael and Golden Boy was at the private brands segment, so what we wanted to do was combine those. That process is well under way and will deliver synergistic results.
I think in terms of timing, you're accurate to say that we don't feel urgency in deleveraging from an operating perspective, but to the extent we can deleverage more rapidly than not, it allows us to have greater capacity for things that we may want to do, whether it's M&A or share buyback, or even accelerated leveraging. So, all things being equal, we wanted to accelerate where it was prudent to do so.
In terms of the question as to why not do an IPO versus the transaction that we announced, the difference is really trading proceeds versus share percentage ownership prospectively. So, if we were to do a traditional IPO, we would not have been able to leverage it as much and we would have been able to sell a little bit less than the 40% in order to have an efficient execution. When you compare the two, it's a couple hundred million dollars different in proceeds. And we are then able to do all the necessary work of integrating these in a environment that also doesn't require the distraction and effort of executing the IPO and complying with quarterly filing obligations. So we thought, given the gestalt of the transaction relative to the objectives of generating proceeds, maintaining position and minimizing taxes, that this was the right outcome.
Okay. And I'm a little confused just on what's the right way to assume the valuation of this company when you take into account the PIK notes and the cash and the debt and stuff like that? Is it 9, 10 times EBITDA or is it higher than that?
No, we would say it's a little over 10 times. We had a considerable amount of interest in enterprise values ranging between $1.25 billion and $1.1 billion. And with those indications of interest, we then focused more on structure. So, pick a starting point in that range, so 10.50 if you want.
In a straight common transaction for Post to own 60% of that enterprise value with the capital structure we've announced, we would have been able to only take about $100 million less than this transaction contemplates. So, by structuring it in the manner we did, we were able to take out $100 million more today and that $100 million bleeds back to THL through the accretion of the dividend in 8th Avenue. So that by the end of four to five years, the present value of those two numbers, our $100 million today and the present value of their dividend are equivalent. And we now are equally invested in a ratio that produces 60/40. So what it allowed us to do was pull forward proceeds, maintain a significant percentage of the upside by structuring it in this preferred manner, starting with an enterprise value around 10.50.
Got it. Thanks. That helps a lot. And the last one on actual business, is there any reason for concern? You talk about the cereal business and your flagship Honey Bunches and Pebbles, or Honey Bunches, in particular, had some weakness. Anything we should worry about, being it offset by government contracts is not ideal. So I just want to understand kind of the health of the brands.
Well, specifically, Honey Bunches of Oats was lapping a quarter in which we had a very deep promotion in club. And on Pebbles, we're equally lapping some high comps. So I would consider both of those transitory issues only.
Great. Thank you.
Your next question comes from the line of Cornell Burnette of Citi Research.
Good morning. And thanks for the questions, guys. Just wanted to start off, I think you talked about freight still being up and moderating a little bit possibly in 4Q. I guess the question here is, one, kind of where have you seen kind of prices amongst maybe some of your competitors in the retail industry going in response to freight? Are you starting to see people getting more aggressive on price to perhaps start to offset freight?
And then secondly, as you kind of look further past the fourth quarter, do you see freight kind of headwinds continuing to moderate in kind of the next six to 12 months or is this still going to be a significant headwind going forward?
I'll talk about the pricing a minute and then Jeff's going to talk about the freight side. I think in terms of pricing, we're seeing a generally strengthening environment in the form of less promotion and some announced pricing, not specifically in the category, but more broadly with respect to CPG businesses. And then, on freight?
So, on the freight in general, what we saw during the quarter was early in the quarter, we kind of reached a plateau that I think proved to be a bit of a head fake in that in the latter part of the quarter, we saw some acceleration of the increases. And we do see some increases going on in parts of our business into next quarter and beyond.
But, really, the driver of why it's moderating in terms of our P&L effect next quarter is some of the pricing that we've been able to pass through in our non-retail businesses. And strangely, in the Bob Evans business, because we have our own fleet, they actually have a revenue offset that they use when they are taking their trailers back from deliveries. They're able to sell that truck space and they're able to sell that at a higher rate now, given the market conditions. So, the offset that they're getting in their business is part of the reason the fourth quarter, we're expecting to be lower than third.
Okay. Great. And then, if I could just slide in one more kind of related to the Refrigerated Food segment, I think you mentioned that in the quarter, kind of the side dish, kind of pro forma retail side dish, volumes are up 5.9%. Just wanted to know how is that tracking against kind of where your expectations are and where that business has been kind of performing in the past?
And then, secondly, it seems like there's still pretty significant headwinds because I think a lot of that growth on a pro forma basis was kind of offset by declines in retail eggs and cheese and also sausage products. So, just wanted to get kind of how both of those sides of the businesses are kind of evolving and maybe what the expectations are going forward?
Yeah. The Bob Evans business, specifically, has performed virtually in line with our expectation, which is low double-digit growth. Some of the difference in the numbers and the Bob Evans performance is offsets around Simply and cheese that you referenced. So, but the Bob acquisition numbers have performed quite strongly. Cheese business is soft. We have a lot of strength in the ongoing distribution, but we've had some distribution losses as some of our national accounts have chosen to go to national brands. Recall, we have a regional brand. The egg business has been weak-ish, not much different, and I'm specifically talking about retail, has been weak-ish, not much different than it's been in the past several quarters going back a couple of years.
The strength in that business of course, is the foodservice business, both eggs and potatoes and the retail business of Bob. We think that there are opportunities by combining the retail businesses to improve some of the weakness in the Michael retail side. And that retail combination isn't completed until October 1.
Okay. Thanks a lot, I'll pass it along.
Your next question comes from the line of Tim Ramey of Pivotal Research Group.
Thanks so much.
Good morning.
Good morning. Wanted to drill down a little bit more on the outlook in the egg business, specifically on foodservice eggs, I think you've said, and it's true, that you almost prefer lower pricing there because it stimulates new products and development. Has that resulted in incremental products going into the foodservice business?
I would say where it has been most notable is on the some of the more high-margin ingredient opportunities. What we're seeing appears to be a sustainable lift in demand around things like sports nutrition, where egg protein is becoming a alternative to other forms of protein as an ingredient. And it's a higher quality, more value added form of protein, so it's not the more historically low-margin ingredients. So, I think where we're seeing the results of that phenomenon are in that segment.
Are you are you supplying RXBAR? Can you say?
I'd rather not get into specific customers.
Yes. And then, just one on the 8th Avenue, how will that look in your P&L? I understand the debt is non-recourse to the parent, but will you consolidate that and then have a minority interest? Is that the way it'll be presented?
Tim, we're expecting that it's going to be deconsolidated and treated as an equity investment. But I want to caveat that by saying we've got to go through the review with our auditors to completely conclude on that, but our current view is deconsolidate and treat as an equity investment.
Okay. And then just one on RTEs, you have the extreme advantage of having a Chairman who has lived through inflationary pressure cycles in past decades. Is there anything that he is sort of counseling that would be of interest here in terms of how this plays out? I'm old enough to remember inflation being a really good thing for RTEs.
We must come across as younger than we are. I think I'd prefer to keep that counsel to myself and tell you that we think that that environment is clearly changing from one of clear deflation to some inflationary pressures, and that there will be opportunities to respond through revenue management what the specifics of that legacy of counsel and advice is. I think discretion says to keep confidential.
Keep that close, yeah. And then, just finally on pork, I think you did nail down some supply agreements with Bob Evans when the deal was done. Obviously, the cash market is somewhat favorable. I haven't heard you talk about your gross margin opportunities there. Can you just speak to that for a moment?
It will be a tailwind in the quarter as sow pricing has come down. We tend to always view that as a temporary shortfall or windfall because over time, the business returns its cost of capital and we don't tend to highlight it too much because: A, it's relatively small in our portfolio; and, B, it can take away as soon as it gives. So, we try to measure that over a longer period time, but in the quarter, it will be a tailwind.
Perfect. Thanks a lot.
Thank you, Tim.
Your next question comes from the line of Brett Hundley of Vertical Group.
Hey. Thank you. Good morning, guys.
Morning, Brett.
I wanted to follow on that line of questioning and talk about margin expectations in the Refrigerated Foods business. I mean there's a lot of moving parts and there'll be some moving parts to the top line, of course, going forward as well. But if I just isolate margin dynamics maybe going past Q4, I think about egg prices being supported. You just mentioned sow prices are down materially year-on-year right now. Cheese prices have been variable, which may offer margin opportunities. And even spot potato prices, related prices, seem to be coming your way. What talking points might you give us on thinking about segment profitability expectations going forward?
So, without quantifying that and putting it into some qualitative variables, what I would say is we attempt to strip out the pure commodity aspects of the margin and look at more of the value-added nature of the mix. So that the way we see margin expansion to develop in the foodservice business specifically, and even in retail, is to continuously innovate around moving customers and consumers up our value curve from liquid eggs to precooked eggs in foodservice, from a liquid gable top to more an egg solution in retail. And that's where we excel, rather than trying to game the commodity markets. The commodity markets are an input that we ultimately pass through with some timing impact on margins, but unlikely to be long-term impact on margins. Where we have long-term margin impact is by changing the mix of our business towards more value-added products.
Yeah, that makes sense. And maybe specifically on eggs, you mentioned them. Your pricing and volume looked good during the quarter. You're at least, as I calculate it, your profit per pound was down sequentially. And I just wanted to ask you, I hope this isn't too much in the weeds, but we had heard of some breeder issues in the egg space, where more medium-size eggs were getting produced relative to larger sizes. And I had heard that a lot of mediums were going for the breaker, and I just wanted to know if this was impacting Michael margins at all in the form of maybe less pounds per case or anything like that. I just wanted to check in with you and get a comment on that.
No, it's not. The reason for the sequential decline is the production interruption at the two plants we mentioned, and then the residual impact of that modest imbalance in our market pricing versus grain-based pricing that lingered in the second quarter, but did not linger into the third quarter.
Okay. And then, just lastly for me, circling back on 8th Avenue, if you can maybe give us your input on what investors might expect – I know this is early – but might expect from a product transaction standpoint. So, would you expect 8th Avenue to really stay close to what it already produces or could it go outside of that as it evaluates M&A? And separately, would Jim be made available to the Street in any capacity?
In reverse order, we haven't really thought about it. But in your first question, we would expect to expand the categories as part of our M&A strategy. We would like to do both, go deeper into the categories in which we already have a presence and then secondarily, to broaden the portfolio where it makes sense.
In my prepared comments, I made a comment that we think share position is a critical element of category selection. And I would stress that point, that we want to be in more categories, but not too many that we're in categories in which we're not relevant. With respect to availability, we have a partner. And we need to talk through some of that in terms of best use of time and resources, but certainly not opposed to it.
Thanks for the comments.
Thank you, Brett.
Your next question comes from the line of Chris Growe of Stifel.
Hi. Good morning.
Hey, Chris.
Hi. If I could just ask a real quick one about the bag cereal category where there's been a little more competition there, some competitors entering the category. The shelf looks to have gotten quite sloppy for your competitors, but I was just curious what you've seen in that category and how it's affecting Malt-O-Meal as a result.
So, our aggregate bag business continues to grow modestly. We re-introduced Pebbles and Honeycomb into the bag segment. We had previously pulled them out in order to support the argument that the bag section should be a section dedicated simply to bag brands, or better said, non-box brands.
Yes.
But as that has changed, we, too, have changed with it. So, we've seen solid growth in both Pebbles and Honeycomb as a result. Some of that has cannibalized our analogs. But our business in bags in total has continued to increase even though MOM is closer to flat, mostly because of our own introduction.
Okay. I had a question as well about 8th Avenue. And does the formation of that entity, does it create a window for, I'll call it, value realization? Does the structure allow for future actions, if you will, at some period of time in the future? Does this thing need to remain private for a certain amount of time while you build through acquisition? I'm just curious how the structure may change your future opportunities with that stake.
I would say that over time, it doesn't limit any of our opportunities. We have the ability to do M&A. We have the ability to combine with the strategic. We have the ability to take it public or ultimately spin. But in the short term, I would share with you that this has been a lengthy process. The management team needs to focus on finalizing these together, executing the synergies and operating the fundamentals outside a heavily distracting transaction.
Okay. If I could just ask one other quick one, in terms of as Post has built its business over the past six years, whatever it's been, you've been really obviously focused heavily on acquisitions. And now, we have the first divestiture here of sorts or monetization of the business, if you will. I'm just curious as you think about the portfolio today, are you in a position where – and again, you're still integrating Weetabix and Bob Evans farms. I understand that – but where we could consider other transactions here, other things you're looking at that it makes sense to monetize at this point in time?
Without commenting on specifics, what I would tell you is we always view the portfolio as a movable feast that is subject to ongoing evaluation with respect to what's the right composition. And there are certainly assets that would likely be valued differently in a different structure. And where that opportunity exists and we have the managerial bandwidth to execute against it, we will.
Got it. Thanks so much.
Thank you.
Thank you. We have now reached our allotted time for Q&A. I would now like to turn the floor back over to Rob for any additional or closing comments.
Thank you, everyone. And, again, I just want to stress how excited we are to be able to participate in the ongoing development of this 8th Avenue business. We're pleased to have THL as a partner and we look forward to speaking with you again in November. Thank you.
Thank you. That does conclude today's conference call. You may now disconnect.