Welcome to Post Holdings Third Quarter 2017 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 51664510. [Operator Instructions]. It is now my pleasure to turn the call over to Brad Harper, Investor Relations of Post Holdings, for introductions. Sir, you may begin.

Good morning. Thank you for joining us today for Post's third quarter 2017 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 website in both the Investor Relations section and in the SEC filings section at postholdings.com. In addition, the release is available on the SEC's website. Before we continue, I would like to remind you that this call will contain forward-looking statements, which are subject to risks and uncertainties that should be carefully considered by investors as actual results could differ materially from these statements. These forward-looking statements are current as of the date of this call, and management undertakes no obligation to update these statements. As a reminder, this call is being recorded, and an audio replay will be available on our website. And finally, this call will discuss certain non-GAAP measures. For a reconciliation of these non-GAAP measures to the nearest GAAP measure, see our press release issued yesterday and posted on our website. With that, I will turn the call over to Rob.

Thanks, Brad, and thank you all for joining us discuss our third quarter results. We had a strong quarter with adjusted EBITDA just over $244 million. This was the first quarter this fiscal year during which the EBITDA declined in Michael Foods. It was more than offset by growth in the balance of the portfolio thus producing year-over-year EBITDA growth. We expect more of the same in the fourth quarter. As you can see from the guidance included in our earnings release yesterday, even ignoring contribution from Weetabix, we are confident in delivering full year growth in legacy adjusted EBITDA despite lapping Michael Foods' extraordinary performance last year. More specifically with respect to each segment, Post Consumer Brands is well into the final stages of the integration of Post Foods and MOM Brands. Our attention is turning to the Weetabix North America integration and remains focused on continuing to deliver solid results in a challenging category environment. Cereal category trends weakened this quarter with a decline of 4.8% in dollars and 3.9% in pounds. We continue to see declines most pronounced in adult brands, all family brands performing with the category and kid's brands performing ahead of the category. Specific to Post, our consumption was down 1.9% on a dollar basis and 1.7% on a pound basis. However, our dollar and pound share increased to 19.2% and 22%, respectively. Malt-O-Meal bags and Pebbles each had a good quarter, growing pound consumption 4.2% and 1.6%, respectively. Honey Bunches of Oats consumption continues to be pressured by distribution losses of ancillary SKUs and general weakness in the all family segment. Great Grains consumption comparison remains negatively impacted by products discontinued in 2016. Our fourth quarter will be the first fully comparable period. Core Great Grains consumption performance was flat this quarter. Overall,…

Thanks, Rob, and good morning, everyone. Third quarter performance was in line with our expectations with consolidated net sales of $1.27 billion and adjusted EBITDA of $244.1 million. Beginning our segment results discussion with Post Consumer Brands. Net sales were $427 million, a decline of 1.7% compared to the prior year. Total sales volumes declined 1.1%. However, product mix improved with volume increases for Malt-O-Meal bags and Pebbles and from initial sales of new license products. As with the first and second quarters, we saw decreases in lower-margin government bid business, a trend we expect to fully lap at the end of this fiscal year. Post Consumer Brands adjusted EBITDA was $125 million for the quarter, a 20% year-over-year increase and benefited from cost savings, improved product mix and reduced consumer advertising and promotion. This was partially offset by a mix driven increase in trade spending and timing of promotions when compared to the prior year. Turning to Michael Foods Group. Net sales were $524 million, a decline of 4% on a pro forma basis. Cheese net sales were the largest driver as volumes declined significantly resulting from branded cheese distribution losses in the second quarter of 2017 and the exit of certain low-margin private label business in the fourth quarter of fiscal 2016. Egg volumes increased 6% on a pro forma basis although we continue to see delays in customers returning to value-added egg products with the ongoing low market prices for shell eggs. Egg revenue decreased 2% on a pro forma basis as we continue to lap the impact of avian influenza pricing and experience lower pricing to our market-based customers in line with Urner Barry market prices. The rate of pricing decline has improved however when compared to the declines in previous quarters. Michael Foods Group adjusted…

[Operator Instructions]. Our first question comes from the line of Jason English of Goldman Sachs.

A couple of questions. In terms of the full year outlook, can you quantify how much Weetabix EBITDA is in your full year outlook, your revised full year outlook?

The fiscal fourth quarter for Weetabix is roughly 25% of our year, and it is performing consistent with our underwriting case previously announced, which was £120 million of adjusted EBITDA.

Okay. We'll do the math on that. Consumer Brands, solid, solid results this quarter. Concerning category trajectory though, can you give us a sense of where you stand in terms of the synergy realization with MOM integration? Are the residual synergies still into next year? And how do you see the glide path of bottom line results if we look beyond just this year? And I'm not asking for guidance into next but just philosophically how you think about the profit stream for that sleepier portfolio given what's going on in the category overall.

Sure. So when you look at the sequencing of synergies throughout the year, you certainly have a annualization impact because obviously not all synergies are realized on day 1. So there's a carryover impact of synergies realized in fiscal '17 that will hit in fiscal '18, and then there's some incremental synergies to be finalized from the post MOM acquisition and the initial synergy realization in fiscal '18 for Weetabix. And frankly, the initial synergy realization from Weetabix will have a relatively modest impact on '18 and a growing impact on '19. With respect to the second part of your question and the glide path on earnings, I'm not sure I like the phrase glide path on earnings. But the trajectory of earnings is that we have always considered the cereal business to be, on an EBITDA basis, a flat to growing 1% component of our overall portfolio. And I think our last call or maybe the previous call, we talked about the long-term value algorithm of a 4% to 5% EBITDA growth with free cash flow generation reducing debt or providing incremental M&A. Attended to that 4% to 5% growth in EBITDA is a 0% to 1% growth in cereal. So we don't have ambitious growth rates baked into our assumption from cereal. We've obviously been doing considerably better than that, and additional consolidation, i.e. Weetabix, can drive better than long-term trajectory opportunities in the near term. But that's how we think about the long term.

And two of your competitors, Kellogg yesterday said they plan on ramping some merchandise activity into year end. General Mills has signaled the same within cereal. Are you seeing any evidence of that? And given where the category is going and potential competitive intensity, why shouldn't we view 0% to 1% growth for that business as indeed rather ambitious?

Well, yes, I think the -- to the first part of your question, we have seen it, we have baked it into the assumptions for the balance of the year. So there's no -- while the competitive intensity is as you've described, that's been factored into our forecast. I think if you look at the overall category, the challenges of the category are most pronounced in the adult segment. Older consumers are choosing breakfast alternatives that better fit their perception of their nutritional needs, chiefly more protein which benefits other parts of our portfolio. The other segments of the cereal category are performing generally better with pre-sweetened performing pretty attractively. Our portfolio tends to skew pre-sweetened. So we feel better about our outlook in the overall category. When you talk about improving the category in general and what the category leaders are doing, I was encouraged to hear some of the themes from other calls about making inroads towards a better articulation of the nexus between nutritional impact on gut health and the microbiome and how fiber has a role to play. And I think that if those trends can contribute to arresting the decline in the adult segment, then the category goes a large way, not entirely a large way towards restoring its health and becomes -- supports that 1% or 0% to 1% as a reasonable assumption. Meanwhile, what we can control and do is the blocking and tackling around the segments of the category in which we operate well.

Our next question comes from the line of Andrew Lazar of Barclays.

Let me start off with just taking some of the simple math you mentioned for the Weetabix addition. If we, let's say, build in roughly a quarter of the expected contribution into your fourth quarter, I guess it looks as though you've essentially raised the underlying or legacy EBITDA range that you had previously put out, at least the low end, I call it $15 million or so. And if that's right, I'm just trying to get a sense, I guess, of what would be the key contributors to again the legacy range or at least the low end of the legacy range coming up by about $15 million for the year.

Strength in PCB, Post Consumer Brands, strength in active nutrition and better cost management at corporate. Michael is pretty much coming in as expected, slightly better than expected, and Private Brands is coming is essentially as expected.

Okay. If we -- I want to make sure I understand your comment about Michael. I think you said we look forward to essentially eliminating the performance gap in 4Q versus 3Q.

No, 4Q versus 4Q of last year.

Does that mean essentially basically the EBITDA declines year-over-year that we've seen essentially moderate or we get to basically flat with the year ago?

Yes.

Okay. And then last thing on Michael, this year was obviously sort of an underearning year following an overearning year kind of thing. But given where we've seen the price of shell eggs thus far, I guess there's that thought process that maybe Michael, the business is sort of overcorrecting to some extent this year. And I realize we need to see shell egg prices start to move in the right direction a bit more aggressively. But can you talk a little bit about that even as you think into '18? And if there's this overcorrection, what do we need to see to have that bump back to a more normalized level of Michael earnings next year? So what do we need to see for that? And then how do you see perhaps the timing of when that could happen? Is it as we head into fiscal '18? At best, does it seems like it's more of a back-end-loaded fiscal '18 scenario? Trying to get a sense of the puts and takes there.

Sure. The key variable for getting Michael back into a "normal" environment is a normalization of the balance between the way it sells and the way it procures, which is this imbalanced problem that has persisted throughout fiscal '17; and secondarily, a more normalization of the cost relationship between market-based eggs and grain-based eggs. Both of those are occurring throughout '17. And while the player population lacks respect for our fiscal year-end cut-offs, we'll continue into the first quarter of fiscal '18. So I would not characterize it as back-end of '18. I think what we will see -- I don't want to give guidance, certainly not at the segment level on '18 yet. But we feel very comfortable with the demand drivers and the margin drivers of Michael as we position for '18 that it bodes well for meaningful improvement over '17 results. And going back to that algorithm we talked about, everything we see now, the algorithm being my comment on 4% to 5% EBITDA growth, everything we see now supports that, including Michael.

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

Maybe the first question, Rob, on Michael, I think the one variable that didn't -- wasn't really as clear at the outset, it was bird flu, was demand destruction, which looks like as it's devolved has been larger or longer-lasting than maybe you initially assumed. So can you maybe just update us on how you're thinking about this egg business long-term, what if anything has changed versus when you first bought it and maybe outline any kind of opportunities you might choose to accelerate market share gains or push more for value-added products in the future?

Sure. I think that it is fair to say there was demand destruction predominantly in the ingredient channel. While that was the lowest margin channel, it certainly was profit contributing, and that we don't believe that there has been any permanent demand destruction in food service or retail but that there has been some delay in the reconversion from shell eggs to more value-added products simply because of this sticky price situation that has persisted throughout '17. So we don't expect there to be any long-term effect because we have a demonstrably superior value proposition when you factor in labor reduction and food safety when selling into the food service, particularly the food service channel. But it has taken longer than we expected. So yes, there has been demand destruction in ingredient, but we do not believe there has been any retail and food service in aggregate demand of egg consumption, and those channels combined has grown.

Okay, great. And then just as a follow-up, you touched on the softness at Dymatize, I think, Jeff. Given the success you've had with Premier moving into FDM, how do you think about your ability to leverage your distribution there? Maybe channel hop Dymatize into FDM more broadly. It seems like it's more of a channel issue than it is a brand issue, if I'm correct.

You are correct. The brand is performing very well in a channel that is struggling. And I'm not prepared in this format to talk about how we're going to deal with specific customer strategies. But your premise about the brand operating well in specialty, especially struggling, is accurate.

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

If I could I just ask, first of all, I hate to ask another egg question but just in relation to the improved pricing we've seen throughout the quarter. We're headed back towards an equilibrium in pricing, and I know you had noted that Michael is beyond $100 million for the year. I thought that would actually improve a bit, maybe not ratably, but improve a bit from that previous view, given that improvement in pricing. So maybe you could better characterize the pricing improvement or that movement towards equilibrium that we're seeing today.

Sure. I think your base assumption is correct but we've had some weakness in cheese that have pushed us back towards that hundred million dollar level. So we tend to talk a lot about eggs, but the aggregate Michael Foods Group decline of roughly $100 million has got a component to it caused by the cheese business.

Okay, that's good to hear. I have question for you in relation to the cereal business. You talked about needing to make some investments in there, innovation. I'm just curious when that starts to kick in. Would that start in the fourth quarter? Is that more a 2018 investment level that would be coming behind innovation in that business?

No, we've ramped it out throughout '17, so we feel quite good about our innovation pipeline now. Coming out of '16, it was relatively low, but we've introduced 2 new products that we have a pretty optimistic outlook on, and we feel quite good about the depth of our product pipeline for the next fiscal year.

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

I think I know the answer to this but I just wanted to ask, do you expect to hedge the P&L at Weetabix? I know you have the sterling debt that you issued, which works somewhat like a hedge.

Tim, we didn't actually borrow in sterling. All of our debt is denominated in dollars, but we did enter into a cross-currency hedge for about £350 million notional level as a partial hedge against the cash flow we expect to generate in pounds that we would use to service the dollar debt.

Frankly, one of the opportunities we saw at Weetabix as we thought we had an attractive currency entry point, and we wanted to get some exposure to it.

Great. And your comment that 3Q was about 25% doesn't imply much seasonality to Weetabix, but I assume that winter time is slightly higher consumption than summertime. Is that correct?

There is more seasonality than you would expect. It's a bit coincidental that the third quarter happens to be roughly 25%. And as we get into communicating more about '18, we'll try to educate the market more on the seasonal aspects of Weetabix.

Got it. And with the significant decline in cheese, is there issues on capacity utilization there? As I recall, that was a fairly regional business and maybe not a lot of optionality on plant closing. Can you pick up more co-man business? Or what's the strategy for handling the capacity utilization?

It certainly has created a capacity situation and had an impact on margins. It's more about blocking and tackling within the nine-state region, which we have good share, rather than moving into any co-man. We essentially cut a pact. So from a co-man perspective, we don't have a lot of whole value at. So it's more about being creative with the brand and trying to come up with new packaging alternatives rather than specifically trying to drive utilizations through co-man.

Okay. And Jeff, what do you expect cash taxes to be in '17? Do you have an update on that?

Well, so for '17, because of the onetime losses we record for debt refinancing premiums and the earlier settlement of the legal case, cash taxes this year are going to be pretty close to 0. On a more normalized basis when we incorporate Weetabix, we see cash taxes in the $150 million to $160 million range.

Our next question comes from Ken Zaslow of Bank of Montreal.

Just a couple of questions. One is yesterday Kellogg indicated that in the U.K., they were actually starting to gain share for the very first time. Can you talk about or discuss your thoughts on U.K. cereal business and your positioning and how does that change the dynamics a little bit?

The U.K. cereal business is much like the U.S. business with the notable exception that -- and that's in terms of volume and dollar or pound growth, with the notable exception that the stronger component of the U.K. business is the healthier adult segment. And we continue to gain share in that segment with the Weetabix brands. So the Weetabix brand continues to perform quite well. I think Kellogg's has made some progress, but our sense is that it has come from other sources.

Okay. My second question is I think you said in your comments in terms of why you were able to raise your guidance a little bit is because corporate expense came in lower. And again, if you look at corporate expense, corporate expense was lower. What actually happened there and is that a sustainable kind of reduction?

I wouldn't model the third quarter level as an ongoing rate part of what is happening there. We have a fairly significant component of our corporate cost that's affected by mark-to-market of our stock price on cash-settled equity awards. So if you look at the beginning of the quarter, end of the quarter stock price, it was down this quarter, which caused some downward adjustment. Obviously, we wouldn't expect that to be the case long term. So we don't necessarily expect to get that back. But if you look at our first 2 quarters, that's probably the better normalized level of ongoing corporate expense.

And my final question is I think, Rob, you said that were -- you had more meaningful cost savings in the integration. Can you just discuss what they were? Was it earlier than expected? Is it typical? Just give us a little bit more color and flavor for that. That would be great. I'll leave it there.

Yes, so I would say that was an -- it's a bucket of cost reduction that is quite widespread. Some of the longer components would be ongoing reduction in our packaging, ongoing -- by virtue of greater volumes, ongoing reduction in our transportation and warehousing is just large and pretty solid performance of the core business. So it's a combination of those effects.

Our next question comes from the line of Cornell Burnette of Citi.

Just wanted to ask on cereal, kind of year-to-date, what was the change in consumer marketing spending? And what is that expected to be for the full year and kind of how if you could just go over on kind of you see your share voice in the category? Are you comfortable with the levels that we're at right now and what does that mean kind of on that line going forward?

Yes, so we tend to look at this in tandem with the amount we spent on trade and in aggregate, and that result in the quarter, not year-to-date, was about $3.5 million. The aggregate year-to-date number is not at my fingertips, but I'm going to say it's roughly double that. It's not a particularly large number. With respect to our aggregate share of voice, yes, we remain comfortable in part because our merchandising tends to be more EDLP-oriented and on shelf, given the significance of the bag business. So I think that when you look at the amount of consumer spend in fiscal '17, it's a comfortable level for us.

Okay, great. And just one on going back to Michael Foods and process eggs. Looking at the Urner Barry price right now, it looks like were sitting at around $0.40 for the break and stock eggs. And I believe in the past you said that kind of it would be a price where perhaps you'd get some customers to switch back to some of the products that you like. Going forward, I mean, can you talk about what happens to prices at least as we move into the latter parts of the year in terms of as we get into the seasons? And then if and when we do get to that level where prices in Urner Berry are in that kind of spot for you, kind of how long does it take for customers to start to -- in your opinion, start to roll back?

I guess the first part of your question about what we expect to happen with the Urner Barry market, we're encouraged by the fact that the last several months the market has been fairly stable. Traditionally, this time period a year has been the period of time when the markets have tended to move down. So the fact that the market has been stable, we view as a positive sign. Also, the USDA reports on the size of the flock has shown decreases month over month since January. So through January through July, each month has been down. So we think that the market is slowly but surely getting closer and closer to where equilibrium occurs and you get back to more normal prices. But predicting exactly when that will occur, obviously, it's next to impossible. But we feel good about that it's progressing in the right direction. In terms of when we would expect customers to return, that's really a case-by-case basis. Obviously, we'll be very proactive in reaching out to potential customers and reiterating the value proposition. But it's very difficult to say that happens in a quarter or a couple of months. It's really case-by-case.

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

Just back on Michael's, when grain prices reset, is there an idea of kind of what -- as we look at the negative $100 million of this year, kind of what kind of tailwind or what that creates going into next year? And when I say that, I understand some of the reason you're at the low end of that $50 million to $100 million we started this year had to do with just year-end spot versus grain prices so just trying to understand how that flips next month.

Next year?

Well, next month to next year, yes. September.

So the -- yes, I think we're going to give you more information as we get into '18 guidance, which we're not prepared to do today. But what I can share with you today is that the imbalance between grain-based supply and grain-based demand, which I think we had previously talked about being a $40 million headwind, is shrinking. The volumes have been growing and the pricing is better, all of which contributes to a meaningful emanation of that gap and some tailwind heading into '18 versus '17.

Okay. And then switching to private label, one thing we heard from TreeHouse yesterday was increased bidding and being more aggressive within the whole private label category that maybe as retailers are just focused on lowest price more than anything else. Are you seeing that in kind of the nut butter category? Or is it a little bit different focus?

No, we're seeing the same thing, but we have a pretty high share so we have a pretty good competitive position in that business. So we may have some margin reduction in dollar growth as we pick up larger pieces of business.

Okay. But it's -- and is this something new in the past 6 months or this is kind of ongoing?

I wouldn't say the increase is a step function. Maybe it's a bit ticked up because I think with the Amazon Whole Foods, it gives a reason to have a conversation but the -- Well, I think it's a change in quantum, not in kind.

Our next question comes from the line of Brett Hundley of Vertical Group.

Rob, I just wanted to go back to something you just mentioned to Bill and just clarify that comment. You basically said that the $40 million headwind imbalance on different production and sales contracts that you have on the egg side is shrinking, correct?

Yes.

And do you feel like that has been gaining momentum? You were also discussing in Q&A here, Jeff, I think it was your comment about how actually UB prices are performing okay for this time of year and then you have that against the backdrop of the chicken and egg numbers looking better as far as from a supply standpoint into next year. So can you give us a window on whether or not you're seeing any more -- or I guess, an increasing formalized intention by customers to kind of come back to that mix that you desire?

I think, as Jeff mentioned, it's a customer-by-customer process, and that some are more ready than others and some of them is merely a matter of prioritizing the change. So we're not going to get into a customer-by-customer discussion. But what we can tell you is that if you look back at the history of Michael, it's a very consistent progression in a normal environment of customers seeking to take labor and safety -- labor cost and safety risk down and finding the value-added proposition very attractive. Nothing inherently has changed in that equation outside of the aberrant cost environment caused by AI, and we expect that march of progression towards value-added to resume. The only question is based on time. So I think we want to shy away from an overly precise answer to that question and talk about trends.

No, no, that's fair. And I think it's important that this is happening because it's a good sign. I wanted to ask you more broadly just about commodities. This is something that's been firmly top of our mind as we look into kind of calendar '18 for a lot of companies. And we're starting to see inflation tick up on oats, wheat, oil, things like that. And so I just wanted to get a comment from you guys as far as your forward view, kind of how you've looked to hedge historically and how that might change if it changes going forward, just under the umbrella of ability to recover inflation going forward.

So specifically for '18, we agree with your comments that we also see inflation in the grain complex into '18. Earlier in '17, we took some hedge positions farther out into '18 than perhaps we had historically done in the past, so we have a pretty good amount of coverage into '18. Nevertheless, we see that for the grain complex in particular that it's a modest headwind for us transitioning from '17 to '18. In other commodities that we buy, we see nuts and sugar being perhaps a modest tailwind, and the same is true with the milk protein in our Premier business. We see that as flat to maybe slightly down year-on-year.

Our final question comes from the line of Carla Casella of JPMorgan.

This Mei Lin [ph] on for Carla Casella. Can you talk a little bit more about the private label cereal business and how much you do today in private brand? And are you seeing any more competitive bidding prices there specifically? I know you guys alluded to the broader picture there earlier. And do you see any more greater opportunity in private brand?

Just to clarify, the last question private brands cereal or private brands more broadly?

More broadly.

So we certainly are active in private brands cereal. We do not break out the results of that line separately and don't intend to do so, but it's a meaningful use of our excess capacity. The Private Brands business is one that we do think there are some opportunities to expand in. Whether that expansion is best under the current structure or whether there's some structuring alternatives that may improve our opportunity to execute against the Private Brands opportunity remains to be developed. But yes, we think that the -- many of the macro trends around the emergence of new classes or more aggressive classes of trade and some of the trends surge online do bode well for Private Brands.

Got it. And just one quick -- another quick question on the new Oreo and S'mores co-branded cereal products, how much more did you really have to give up on a co-branded product?

Yes, that's a -- we certainly pay a licensing fee. But what that licensing fee is, we would not be in a position to disclose.

That was our final question. I would now like to turn the floor back over to Rob Vitale for any additional or closing remarks.

Thank you, everyone. I think the only thing I would close with is that the year is shaping up very consistent with where we expected it to with this Michael lapping panning out to be, albeit on the high side, really quite consistent with the manner we articulated back at the beginning of the year. So we're pleased with the results both at Michael. We're pleased with the results on the balance of the portfolio, and we remain confident that we will end the year with growth in our legacy business and an attractive outcome from Weetabix. We're quite excited as we move forward and are looking ahead in '18. Again, thank you all, and we look forward to talking to you in November.

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