Post Holdings Inc (POST) 2015 Q2 法說會逐字稿

Welcome to the Post Holdings second-quarter 2015 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. It will be available for replay beginning at 12 PM Eastern time. The dial-in number is 800-585-8367, and the pass code is 23342813.

(Operator Instructions)

It's 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. Welcome to the Post Holdings conference call where we will discuss results for the second quarter of FY15. With me today are Rob Vitale, our President and CEO; and Jeff Zadoks, our CFO. Rob and Jeff will begin the call with prepared remarks, and afterwards will be available for a brief question-and-answer session.

The press release that supports these remarks is posted on our website at www.postholdings.com in the investor relations section and in the SEC filing section. In addition, the release is available in our SEC filings on the SEC's website. Before we continue, I would like to remind you that this call will contain forward-looking statements. These forward-looking statements are subject to risks and uncertainties, which should be carefully considered by investors, as actual results could differ materially from these forward-looking statements. For more information, please visit the SEC filings page in the investor relations section of our website.

These statements speak only as of the date of this call, and management undertakes no obligation to update or revise these statements. All forward-looking statements are expressly qualified in their entirety by this cautionary statement. As a reminder, this call is being recorded for audio replay.

And finally, this call will discuss certain non-GAAP measures. For a reconciliation of non-GAAP measures to the nearest GAAP measure, see our press release issued yesterday and posted on our website.

With that, I will turn our call over to Rob.

Thanks, Brad. Good morning, and thank you for joining us. We have quite a bit to discuss this morning. We had a strong quarter, closed a major transaction earlier this week, and we are working to mitigate the impact of a significant avian influenza event affecting our business.

Let me start with MOM Brands. We closed the acquisition on Monday of this week, and our optimism remains quite high. Integration planning has gone well, and we continue to believe our synergy estimates are conservative. In fact, we expect to achieve the full $50 million in cost reductions by the end of year two rather than year three.

We also continue to believe there is meaningful upside to our $50 million estimate. The MOM combination is not simply about cost reduction, rather it positions Post as a value leader in RTE cereal.

Once again this quarter, value grew as extra large boxes grew 14.3% in dollars and bags grew 6.3%. We believe post can grow in the segment of the category once the businesses are combined.

With respect to the fiscal second-quarter results, we are pleased with our performance. Consolidated revenue was just over $1 billion and adjusted EBITDA was just over $149 million. Jeff will go into more detail later in the call.

Moving to operational highlights, I will begin with Consumer Brands. Post Foods had a strong quarter that exceeded our expectations. Shipments rebounded nicely from the weak first quarter, however, we do believe inventory retail grew this quarter which will pressure fiscal third-quarter shipments. We expect Q3 shipments to be between Q1 and Q2 levels.

At a category level, RTE cereal was down 2.6% in dollars and 2.2% in pounds during our fiscal second quarter. This is the third consecutive quarter in which rates have declined has slowed.

In a repetitive theme, less effective promotions continue to weigh on the category. However, as I mentioned, we continue to see growth in bags and extra large sized boxes as consumers seek value options. Again, we continue to believe in the merit of our migration to a value-oriented strategy as highlighted by the MOM acquisition.

Post had mixed consumption performance this quarter as we lapped a strong quarter last year that included our national bag roll-out. Also, we discontinued several weaker Honey Bunches of Oats SKUs reducing our base volumes. In contrast with the category, Post pound promotional lift was up 22 points this quarter as the strategy of fewer deeper and higher quality promotions proved effective. For the quarter, Post's market share was 11.3%.

Quickly commenting on MOM 's consumption performance, they had strong performance this quarter, up 3.8% in both dollars and pounds. On a combined basis, Post Foods and MOM represent 18.3% of the RTE cereal category for Post's fiscal second quarter.

Turning to the active nutrition portion of Consumer Brands, premier nutrition continues to grow rapidly in both sales and adjusted EBITDA. Sales growth was driven by increased item distribution, club promotions, and the launch of a protein powder product.

Dymatize continues to under perform. Operationally, we have made great progress. Fill rates have continued to increase this quarter, and we are approaching best in class.

We have received NSF recertification, which tends to be an indicator of successful FDA approval for good manufacturing practices. A byproduct of this operational overhaul is that by year end, our production capacity will have nearly doubled. However, we have work to do on pricing and G&A costs.

Net pricing, primarily in international sales, were weak in the second quarter. Meanwhile, we are addressing non-production costs that have been allowed to grow in order to fix the operational issues. G&A reduction is critical to getting Dymatize margins back in line.

Essentially, we are currently operating at private label gross profit margin but have a branded cost structure. We have plans to address both sides of that equation.

In March, we announced our intent to close the PowerBar manufacturing facility in Boise Idaho. We expect the closure to be completed in July 2015 with net pretax annual cost savings of approximately $4 million beginning in FY16. Production of the PowerBar products will be transferred to co-manufacturers. We continue to expect FY15 to be an investment year at PowerBar.

Putting aside the short-term pressure created by avian influenza, we've been quite pleased with the performance of the Michael Foods Group. Compared to the prior-year quarter, net sales for the group were up with eggs, potatoes, and pasta all showing sales growth.

Dakota Growers had a strong performance this quarter and is on schedule to return to the profit levels we previously discussed. Our private label businesses continue to perform nicely this quarter with Golden Boy net sales up 5.3% on a comparable basis and Attune net sales up 21.2%.

Before turning the call over to Jeff, I will provide some comments around avian influenza. AI can be classified as high or low pathogenic. High pathogenic are virulent strains with high mortality. This is the third reported widespread outbreak of high path AI; they have occurred in 1924, 1983, and now 2015. These outbreaks are rare but significant events.

With respect to this particular incident, we are unable to say whether AI will continue to spread. Based on conversations with internal and external experts, we believe that rising temperatures reduce and ultimately end the spread of AI.

Second, I want to stress the reports of public health agencies that indicate this is not a food safety issue. In addition, Michael Foods value-added egg products are pasteurized to log 5 kill level, which has been shown to eliminate AI.

Third, to date we have lost approximately 14% of our egg supply, and we have developed a mitigation plan to manage through this difficult situation. I'm extremely proud of the way our colleagues have responded to this challenge. Jeff will discuss the financial impact later in this call.

Fourth, Michael has outstanding bio-security measures. Nonetheless, we expect there to be further learnings coming from this incident that we will incorporate into our future security measures.

Finally, the AI event is dynamic and ongoing. In forecasting its financial impact on the balance of FY15, we have made assumptions around supply limitations and the price reaction of the broader egg market.

These variables continue to change. Jeff will provide updated guidance for FY15. To the extent new material information develops prior to our next quarterly call, we will provide further updates as soon as practical.

To close, we had a solid quarter and we feel confident about our businesses. Like any business, we have our challenges but my confidence level in our ability to deliver is high.

The AI event weighs on us in the near term, not only financially but on an emotional level. We take excellent care of our flocks and to see a portion of them destroyed is quite difficult. The toll on small farmers is immense. But for us this, this will indeed pass and the fee system that underlies our move into Michael remains stronger than ever.

I will now turn the call over to Jeff.

Thanks, Rob. Good morning. Before reviewing the segment results, I want to you remind you that they were [included] in the second quarter consistent with our operations prior to the acquisition of MOM Brands and aligned with our segment reporting in the first fiscal quarter.

In the third quarter, we expect to report four segments. First, we will report combined cereal results which will include Post Foods and MOM brands. Second, active nutrition will be reported separately and will include Premier, Dymatize, and PowerBar.

Third, the Michael Foods Group will be consistent with year-to-date FY15 reporting including the legacy Michael Foods businesses and the Dakota Growers Pasta business. Fourth, we will continue to report Attune Foods and report Golden Boy as one combined private label segment.

Starting with Consumer Brands, second-quarter sales were $378.5 million, up 22.1% on a reported basis. On a comparable basis, sales increased approximately 5.6%.

Compared to the prior-year quarter, RTE cereal sales volume increased approximately 1.3%, and net pricing increased slightly at 0.5%. The net pricing increase resulted from lower trade spending compared to the prior-year quarter.

Active nutrition brand sales were up significantly on a comparable basis at approximately 16%. This reflects the strong growth at Premier, which continues to experience increased distribution and organic growth in the club channel. At Dymatize, we have begun to cycle the weak prior-year results and PowerBar sales declined year over year as expected.

Consumer Brands adjusted EBITDA that was $66.9 million. Adjusted EBITDA benefited from a 4.5% decline in cost of sales per hundredweight from favorable commodities, price trends, and from cost management initiatives at Post Foods. This was partially offset by an unfavorable sales mix associated with the continuing shift to larger package sizes.

Adjusted EBITDA also benefited from higher volumes and lower milk protein concentrate costs at Premier. This was partially offset by incremental promotional spend. Finally, adjusted EBITDA was negatively impacted by elevated operating expenses and lower net pricing at Dymatize, which resulted in part from discounts given to international distributors in an effort to offset the impact of the strong US dollar.

For the Michael Foods Group, net sales were $550.3 million for the second quarter. On a comparable basis, sales were up 1.8% over the prior year. Egg volumes were up 3% primarily from growth in the food service channel.

Potato volumes declined 2.5% driven by lower food server sales, and pasta volumes declined 8.5% primarily in the food ingredient channel. Volume declines for potatoes and pasta were more than offset by increased average net pricing. Segment adjusted EBITDA was $77.7 million and benefited from these increased sales and manufacturing efficiencies at Dakota.

Moving to private label, second quarter net sales were $124.9 million, up 8.3% over the prior year on a comparable basis. The sales increase was driven by higher volumes for conventional peanut butter and tree nut butters as well as new private label granola business. This was partially offset by a decrease in volumes for the fruit and nut business resulting from inventory corrections at a significant customer and supply shortages for certain snack mix ingredients. Private label adjusted EBITDA was $16.9 million.

Moving to corporate items, we have $1.6 billion notional amount of interest rate swaps with four start dates in 2016 and 2018. These swaps hedge both our existing term loan and the incremental term loan taken out for the MOM transaction. The swaps allow us to benefit in the near term from lower short-term interest rates while fixing our interest rates for the long term.

As a result of continuing declines in long-term interest rates, we recognize the non-cash mark-to-market loss on our interest rate swaps of $28.8 million in the quarter. We do not elect hedge accounting, and as a result changes in market value are reflected in our results.

Our year-to-date income tax benefit was $45.9 million representing an effective income tax rate of 40.7%. As I mentioned last quarter, our cash taxed differ meaningfully from our GAAP income tax primarily because of non-deductible depreciation and amortization expense, and in the current year from non-cash mark-to-market losses on interest rate swaps, which are not currently deductible for tax purposes. Going forward, our cash taxes will benefit from full deductibility of depreciation and amortization expense related to the stepped-up tax base that's resulting from the MOM acquisition.

Turning to our outlook, prior to the acquisition of MOM Brands, we had estimated FY15 adjusted EBITDA between $540 million and $580 million. We have revised this to include better than expected year-to-date performance, the completion of the MOM Brands acquisition, and the impact of AI. Including the forecasted partial year contribution from MOM brands of approximately $50 million, and the expected negative impact of AI of approximately $20 million, we now estimate FY15 adjusted EBITDA between $585 million and $610 million.

However, it is important to reiterate the AI situation remains dynamic, and if it continues to spread or the egg market reaction is more significant than our estimates, our expectations could change materially. To the extent new material information develops prior to our next quarterly earnings release, we will provide further updates as soon as practical.

Regarding our capital expenditures outlook for FY15, which has also been updated to include MOM Brands, we expect to invest between $125 million and $135 million including $40 million related to growth activities. Capital expenditures during the second quarter were $21.9 million and were $45.6 million year to date.

In connection with closing the MOM brands acquisition, we issued approximately 2.45 million shares of our common stock to the former owners. We now have approximately 54.8 million shares of common stock outstanding.

Finally, we would like to share with you that we closed our incremental senior secured term loan facility simultaneously with the closing of the MOM Brands acquisition. We raised $700 million in principal value on the term loan bringing our total term loan balance to approximately $1.6 billion. Giving effect to this capital raise, we expect quarterly net interest expense to be approximately $67 million.

Now, I would like to turn the call back over to the operator for questions. Operator?

(Operator Instructions)

Chris Growe of Stifel.

Good morning.

Good morning, Chris.

I had just two questions for you, if I could. I want to just understand on the AI situation. The destruction of the chickens that were laying the eggs. Is it possible, then, to replace them?

It's obviously a big chunk of your supply. Is it that you have to pay more to go out and try and buy these on the open market or can you even find that many to replace the lost eggs?

Well, it's both. There is an outright supply limitation as much of the egg supply is pre-contracted. The supply that's available will be available at a higher price. So, we have elements of both.

Do you have contracts with your customers that require you to supply eggs or is that a limitation as well?

I was speaking to a market convention in terms of the outright supply of the entire market.

Okay. And just one more if I could ask on cereal, we've seen -- obviously, you had a good performance in the quarter overall, especially including MOM. We have seen though a drag from mix, especially larger pack sizes and box sizes as well as the bags doing well. I'm just curious what that says about the category overall.

Is that likely to be a continuing trend and therefore a drag on profitability or at least on margin. That value segment looks like it's continuing to perform pretty well. I'm curious any thoughts you have on that and in that regard, how Post is positioned there.

I'm going to take the question more from the second part of your question as how we view it because we have embraced the strategy of moving to the value segment certainly as embodied by the acquisition of MOM. The opportunity to look at costs at MOM and the combination between Post and MOM and the resulting scale gives us the ability to use that scale to produce efficiencies that allows us to migrate into that value orientation with the impact of negative mix and still expand margins.

So, yes, we will continue to have a overhang of mix as a result of our migration to value but that will be more than offset by a reduction in cost as we bring the two businesses together.

Okay. And just related to that, is growth in bags overall versus even the value size box a positive or negative for you? Maybe we could talk about it after the synergies you get from both companies. Will that be a plus or minus for you?

It will be a plus because we will have right sized the margin structure in anticipation of that being a meaningful component of the revenue of the business.

Okay. Thank you for your time.

Thank you.

Jason English of Goldman Sachs.

Good morning, folks.

Hi, Jason.

I guess I want to come back to AI a little bit further. Can you give us a sense of how much of your supply comes from Minnesota and Iowa overall?

About 40%.

And Chris asked, I thought, a good question, in terms of mandate to provide your customers with supply. Does it exist? Are you sort of obligated to dip in to wherever you need to supply your customers? And if so, can you declare force majeure -- have you declared force majeure in terms of the pricing particularly since so much of your pricing is grain-based and it looks like egg prices are going to be soaring on this one?

We do have the ability to declare force majeure in some contracts. We're not going to comment on our specific actions on specific contracts. But we are obligated under some contracts irrespective of force majeure or prior to considering force majeure to supply all of the needs of a particular customer.

That's the result of the grain based versus demand versus grain-based supply. So, yes, as the supply is constrained, we will have pressure to procure on the open market to produce under some of the contracts. And that's why it is both a matter of availability supply and price on the open market in assessing the impact of AI.

And based on what you know today, would you expect this to be a meaningful overhang as we head into 2016 barring, of course, that this remains limited to the supply restrictions you have today?

We are going to provide additional information about 2016 in upcoming calls. There will certainly be some impact of AI into 2016, but whether we can call it meaningful or not, we're not going to try to forecast that far out into we have better information about the event.

Thank you. That's helpful. One last and then I'll pass it on. I want to switch gears.

Dakota and Michael's was combined in the spirit of trying to capture some revenue synergies, and I was hoping that you could maybe update us on what progress whether it be actual realized contact wins or line of sight to potential contract wins you are seeing from that combination.

Well, we're still in the early stages of bringing the Dakota sales force into the Michael sales force so that we can take advantage of some of the strengths that Michael has, particularly in food service and ingredient. So we have better discipline around the route to market but it's early in terms of identifying initial wins.

Thanks a lot, guys. I'll pass it on.

Thank you.

John Baumgartner of Wells Fargo.

Good morning. Rob, I just wanted to ask about the volume decline in pasta, I guess presumably at Dakota. I guess somewhat [size blocks] are having secured those new business wins. Anything going on there in particular?

Two things, we're lapping a quarter last year in which we had yet to eliminate the outsourced revenue or rather the insourced revenue that went away last year. Secondly, with the price run-up in durum, we did see some volume production at retail.

Okay. Similar to last year. Okay. Secondly, in terms of the PowerBar business, I think when that deal was first announced, I think it was noted that PowerBar had about three to five years worth of sales growth capacity at that time.

In closing the Idaho plant, does that suggest that the longer-term outlook for PowerBar may be not as good or is this more of a cost savings move? What are your thoughts around that?

Entirely cost savings. The plant was built at a time where the PowerBar business was a much larger business than it currently is. And the absorption was so heavy that it was advantageous to move to a co-man model. The plant in Boise was also limited in form. The bar category, as you know, is a category in which form and flavors move frequently so we think a better model is to not invest heavily in bricks and mortar but use co-man so that we can adapt to consumer tastes as they evolve.

Then, lastly in terms of just conceptually here, private label, wondering if you can comment maybe a bit in terms of what you're seeing in the natural organic segment for private label.

Where do you see that going in terms of increasing adoption by traditional retailers, Whole Foods' announcement of the value concept now. Is store brand, natural organic an area where we can see more M&A from you going forward?

Our private label business, as you rightly point out, is skewed to health and wellness. What we have observed in the channels like Whole Foods and Trader Joe's and Sprouts where they are based, or they really define that channel, is that the store equity is not only competitive with ours but is in some ways is more well-received by the consumers than the national brands.

So, we do believe there's continued M&A opportunities around the private labels for each of those and other competitors in the channel. We obviously saw the announcement coming out of Whole Foods and think that really does create an opportunity for us to expand with them.

Great. Thanks, Rob.

You're welcome.

Cornell Burnette of Citi.

Good morning. Just a quick one on AI. I know that this is a very fluid situation. But in terms of what's your understanding on the amount of time it takes when a layer gets destroyed because of AI? What's your sense of the amount of time that it takes to get that new supply up and running again at that provider?

About 12 months.

About 12 months. Okay, great. And then looking at the impact of AI, so in $20 million over five months so that annualizes to nearly $50 million on a full-year basis on a Michaels Foods business ex-Dakota, which is about $270 million in EBITDA, seems rather big.

So I think what you guys were saying earlier that obviously you lose some volumes, but maybe the bigger impact is what happens on the spot market and how the supply of eggs goes down and so you have to pay more on the spot market. With that in mind, how much of your supply do you think will have to be sourced from the spot market right now?

What type of numbers are you seeing in the spot market currently, and where do you think they will go as the year progresses?

So, in reverse order, the only thing I think we know is it will go higher. Trying to guess where it's going to go is really nothing more than a guess.

In terms of the amount that we will need to source, we have a shortfall of the 14% that has been destroyed. Now we have some mitigation around that already, and we are working to further enhance our mitigation in other ways. That's about 165 million pounds that we will need to source.

Okay. And then one last question, if I may. Just looking at the most recent Nielsen data, switching to cereal really quickly, looks like the retail cereal sales have somewhat taken a step back.

Nielsen data has shown a 6% decline in Post sales, excluding MOM, over the latest 12-week period ended April 18. I just wanted to know, what's your read on this? What's driving this? Is it the fact that maybe you're lapping some of the gains that you had last year when you had the bigger box roll-outs?

A little bit of that but there's also just some promotional calendar impact on that short period of time. So we, in the prior year, had heavy promotional calendar that didn't repeat this year.

Okay. So, you would it be -- so you'd kind of qualify this as more related to the timings of promotions but at the same time, I guess going forward, kind of on a year-on-year basis, the trend is still to maybe pull back a little bit on promotions relative to what you did last year?

Not so much pulling back on the dollars on promotions but repurpose them to be fewer and deeper so that they're more effective.

Very good. That does it for me. Thanks a lot.

Thank you.

Andrew Lazar of Barclays.

Good morning, everybody. To start off, I guess, just on MOM Brands, you I guess have only owned it for a week or so but have already pulled forward as you talked about the cost save timing from 3 to 2 years, and mentioned using potential meaningful upside to the $50 million. What drives that more positive outlook?

Is it just getting into the business, confirms what you kind of had thought to be potential upside maybe initially? Or, I know there are additional aspects to the productivity side that you now see that you didn't before. I'm just trying to get a better understanding there.

So, when we originally articulated a three-year time horizon, we built in sufficient time so that the enabling technologies around IT and logistics that could provide staging that would take longer were sufficiently hedged. As we've gotten into it, we have not so much expanded the cost reductions in those areas, but we found ways to accelerate the timing that are less reliant upon system conversions so that we got comfortable in eliminating those hedges and bringing the timing forward.

You know, we've now been in MOM for about 90 days. Obviously, not operating but learning and getting deeper into the cost reduction opportunities.

And again, when we announced we built in enough caution that we allowed for surprises. We've had no negative surprises and have become encouraged that the upside is more significant than we had previously discussed, so it's more the elimination of hedges then it is new learnings.

Okay. And then I guess two quarters ago, you had an inventory build in cereal at retail. Last quarter that got drawn down, and this quarter it sort of reloaded a bit. Is that more typical for your business?

Is there more volatility in retail inventories than maybe you've experienced in cereal in the past? I'm trying to get a sense of why we've got the sort of boom and bust cycle a little more as opposed to tracking consumption more closely.

That's a little bit more dramatic than I would characterize it.

It probably is.

Ebbs and flows in retail inventory, and we look at it back over a very long period of time and it gets back to a one-to-one consumption to replacement level, but then in any given short-term cycle, you can see 3% to 6% fluctuations around the mean. So, we don't view this as anything unusual. It's just timing.

Okay. That's helpful. Last thing would just be, as you've gotten into speaking with retail customers and such about owning MOM Brands going forward, what's their perspective on pulling together this value-oriented strategy as a combined entity? And I'm just trying to get a perspective of how they view it and some of the benefits maybe they see from it.

Well, I think they view both MOM and Post as respected competitors who they want to retain the virtues of each company. So, what they have, if there's a chorus, the chorus is figure out a way to retain the best of both cultures and routes to market while coming up with a new singular route to market. So, we have had quite a bit of learning along the way in terms of how Post is viewed, how MOM is viewed, and I think it will result in a combined route to market that does bring together the best of both.

Great. Thanks. Very last quick one just on AI would be, I think you initially saw some of the issues around AI and sort of contracted egg suppliers, and then you've got some of your own internal company's supply I guess about one-quarter of your production as well.

Is it across both at this stage or is it still just in contracted supply and does it really matter if it's contracted versus company owned at the end of the day anyway?

I want to back up. You said one-quarter of our supply. That's much too high. It's 14%. Then the second part of your question.

I meant one-quarter of your egg production is internal.

Oh, yes, yes.

Got it.

No, it doesn't matter. It doesn't matter whether it affects a third-party contract farm or one of our farms, the effect is the same.

Okay. Thank you very much.

Thank you.

Ken Zaslow, Bank of Montreal.

Good morning, everyone. A couple questions. One is, if you exclude MOM and you exclude the AI, can you talk about the progress on efficiency in savings within the legacy business? I know there were some procurement savings from Michael, there was the Modesto closure, there was savings from Dymatize. Can you talk about the progress that you're making there and if you could quantify any of that?

So, we have Modesto running through the P&L already. That has been achieved and the full-year savings over a two-year stacked period is about $14 million. We have done a packaging consolidation program, which is skewed to the last half of this year which is $7 million to $9 million of cost reduction.

We mentioned the closure of the Boise facility. We are working on creating one model of private label that creates some efficiencies in that. Then on Dymatize, I would not necessarily say that was to date about cost reduction as much as it was about gaining operational effectiveness. That will now turn to cost focus.

Okay. Because when I look at your guidance, I kind of look at it and say look, the back two quarters EBITDA is somewhere around the $160 million level and you just hit $150 million in this quarter. I'm trying to figure out why you don't continue to build up from the 150 to a higher number than that. Is there something that I'm missing or is it more of a level of conservatism?

Well, I think we will approach things with a level of conservatism. On the RTE business, as we mentioned, there was a bit of pull forward from the third quarter into the second quarter with the inventory build. So, again, we're attempting to build in a balance of both opportunities and caution to make sure we have a number that we're comfortable with.

Okay. But even on the EBITDA number, you would add in MOMs, which obviously has a run rate of $120 million. I'm trying to figure out -- the math seems exceedingly conservative. Maybe we'll take it offline, but it just doesn't seem like it's adding up exactly the way we would add it up. I don't know if there's any comment on that.

No, I don't think I have a comment on that. It's our best guidance at the time.

Okay. My other question that I have is on AI, is there the lack of exports at all that changes the ability to actually get supply that kind of alleviates some of the supply constraints?

It could. I think the point that I would stress on AI, as you all are rightfully asking, there are a lot of variables that impact what the ultimate financial impact of this is. That certainly is one. And trying to -- and some of them are counterintuitive.

Trying to necessarily predict every one of them is a bit of a fool's game right now. We're trying to make some judgments around all the variables and make some assessments. But yes, if export markets shut down and there's incremental supply in the US, that could be a positive.

My last question is, if I think about the price level of eggs right now, how much have they actually increased since AI that you're going to be incurring?

We have baked the totality of the rates into our expectations, so without trying to break out the different buckets of the $20 million, what I would tell you is there is a handful of different categories of eggs. On average, they're up call it 40% in the last -- since April 22.

Great. I appreciate it.

Bill Chappell of SunTrust.

Good morning. Thanks.

Hello, Bill.

Couple quick things. First, on Dymatize just to make sure I understand where we stand there and the outlook over the next few months.

We feel very good about the progress made on the operational issues that were headwinds really since the transaction close until now. About 45% of that business is international, so while we are now in a much better through put position, demand has weakened as a result of the strength of the US dollar. We denominate everything in US dollars so it's not currency risk, per se, but it's simply elasticity risk as in currency prices have gone up.

So we have had to deal back on pricing in order to remain competitive, but that has cost us some volume. In fixing the operational issues, costs on the nonproductive side have grown and now we need to again, as I mentioned in the comments, right size the business with the pricing our margins at the gross profit level are low, and we need to address that through pricing and cost reduction and likewise, we have a branded food structure in terms of our G&A structure and we need to take some cost out of that.

So, we continue to be cautious in our guidance around Dymatize. Low expectations for the balance of the year are built into the guidance that we previously gave.

Okay. Just to step back and maybe you mentioned this. Where in the quarter in terms of the core business were you well ahead of expectations? I know you don't give quarterly guidance but just from an internal basis.

The cereal business was strong. Michael was strong. Dakota was strong. Premier was strong. It was a pretty consistent performance across the portfolio with the exception of Dymatize.

Okay. And then just one last one. Just switching to the comment on natural organic private label, do you feel you have a strong footprint just in the kind of the nut butter, peanut butter, is that in looking for tangential categories or is it a bigger push to build up that whole private-label business?

Well, I think you know us well enough to know that we're are opportunistic. Price and actionability plays into that. But we certainly do perceive opportunities to expand into additional categories in that channel. There may also be opportunities beyond that channel.

We are very confident in our position within the product categories and the channels in which we currently operate, so there's not an imperative to do anything in private label. But as opportunities emerge over the next several years, we would look at both opportunities to expand in the health and wellness channel where there likely is a premium growth opportunity or more broadly where maybe it's more of a value opportunity on the buy.

Okay. I just asked that because it doesn't seem that the multiples for this type of companies are opportunistic in your words.

Well, that's why I would agree with making a distinction between private label and health and wellness and potentially private label more broadly defined.

Got it. Thanks so much.

Brian Hunt of Wells Fargo.

Thank you for taking the time this morning.

Hey, Brian, whatever question you ask, we're going to ask you a tougher question on your call.

Okay, Rob and Jeff. You got it. Thanks for dialing in later. If I think about the inflation outlook given tree nuts, egg ingredients and as eggs go into pasta and all and egg albumen which goes into some of your protein products, I'm sure. Can you give us an update outlook on inflation, tree nuts, eggs, et cetera, excluding the AI impact on Michael Foods?

I don't think that we can give you any comment on eggs right now because I think you've got to just assume the market is in a reset. I'm going to avoid the egg aspect of that question because we simply are in a period of time that's too volatile to answer the question.

But on tree nuts, we're certainly seeing substantial inflation particularly around almonds driven by the California drought situation. To date, we are able to pass that through as the consumer demand seems fairly elastic. We don't know when that reaches a tipping point, but we have not reached it yet.

Great. And then with regards to the M&A question, and I think it's been asked a couple times in the last year, but you all have created -- gone to 4 silos again as you reported in the next period. Is there any desire as you look at acquisitions going forward to create another silo?

Or is there in your opportunity enough -- in your opinion, enough opportunities within the existing silos in the acquisition environment to continue to build the business?

We certainly don't start from a position that we would like to add another silo. Frankly, to the extent that we have opportunities that fit within them, we would rather look at opportunities where we have a higher marginal return on capital that would be produced from adding to one of the existing platforms and that's a nearer end focus. Having said that again, as I responded to Bill, we are opportunistic by nature to the extent there was one that made sense and we thought it was attractively priced, we wouldn't shy away from it, either.

Great. And then my last question, you used equity to acquire MOMs as well as debt in a nice balanced way to attack the capital structure. When you look at limitations on the leverage, what do you foresee the top end of the leverage spectrum as you potentially continue to make acquisitions?

And over the longer term, where would you like to target from a leverage perspective? And again, that's it for me. Thanks.

We don't really know what the top end available is. Where we have operated is at about a 6.5 leverage ratio.

We would like to be at a 5 times leverage ratio within two years or so. We are getting there through obviously generating free cash flow, which has gone nicely, and EBITDA growth.

So we think at 5 times, we have strategic flexibility that we don't have north of 6 times, but I don't know where the upper limit is. I think that's more driven by timing of the market and credit rating agencies and others, but our comfort level is migrating closer to 5.

Thank you for your time.

Thank you.

Ladies and gentlemen, we have reached the allotted time for questions. I will now turn the floor back over to Rob Vitale for additional or closing remarks.

Thank you, operator. Again, thank you all for your participation this morning. As I mentioned in the prepared remarks, as this AI event changes to the extent it does, we will be back with updates around information that becomes available. So, thank you all.

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