Post Holdings Inc (POST) 2015 Q3 法說會逐字稿

Welcome to Post Holdings' third-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, and will be available for a replay beginning at 12 PM Eastern Time. The dial-in number is 800-585-8367 and the passcode is 81064864.

(Operator Instructions)

It is now my pleasure to turn the floor over to Brad Harper, Investor Relations of Post Holdings, for introductions. Sir, you may begin.

Thank you, and good morning. Welcome to the Post Holdings conference call where we will discuss results for the third-quarter 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 the call over to Rob.

Thanks, Brad. Good morning, and thank you for joining us to discuss an eventful three months. During the quarter, we completed the MOM Brands acquisition; announced the combination of Post Foods and MOM into our Lakeville campus, and began that transition; managed through an unprecedented incident of avian influenza; and delivered consolidated revenue of $1.2 billion and adjusted EBITDA of $187.5 million. As a result of the momentum generated this quarter, we raised our adjusted EBITDA guidance for FY15. Jeff will provide further details later in the call.

Let me start with avian influenza and Michael Foods. Recall our initial outbreak of AI occurred in April and, throughout the quarter, it was a challenge to determine the ultimate impact on flocks. In fact, we had one instance of an announced positive test that was not corroborated by subsequent testing. In response to the AI outbreak, our approach was to control costs as tightly as we could and work extremely closely with our entire supply chain, from farms through production to customers, in an effort to triage supply in a fair and reasonable manner.

Our goal was for Michael Foods to emerge from AI as a better partner to our customers, and with our business healthy and positioned for continued growth. While this continues to have moving pieces, I believe we are working successfully towards that outcome. We took an aggressive position on cost management, including a plant furlough and shift reductions. We suspended production of several product lines to focus remaining eggs on high-velocity items. We took several rounds of price increases in cooperation with our customers. As a result of this cost management and close collaboration across Michael Foods, third-party supply chain, and customer partners, the impact of AI on Q3 financial results was essentially mitigated. We expect flock re-population to be phased in between now and the end of calendar year 2016.

I characterize this AI event as unprecedented. What I cannot accurately characterize is the probability of a near- or intermediate-term recurrence. As a result of this incident, we have reviewed and begun to revise certain practices around bio-security and flock management practices. We will incorporate new learnings into our business model in a way that will seek to mitigate the impact of ongoing costs and potential future events. We believe our ongoing commitments to collaborative customer relationships and safe and reliable supply has resulted in us becoming a better company.

With respect to ready-to-eat cereal, our results and our progress towards united business were encouraging. First, we had strong financial results in both legacy Post and legacy MOM. We are highly confident in our synergy estimates, and we have taken actions that will result in cost reductions, beginning in the first quarter of FY16. To clarify, we do not expect any meaningful synergies to impact FY15 results.

At a category level, ready-to-eat cereal declined 1% in dollars and 2% in pounds during our fiscal third quarter. This is the fourth consecutive quarter in which rates of decline have slowed, but we are lapping the worst quarter in recent history. We continue to see a migration of larger package sizes, which bodes well for our combined business. During the quarter, extra large boxes grew 18.4% in pounds, and large bags grew 3.3%.

Legacy Post Foods consumption performance this quarter was down 4% in dollars and down 3.2% in pounds, as distribution declines weighed on otherwise healthy consumption results. The declines are primarily related to the discontinuation of several weaker Honey Bunches of Oats SKUs, which reduced our base volumes.

Legacy MOM had a strong consumption performance this quarter, up 6% in pounds and 6.8% in dollars. MOM's consumption improvement was driven by the bag growth I previously referenced, and initial results of new product introductions. Combined, our cereal business had an 18.4% and 21.4% market share this quarter in dollars and volume, respectively. This was an increase of 0.2 share points in dollars and 0.6 share points in pounds.

This business segment continues to be called Post Consumer Brands, but now excludes our Active Nutrition brands. Our reversal, in terms of moving Active Nutrition out of Consumer Brands, was done to enable cereal -- the cereal business to have a clear focus on near-term results and integration. Our business model leans towards a decentralized approach to operating decisions. Within our Consumer Brands segment our approach is temporarily more integrated, as we seek to establish this business segment as a platform for future brand and M&A. Our focus is foundational, with respect to expanding existing capabilities en route to market, supply chain, IT, and other functional areas that can be leveraged across the brand portfolio.

Our Active Nutrition segment remains a study in contrast. On one hand, premier nutrition continued to traffic growth in both sales and cash flow. Sales growth was driven by increased item distribution, organic club growth, and new product introductions. Given the strength of our team in Emeryville, we have now expanded their responsibility to include managing PowerBar.

Good progress is being made on PowerBar. Production at the Boise manufacturing facility ceased in June, and production was transferred to co-manufacturers. This will enable us to begin to benefit from annualized manufacturing cost savings of approximately $4 million. We have revamped both the product and its packaging. Last, we have exited our underperforming Australian business, which consisted of the Musashi brand. We are encouraged by this progress, and look to 2016 as restoring appropriate margin levels and positioning it for growth.

On the other hand, Dymatize continues to struggle. We made progress on reducing G&A costs this quarter; however, yield loss and ongoing inventory write-offs continue at unacceptable levels. Additionally, net pricing, driven by currency strength in the raw material pricing, was again weak this quarter.

Our Private Brands businesses continue to perform nicely, with nut butter net sales up 1.5% on a comparable basis, and granola net sales up 15.2%. Cash flow from the Private Brands business continues to be attractive and within expectations.

With respect to strategic alternatives, M&A remains a key priority to Post. Of the 10 acquisitions we have executed, only Dymatize is performing below expectations. We are pleased with the status of our portfolio. Year-to-date performance and our strong cash flow have resulted in a de-leveraging of our balance sheet, well ahead of announced targets. Meanwhile, our M&A pipeline remains rich, with both transformative and tactical opportunities. We remain focused on identifying accretive M&A opportunities, and are confident that we can execute despite a relatively more leveraged posture.

To close, it was obviously a strong quarter. We are pleased that we are beginning to demonstrate the earnings power and cash-generating capacity of our combined businesses. I will now turn the call over to Jeff.

Thanks, Rob. Good morning. Before reviewing results, I want to remind you of the components of each of our four segments. First, Post Consumer Brands includes Post Foods and MOM Brands. Second, Michael Foods group consists of the legacy Michael Foods businesses and the Dakota Growers pasta business. Third, Active Nutrition includes Premier, Dymatize, and PowerBar. Fourth, Private Brands includes Attune Foods and Golden Boy.

Starting with Consumer Brands, third-quarter sales were $356.9 million. On a comparable basis, sales increased approximately 1.4%. Post Foods sales were down 2.7%, and MOM Brands sales were up 6.8%. As expected, Post Foods third-quarter sales volumes were between first-quarter and second-quarter levels. On a sequential basis, Post Foods saw increased average net pricing resulting from lower trade spending. When compared to the prior-year quarter, sales volumes declined 2.4%, while net pricing increased 0.8%.

MOM Brands had a strong quarter. Sales were up nearly 7% compared to a year ago, driven by increased sales of Malt-O-Meal branded bags, license brands, and private label. Volumes increased approximately 9%, and net pricing declined approximately 2%. The net pricing decline resulted primarily from an unfavorable mix associated with higher private-label volumes.

Post Consumer Brands adjusted EBITDA was $90.1 million. Adjusted EBITDA benefited from a 2.9% decline in cost of sales per pound in the Post Foods business compared to the prior-year period, primarily from favorable commodity price trends and from cost-management initiatives. This was partially offset by an unfavorable Post Foods sales mix associated with the continuing shift to larger pack sizes.

Moving to Michael Foods group, net sales were $564.7 million for the third quarter. On a comparable basis, sales were up 0.9% over the prior year. As Rob mentioned, the impact of avian influenza on the egg business result this quarter was mitigated. This resulted from aggressive cost management, pricing actions, and close supply-chain collaboration. Egg product sales were up 1.8%, with volumes down 5.5%, primarily in the food ingredient channel. As with prior quarters, we did experience a volume shift to higher-value-added products.

Potato volumes declined approximately 12%, driven by lower food service sales. Pasta volumes were up 2.3%, primarily related to quarterly bid business and increased volumes in the retail channel. Cheese volumes declined 4.3%, resulting from lost distribution and declines in private label. Egg, potato, and pasta all saw increased average net pricing in the quarter. Segment-adjusted EBITDA was $81.2 million, and benefited from increased profitability per pound in all products. As a reminder, Michael Foods is lapping a prior-year period which was significantly negatively impacted by rising commodity costs ahead of pricing actions.

Turning to Active Nutrition, sales were $153.8 million. On a comparable basis, sales were significantly up at 17%. This growth was driven entirely by Premier-branded products, which continue to experience increased distribution and organic growth in the club channel. Dymatize sales were relatively flat compared to the prior year. Sales growth in specialty and international channels was offset by a decline in private-label sales and higher trade promotions. The increased trade promotions were driven by a more challenged international pricing environment resulting from the strong US dollar.

Last, as expected, PowerBar sales declined year over year, as sales growth in Europe was offset by the strong dollar and soft sales in North America. Active Nutrition adjusted EBITDA was $15.5 million. Adjusted EBITDA benefited from higher volumes, lower trade spend, and lower milk protein concentrate costs at Premier. Adjusted EBITDA was negatively impacted by lower net pricing and lower margin co-manufactured product at Dymatize. Finally, adjusted EBITDA benefited from lower trade spending and lower operating costs in North America at PowerBar.

Moving to Private Brands, third-quarter net sales were $136.7 million, up 4% over the prior year on a comparable basis. The sales increase was driven by higher volumes and increased net pricing for tree nut butters, as well as increased private-label granola sales. Private Brands adjusted EBITDA was $17.5 million, and was negatively impacted by higher commodity expenses, primarily almonds.

Before moving to our guidance, I would like to make a brief comment regarding our interest-rate swaps. As a result of sequentially rising long-term interest rates, we recognized a non-cash mark-to-market gain on our interest-rate swaps of $41.9 million in the quarter. Year to date, we have recognized a loss of $41.5 million, resulting from declining long-term interest rates in the first half of our fiscal year. We do not elect to hedge accounting and, as a result, changes in market value are reflected in our results.

Now, turning to our outlook, as a result of better-than-expected third-quarter results and expected continued strength in the fourth quarter, we are raising our adjusted EBITDA guidance for FY15. We now expect adjusted EBITDA to be between $635 million and $650 million, an increase from our previous estimate of between $585 million and $610 million. Our guidance range assumes continued mitigation of previously reported AI disruptions, and no further outbreaks.

Regarding our capital expenditure outlook for FY15, we now expect to invest between $110 million and $120 million, including $35 million related to growth activities. Capital expenditures during the third quarter were $28.7 million, and were $74.3 million year to date. With that, I would like to turn the call back over to the operator for questions. Operator?

Thank you.

(Operator Instructions)

Tim Ramey, Pivotal Research.

Good morning. Thanks so much for taking the question. A couple of things.

It's difficult to picture exactly how Michael Foods sales were up only 9% -- or 0.9% in the quarter. I know that the outbreak didn't impact a lot of the quarter, maybe a third of it or so. Can you give us any sense of how the sales will look in the fourth quarter, so that we can better understand what margins might be doing there?

We don't give that level of guidance going forward, but directionally what we can tell you is that the issue is a loss of volume, increase in pricing, and a resulting expansion of margin. But we're not -- we don't go into that level of detail on a quarterly guidance

Okay. On Active Nutrition, a pretty large delta year-over-year. I know that's most likely coming from depressed results the year before, but can you put a little more color around that improvement -- the $15.5 million versus $5 million?

Sure. As we mentioned, it really is a tale of two cities. I think we've used that phrase before, and may need to get a new one.

But the situation is that Active Nutrition -- I mean Premier Nutrition -- is growing quite rapidly, north of 30% in volume and revenue, and ahead of that in EBITDA, driven by both velocities and expanded distribution. It is lapping a relatively lower period the prior year -- not so much from a sales perspective, but from an EBITDA perspective because of the timing of prior-year promotions. On the other hand, Dymatize continues to be flat to last year. So all the growth of Premier is comping against a relatively low period of EBITDA last year, resulting from Dymatize being flat, and Premier bearing heavily promoted.

Right, okay. Thanks, Rob.

Thank you, Tim.

Andrew Lazar, Barclays.

Just a couple things from me. First off, Rob, you have been building back a private label business over the last couple years. I think in a past life though, having a large private label and branded business specifically in the same category didn't work out as well for what was then Ralcorp. I'm trying to get a sense of is that a structure or a dynamic that you would repeat, or are you less worried about that maybe potentially than some investors may be?

Well I think understanding the answer to that question requires really understanding the nature of the Post business model, which is for Post Holdings to be a holding Company operating highly decentralized strong operating companies. In that context, the ability to manage a private brand business and a branded business within the same ownership structure is entirely consistent.

Where I think some of the challenges are created is an attempt to overly integrated the two routes to market or the two businesses in a manner that starts to create internal conflict, both from a route to market, logistics, all of the different capabilities that would be relevant in terms of attacking each opportunity. I would answer that by saying that on a disintegrated basis, a holding Company structure, yes we can do it, and I think investors should not be overly concerned about the implications of that. On a highly integrated structure I would be wary.

Got it. At Ralcorp, just remind me, I should know this. It was trying to become more integrated -- at least let's call it within the cereal piece?

I would call it a hybrid.

Okay. Then with respect to Michael, obviously the results were up quite a bit better than at least we and I think most others had modeled. My concern there would be do you get a sense that where the margin structure is there, are we entering an over-earning period to some extent, given the success in mitigating AI and some of the pricing actions that you've been taking, that we should think about that going forward, where perhaps a structure or profile isn't necessarily sustainable?

Well, I think we are not entering or we have not been in an over-earning cycle, but we potentially have been in an over-margin cycle. We have been in a situation in which volume has been compressed and margins have expanded.

But we would expect to return to a normalized level where volumes are expanding and margins are potentially lower. Keep in mind on Michael we tend to think in terms of penny profit, rather than percentage margin. We would expect the dollar level to be sustained at a lower margin structure.

Okay, got it. The last one for me would be -- it may be too early, but you had mentioned I think on the last call that there could well be some incremental impact from AI as we go into FY16. I don't know whether you've got more clarity on that, or if the mitigation efforts make that comment less relevant now, or still as relevant as it was then? Any perspective there would be helpful.

The activities aimed at mitigating AI will certainly continue FY16. We are not in a position right now to quantify what that impact will be.

But as we mentioned in the prepared remarks, re-population of the flocks is a process that will take through most of calendar 2016. All of the dynamics that are in place now will continue through the bulk of calendar 2016.

Got it. Thank you.

Thank you.

Cornell Burnette, Citibank

Good morning, everyone. I just want to dive back into private label and M&A opportunities.

Looking at you guys in the past, a lot of PL acquisitions that you did, when you think about maybe Attune and Golden Boy, seemed like they were things that were outside the center of the store in natural and organic, and got you into some faster-growing channels. I wanted to check the temperature on how you thought about -- if you look at maybe some of the old Ralcorp assets, something that's more center of the store. It seems like you just have a less robust growth profile from a top perspective, because obviously center of the store isn't doing so well.

As you were saying early, maybe it's not the best to integrate those assets with what you have currently in the portfolio, so maybe there's not as much cost synergy that can come out of it. How do you balance that with what you've been doing on the M&A front in Private Label thus far?

Well, I think everything you said is accurate, but I think everything you said can be priced. I think the equilibrium tool is what you pay for those assets. I think Post should be characterized as an opportunistic Company. If we think an asset can be priced attractively at a slower growth rate or a faster growth rate, we would take an interest in it.

Understood. Then going -- diving a little bit into active nutrition, I know it's a smaller part of the portfolio but a good year-over-year performance there, and I think you guys did a good at job of explaining why. A couple questions there.

With the PowerBar deal, I believe that the thought there was for the most part it wasn't going to really contribute to earnings this year. Was that the case in the quarter? Going forward, do you expect things to get a little bit better because you start to get some of the cost savings as you move to the co-packing for that business?

The answer to both questions is yes. It was negligible in the quarter, and we would expect it to gradually increase as we realize those cost savings.

Also on Dymatize, the understanding there is that you're still using a co-packer for some portion of that business, which is probably detrimental to margins there. What's the time line that you think you can move some of that Dymatize production back in house?

The timeline for moving it back in house is determined by an FDA review. The FDA has visited.

They had essentially no comments on their review. But we are in a waiting period to get the go-ahead from them. That waiting period is entirely within their control.

When you bring it all together, over time what do you think is a realistic operating or EBITDA margin -- however you would like to give it -- goal for that segment? Given the issues that you have with Dymatize and PowerBar, it seems like the margins here are still relatively low versus where they could be over time?

Well, as we migrate increasingly towards a co-man model in this segment, which we believe strategically is the right thing to do, we would expect an EBITDA margin structure in the low teens. But a very high cash conversion of EBITDA to free cash flow, because that model inherently has essentially no capital behind it. We would expect on a blended basis a lower EBITDA margin, but free cash flow entirely consistent with the balance of the businesses.

Okay. Then the last one for me is obviously on cereal. You guys did very good in the quarter. Obviously, as you said, the overall category's starting to look better with sales only down 1% in the quarter.

Just wanted to get your take on maybe what do you think is driving some of the improvement in the category on a sequential basis? Then as we go forward maybe out over the next year, what's your outlook that you can share with us on the category, and then again for you guys internally in terms of sales?

Well, to start with the obvious, we are cycling easier comps, so that's one thing. The leaders in the category seem to have reinvigorated some of their spending behind it, and that seems to be paying off for the entire category.

Within our business, specifically, we focus on a sub-segment of the category, with a few exceptions. That sub-segment seems to be quite strong, with value consumers being the heart of the ongoing RTE category. As we mentioned in our prepared remarks, we continue to feel good about our migration to value pricing, and where we are in the overall segment.

Okay. Thanks a lot guys. I really appreciate it.

Thank you.

Bill Chappell, SunTrust.

Good morning. Just trying to understand the dynamics of force majeure as we look over the next few quarters, will there be some time frame where it reverses, where you have enough volume until we see again a reversal of sales versus margin intra-quarter?

Force majeure is really a different issue, but the dynamic that will occur is that as supply expands the supply-pricing relationship will normalize, and penny profit will stay roughly in line as margins come down.

There should be at some point -- you're saying six to nine months now supply normalizes. Is that the right way to look at it?

It's a bit longer than that. We're calling it through 2016, so that's -- what is that, 16 months?

Okay. Switching gears on Dymatize, I want to clarify. Obviously, you pulled out that sales still haven't recovered.

I thought the year ago, or over the past year the issue was just you had supply constraints, so you weren't really able to meet the orders. Is the thought that those out-of-stocks or empty shelves over that time frame you've lost market share and you just can't get it back -- is that the best way to look at it, or it's going to take time to get back, or there's still something else that I'm missing?

No, the sales have held up reasonably well, despite a series of operating miscues. The issue is more operational. We have a factory in Dallas that has some structural impediments to operating as efficiently as it should. Trying to work through those structural impediments has been a more arduous task than we expected it to be.

But I think you were saying sales were relatively flat, with a depressed quarter a year ago. Dymatize had been running double digits. Do you expect it to get back to double digits?

Last year we went from double digit to flat, and we're still flat, so that's correct. But they've held up -- albeit losing their growth rate. The category continues to grow nicely, and yes we expect if we can fix the operational issues that the brand should grow at the same or better rate of growth as the category.

Okay. The last one for me, just to make sure I understand on the commodities excluding eggs, your outlook, especially as you get into almonds and nuts over the six to 12 months?

On balance it's a pretty flat situation, but if you look internal to the basket of commodities you've got a lot of variability. You rightly highlight almonds as one that is highly inflationary, but offset by a number of commodities going the opposite direction. One of the nice things about the business as it currently stands is we've got quite a few uncorrelated commodities that are resulting in essentially a zero change year-over-year, despite a great deal of internal volatility.

Got it. Thanks for the color.

Jason English, Goldman Sachs.

Good morning, folks. Thank you for the question.

I want to come back and build off of Mr. Lazar's question on over-earnings in eggs. It sounds like you're confident from a penny-profit basis, despite hitting record quarterly EBITDA in Michael Foods. You're not over-earning there. Can we start by helping us understand what's really driving the record level of EBITDA?

Keep in mind, when we report Michael Foods now, we also include Dakota in that.

Good point.

Michael Foods EBITDA was strong this quarter. I'm not actually sure it's a record quarter for Michael Foods. I don't believe it is.

What's driving it is what we talked about, is strong margin and penny-profit performance as a result of very diligent focus on costs, pricing actions, all the things we characterized in our prepared remarks. I think it's probably not as strong a quarter on a stand-alone basis as it appears, because the aggregation with Dakota. It is a very solid quarter, but I think it's one that we can repeat.

Excellent. Is there any flaw in looking at this quarter. It's not tremendous on seasonality of your business, but looking at this quarter -- which is really the first clean quarter with all your acquisitions in annualizing this number to get a cleaner read of what your underlying EBITDA is an annualized basis?

Well, we've given guidance for the balance of the year, and we'll give guidance in November for 2016. Every quarter has some nuance. We expect a slightly softer quarter in RTE. We expect a continued strong quarter in Michael Foods, strength in the balance of the business.

The quick answer is that we have modest seasonality, as you rightly point out. You can interpolate some quarterly numbers from what we gave today. I think you can build upon a longer period of time the one quarter with what we've given to draw some conclusions around the balance of the year and the annualization. Particularly if you include the fact that we only have five months of MOM in our current-year guidance.

Yes, exactly. Sorry I'm drawing this out, but let me layer on top of it a little bit more now. Now that you've got -- you been living with MOM -- that initial synergy target that doesn't even start to build to next year --

I don't know that I like the characterization of living with MOM, but go ahead.

(laughter) I didn't even pick up on that. Very true. I hope you're not actually living with your mom.

The $50-million cost synergy number, do you still feel confident in that? Are you seeing opportunity for more, or where do we sit, now that you've owned the business for a period of time?

We feel very good about the acquisition. We feel very confident in our ability to deliver the synergies.

If and when we determined that the synergy number is a greater number we will report that, but for now our position is a great deal of confidence in delivering what we've announced. I think it is appropriate to look at the annualization of the MOM numbers plus synergies is the right way to think about MOM.

All right, and the last question. I'll close it out, I promise. Those are cost synergies. Are you seeing any opportunity on revenue synergies related to trade spend reductions, since now you both compete and almost own the value tier outside of private label?

The competitive dynamic is so complicated that I think us and MOM coming together as one is not enough to change that markedly. We are highly focused on the cost side of the equation.

Very good. Thank you gentlemen. I'll pass it on.

Ken Zaslow, Bank of Montreal.

Thank you, good morning, everyone. Two quick questions. One is you didn't go over what actually exceeded your expectations, and what drove the exceeding of expectations?

The biggest over-performance was in ready-to-eat cereal. I think as we have moved into the integration with MOM -- some of these things are obvious in retrospect, but we are by nature a very aggressive Company. We were aggressive in M&A and aggressive in new product introduction.

As we moved into the integration with MOM, one of the things we decided to do was highly focus the organization around cereal. As a result, a lot of extraneous activities fell away. I think that focus is essential to the go-forward plan. That has resulted in better performance across the cereal business, both in terms of volumes and cost management.

Then my next question is excluding PowerBar because you mentioned that, and obviously you mentioned MOM Brands as well, where are the other cost savings? Can you talk about the opportunity that you see in other parts of your portfolio, where you are on that? Give us a little bit more color on that? That would be helpful.

Obviously, the biggest one is in the integration of MOM and Post, and taking the duplicative costs out of that combined organization. We have cost-reduction, as you highlight, going under way with PowerBar. But we have an ongoing cost-reduction program in each of the individual businesses that is targeted at 2% to 3% of COGS annually.

What about with the new organizational structure, the co-CEO structure going away? There's a litany of opportunities throughout the organization. It would be helpful if -- even if it was a little bit anecdotal would be helpful to see if there's anything -- again, the MOM is very clear and it's very open. But the other pieces of it seem more subtle, and any color on that would be gratefully helpful.

I'm not sure what you mean by the co-CEO structure going away, but the -- we have opportunities to reduce costs over the long term. The holding Company, as we get to more of a stabilization rate, we pay a very high level of costs around things like becoming SOX compliant. When you do ten acquisitions in three years, and none of them are SOX compliant coming on board. There is a considerable expense investment in making those businesses SOX compliant, so that's one anecdote.

But there's an ongoing cost-reduction program in each business again. But the big one in terms of fundamentally changing the margin structure of the individual business segment or the overall holding Company would be the post-MOM integration.

Great. I appreciate it.

John Baumgartner, Wells Fargo.

Thank you. I'd like to ask about structural changes in the egg industry, in terms of any changes we can expect going forward as we emerge from the influenza outbreak. Maybe to the extent that some of these smaller egg producers exist, and maybe don't come back financially, what's the opportunity or interest level for Michael -- maybe go out and consolidate and bring more of this production in house going forward?

Well, in many situations like this the party that goes into the incident the strongest tends to come out stronger, and I wouldn't be surprised if on the other side of this event you do see some of the weaker participants in the market place not return. We don't know that yet. We're in the early stages of reviewing the landscape following this. Frankly, we want to be very cautious because we don't know what's going to happen in the fall.

But I think your intuition is correct that coming out of this, stronger providers who performed exceptionally well during this will stand to gain. Where exactly that comes from will remain to be seen.

I think structural changes, we all have to look at geography. We all have to look at bio-security. We all have to look at flock size. Everything that we've talked about before, in terms of how a threat like this can change our behavior going forward, and we are actively doing that analysis.

Okay. Thanks, Rob.

Then sticking with Michael, is there a way that you think about the potato and cheese businesses going forward, in terms of how strategic those are for you? If they are strategic, any opportunity to generate consistent growth, better growth, in cheese or potatoes?

Cheese is a nicely attractive cash-generating business. We view ourselves as a business driven by free cash flow more than EPS. While it is not a large business within the overall holding Company, it is a nice steady contributor to free cash flow. In order for it to become more strategic would likely have to involve an M&A event.

Potatoes, while we had a bit of a softer quarter in potatoes, we see that as a form and a product that has a lot of growth potential inherent to it, as the food service channel makes a transition from raw potatoes to further processed potatoes, not unlike the transition that occurred with eggs. We view potatoes as more long-term strategic than cheese, because there are some natural growth opportunities contained within the business. But at the same time, there are also a number of M&A opportunities that could emerge with potatoes.

In terms of acquiring smaller brands?

Correct.

Great. Thanks, Rob.

Brian Hunt, Wells Fargo.

Good morning, and thanks for taking my questions. First question is, when I look at the egg business, there's definitely some rumblings of imports starting to filter in. Is that something you all are evaluating? If not, why couldn't you add to your volumes with importation of eggs?

We will react to that as it develops. So far it's been relatively modest, but as it develops we'll certainly look at that.

My next question is, sticking with eggs, given how you performed during the quarter and your ability to move product mix around, do you all feel like you gained share on the food service side relative to your various competitor during the period?

Very difficult to say. I think what we can say is that we gained a great deal of confidence from our customers. I think we performed very well. I think you have to give a tip of the hat to the Michael Foods team for executing very closely with its customer base, and making sure that we managed supply as effectively as we could.

Whether we actually gained share or not it's hard to say given the shrinking volumes that share was gained or lost. I think the question about the ability to gain share in the future is accurate, or insightful. But whether we actually have gained share or not is very difficult to say.

All right, Rob. My last question, when I look at the silos of segments that you have under the holding Company, Post on the cereal side obviously has great scale.

But when I look at Michael's active nutrition and private brands, where ideally do you think that the Company needs to build incremental scale? Would you all along those lines consider adding another silo to the business? That's it for me. Thank you.

Well, certainly active nutrition and private brands are currently sub-scale. I think Michael is a full-scale business, and one of the best go-to-market teams in food service. I think we have opportunities to further enhance our food service business, but that's already at scale level. Active nutrition and private brands are aware, I think, transformational M&A is likely.

In terms of adding another silo, I think that our first blush is to look at opportunities that are synergistic and have a higher marginal return on capital. But as I responded to the comment about center-store opportunities, we are an opportunistic organization. If the opportunity to add a silo at an attractive price emerges, we would certainly consider it.

Great, Rob. Thanks for your time.

Thank you.

Ladies and gentlemen, at this time we have reached the allotted time for questions. I would now like to turn the floor back over to Mr. Rob Vitale for any additional or closing remarks.

Again everyone, thank you. We're very pleased with the quarter. We appreciate everybody's ongoing support, and look forward to talking to you again next quarter.

Thank you ladies and gentlemen. This does conclude today's Post Holdings third quarter 2015 earnings conference call. You may now disconnect, and have a wonderful day.