Post Holdings Inc (POST) 2016 Q2 法說會逐字稿

Welcome to Post Holdings' second-quarter 2016 earnings conference call and webcast. Hosting the call for 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 o'clock PM Eastern time. The dial-in number is 800-585-8367 and the passcode is 8865-3759.

(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. Good morning. Welcome to the Post Holdings' second-quarter earnings call. 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 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 Filings section. In addition, the release is available on 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.

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

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

Thanks, Brad. Thank you all for joining us. We are pleased to share with you our second-quarter results. We had another traffic quarter. Our adjusted EBITDA performance was strong across segments. On a consolidated basis, revenue was $1.3 billion and adjusted EBITDA was $247.8 million.

This morning, I will discuss some segment highlights and our strategic outlook. We are making great progress at Post Consumer Brands. Our ERP conversion went as planned. We have started identifying incremental synergies across logistics, warehousing, and distribution.

In our press release, we announced $25 million in additional cost synergies, which we expect to be realize by the end of FY18. The initial $50 million in annualized run rate synergies continue on track to be realize the end of this fiscal year. Recall last quarter, we increased corporate-wide planned spending by $25 million targeted toward brand building and cost reduction projects. Approximately $8 million was incurred in this quarter. The majority of the remaining $17 million is for Post Consumer Brands and will hit in the second half of FY16.

Our outlook on the ready-to-eat cereal category remains unchanged. The category declined this quarter 2% in dollars and 2.5% in pounds and was pressured by softness primarily in the food and mass channels. Base dollars in pounds were down slightly. Incremental sales remained soft and weighed on category volumes, as merchandising support to the category was reduced.

In general, we are encouraged to see sales mix shifting to base from promotion. In the long-term, we think this is healthy for the category and is beneficial for us as we have historically under-indexed on our fair share of promotion.

Specific to Post, our consumption dollars declined 1.9% and pounds declined 3.1% for the quarter. We are particularly focused on the support of our core four brands: Honey Bunches of Oats, Pebbles, Great Grains, and the Malt-O-Meal branded bags. We saw consumption dollar and pound growth for three of our core four. The exception was Honey Bunches of Oats, where base volume growth of 2.5% did not fully offset incremental volume declines of 15%, compared against a heavy merchandise period last year.

Pebbles and our main Great Grains products continued to see solid consumption growth, with pounds growing 5.8% for Pebbles and 2.8% for these Great Grains products. We are focusing the Great Grains brand on our four core SKUs and reducing support from ancillary SKUs.

Malt-O-Meal branded bags had good dollar consumption growth of 2.8% and volume consumption growth of 0.2%. This result was achieved despite lapping a prior year that had heavier consumption of smaller trial size bags. In general, consumption base sales for Post Consumer Brands were flat, while higher promoted prices reduced incremental consumption.

Michael Foods had a very good quarter. Our repopulation efforts continue following last year's outbreak of avian influenza. Our own farms have resumed operations. We expect them to reach full output levels during our fiscal third quarter.

Third-party contracted farms continue to repopulate. We expect them to reach full production capacity by the end of calendar 2016. Recall that as egg supply returns, we are in the process of reversing the temporary portion of incremental AI pricing. Our business has shifted towards higher margin channels and products benefiting margins. We expect mix to remain favorable in comparison to our pre-AI mix.

Turning to Active Nutrition, Premier Protein performed exceptionally well this quarter with shake sales up over 50%. Premier continues to have strong growth in the club channel and is showing great growth in food, drug and mass through expanded distribution. The power of our renovation is underway with new ingredients, new products, and new packaging.

We continue to ramp up production with our co-manufacturers for Dymatize. Recall that we intentionally shrank Dymatize to its core product lines. Inventory for two of the three core product lines has returned to normal levels. In fact, revenue for the three core product lines increased 23% sequentially. Our expectations for FY16 continue to be modest as we've shifted marketing dollars to the second half of the year to support the brand.

We are quite encourage with our portfolio performance. You may have seen from our press release that we increased guidance to reflect the ongoing strength of the business. The remaining quarters in 2016 are now expected to average between $205 million and $215 million in adjusted EBITDA versus our prior guidance, which implied an average of between $192 million and $202 million.

In raising our guidance last quarter, I commented that our initial perspective on FY17 is that we would expect to grow from that guidance. Our view now -- recognize that we remain in the very early stages of planning for FY17, remains that we will see growth from 2016 to 2017. This growth results from incremental synergy realization in cereal, ongoing growth in Premier Nutrition, the realization of this year's turnaround efforts at Dymatize, and organic growth in Private Brands. These benefits will likely be offset by a decline in our Michael Foods egg business, where we expect to see volume increases and pricing declines.

On the M&A front, despite a period of quiet, we are no less busy. We continue to be actively engaged in reviewing opportunities and remain committed to complementing our organic growth with strategic and tactical M&A.

With that, I will turn the call over to Jeff.

Thanks, Rob. Good morning. Starting with Post Consumer Brands, second-quarter sales were $440.1 million. On a comparable basis, sales increased nearly 1% with volumes declining approximately 2%. Volume increases for Malt-O-Meal branded bags, Pebbles, and co-manufacturing were offset by declines for MOM boxes, quarterly big business, Great Grains, Shredded Wheat, and Grape-Nuts. Net pricing increased 2.7% on a comparable basis and was partially offset unfavorable mix associated with larger package sizes on Post branded products and higher co-manufacturing volumes.

Post Consumer Brands adjusted EBITDA was $106.3 million for the quarter. Adjusted EBITDA benefited from synergy savings, higher average net sale prices, and slight improvement in raw material and freight costs. This was partially offset by increased advertising and consumer spending, which was related to the incremental corporate-wide investments targeted to brand building.

Moving to the Michael Foods Group, net sales were $557.7 million for the second quarter. On a comparable basis, net sales decreased 2.2%. As expected, because of the impact of AI, our egg volumes were down approximately 16% on a comparable basis. However, egg volume -- excuse me, egg revenues declined only 2.8% behind AI-related price increases and favorable product mix.

As with the first quarter, an attractive price/cost relationship and favorable product mix resulted in improved profitability and margins for our egg business. Reductions in AI-related price increases are underway.

Across potato, cheese and pasta, we also experienced improved product mix. We exited lower margin business in potato and cheese and gained private label and food ingredient volumes in pasta. In all three businesses, we benefited from disciplined pricing strategies and favorable cost/price relationships.

Michael Foods Group adjusted EBITDA was $121.9 million and benefited from the acquisition of Willamette Egg Farms, increased profitability per pound in egg and cheese, and higher volumes in pasta. While total advertising and promotion expenses were lower for the segment, we made incremental investments in retail potato advertising and promotion.

Turning to Active Nutrition, sales were $143.8 million and increased 11.6% on a comparable basis. Sales for Premier Protein shakes grew more than 50%, driven by consumption growth in club and distribution gains in FDM. Dymatize sales, as anticipated, declined significantly as a result of reduced product supply related to the ramp-up of production in co-manufacturers and our strategy to narrow the scope of the product portfolio. Active Nutrition adjusted EBITDA was $20 million and benefited from higher non-promoted volumes and lower raw material costs at Premier and manufacturing savings associated with the power of our facility closure.

Moving to private brands, second-quarter net sales were $129.7 million, an increase of 3.8% over the prior year. The sales increase was driven by increased volumes for organic peanut butter, regular peanut butter and dried fruit and nut products. This was partially offset by reduced volumes for tree nut butters, as we are lapping a period in which certain tree nut butter customers moved to dual sourcing.

Private Brands adjusted EBITDA was $13.9 million and benefited from increased volumes. This was offset by higher manufacturing costs, unfavorable foreign exchange rates, and losses on write-downs of idle fixed assets.

Before moving to our guidance I would like to comment on our interest rate swaps and our net leverage position. Although the majority of our debt is at fixed rates, we have two interest rate swaps with an aggregate notional amount of $1.6 billion and placed the hedge of a portion of the interest rate exposure related to the future refinancing of the fixed rate debt.

During the second quarter, we incurred a non-cash mark-to-market loss on these swaps of $90.9 million, as long-term interest rates fell significantly. However, we also saw significant appreciation in the trading value of our outstanding fixed rate bonds, indicating the potential for lower refinancing costs and that the hedges are working as intended. The swaps mature primarily in late FY18 and early FY20.

Regarding leverage, our strong operating performance over the past four quarters has reduced our net leverage as measured by the terms of our credit facility and giving full credit for our cash on hand to 3.9 times. At this net leverage level, we have significant secured and unsecured debt capacity to pursue new M&A opportunities.

Now turning to our outlook. We expect adjusted EBITDA for the second half of FY16 to be between $410 million and $430 million, including $17 million in incremental expenses aimed at brand building and driving additional cost savings. Our adjusted EBITDA guidance for the full fiscal year is between $893 million and $913 million.

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

(Operator Instructions)

John Baumgartner, Wells Fargo.

Rob, I would like to ask, for Active Nutrition, can you speak to the margin upside there year-on-year? How much of it was from favorable commodity moves versus maybe shift in promo timing? Then I guess, [new] building and all, any structural benefits from the facility closure there?

It's all of the above and a little bit more. We benefited from protein costs. We benefited from some favorability of timing and promotions. But I think more structurally, what we are seeing is as the scale of the shake business expands and benefits to being able to leverage that scale across procurement and across manufacturing, more specifically, [co-mans]. So, as the business grows and obtains scale, it just becomes a structurally more attractive business.

Okay. Then in Premier, how are you navigating the break-in in channel exclusivity there? How is the club channel reacting to the move into FDM?

We are navigating it with different pack sizes, different pricing strategies, and different value propositions, so that we tailor each of the product offerings to what drives the consumers on a channel specific basis.

Okay. Then just lastly in terms of Michael. For the potato business, we have seen some acceleration in the sales growth in the Nielsen data for the last couple of quarters. Can you speak a little bit about to your strategy there or expectations more into the retail part of that business going forward?

Yes. We have had new launches around our cut products. We put some incremental advertising dollars into the Simply Potatoes brand, part of the $25 million that we talked about adding last quarter. A meaningful portion of what hit in the $8 million this quarter that we talked about, went to the Simply Potatoes brand. So we're looking to grow that with some meaningful investment at retail.

Great. Thank you.

Thank you.

Jason English, Goldman Sachs.

Congratulations on another strong quarter. I am somewhat embarrassed to admit that I am having -- I am struggling a bit to try to figure out how best to model the Michael Foods Division on a go forward, particularly as we enter this sort of glide path back to normalcy in the market. So I am looking for some help on that front. Can you help us understand sort of the puts and takes on a go forward?

I think, my memory could be a little foggy, last quarter you suggested maybe there's $20 million of over-earnings suggesting maybe normalized EBITDA for that business on a quarterly run rate is closer to [100]. Is that a still reasonable rule of thumb? Anything, anything you can add on that topic as we think about the forward for that business would be greatly appreciated.

Yes. We realize that's a bit opaque. We will try to help a bit but probably won't eliminate all the opaqueness. I think the best way to look at it is on a portfolio basis. Look to our second half guidance as a more normalized level of performance than is our first half, recognizing that we've got some incremental spending in both first and second half at various degrees. So, if you start to annualize both our first and second half and compare the two, it's an imperfect proxy because there are give and takes with respect to synergy realization growth in Active Nutrition and other areas. But that gives you a starting point proxy for trying to get to the understanding you are trying to reach.

That's helpful. Obviously, the comments made earlier about the expectation of continued growth next year implies by nature that a [410 to 430] sort of half-year run rate is expected to be exceeded as you go through next year. Can you just do -- at a higher level outlying some of those drivers of growth?

Let me reiterate, as I mentioned in the comments, that our planning cycle is early. Our planning cycle occurs in our fourth quarter. So, what we are now doing is really more along the lines of developing context toward 2017. So nothing in that should be construed as guidance for 2017.

Understood.

With that as context, we look to enter 2017 with some difficult Michael comps given the dynamic of 2016, offset by annualization of realized synergies in cereal, incremental synergies in cereals, the reversal of the unusual A&C level that we talked about already and the reversal of superior performance level incentive payouts.

As we enter into 2017, we have some gives and takes that don't even then start to factor in the strength of the business categories, above norm growth in Active Nutrition, and some growth opportunities in private brands. So, said another way, we look to FY17 to have a risk and opportunity balance that looks to us to support the sustainability of the aggregate portfolio EBITDA even while some of the individual Company performances may not be sustainable.

That's helpful color. Thank you. I will pass it on.

Andrew Lazar, Barclays.

One follow-up there and then another question. When you say reversal of some the brand building spend this year, does that mean that remains in the budget at that level next year? Or may not need that incremental $25 million in next year?

So we entered 2016 with a fully loaded A&C budget and added $25 million to it. It's not quite the totality of $25 million going into A&C but the bulk of it did. So, what I'm indicating is next year, we would view that as cushion and look to next year's business performance to decide whether to spend it or not. But that it is above the normative level of spending.

Got it. Then, getting back to just Michael for just a minute, I guess, maybe to ask it a different way. If previously maybe there was $20 million or so that you felt like you needed to make up for in the rest of the business as you went into FY17, what -- broadly, what would that level maybe be now given the out-performance in 2Q and what you're looking for in the back half at Michael, that you kind of feel like the rest of the business needs to make up for, so to speak, in 2017 to get you overall EBITDA growth in 2017?

We are not going to drill down further into the specifics of Michael than to guide to -- guide you to look at again, as I mentioned to Jason, the first and second half performance, recognizing that a large portion of that delta is driven by Michael.

Got you. Then the last thing would be, any way for us to get a sense of, even directionally, maybe how much more profitable on a centerline basis Michael would be coming out of AI than it was going into AI? I don't know whether it's a cents per pound metric or -- margin may not be the best way, I understand. But trying to get a sense of where that is, because I know that it was a pretty significant shift in customer makeup and such.

Again, because of where we are in the planning cycle, we don't want to precisely answer that question. But we can give you a directional arrow that says, because of the shift in mix and because of some of the incremental cost around biosecurity that the margins will be higher. But we don't want to put a stake in the ground yet in terms of where that margin structure will land.

Got you. Thanks very much.

Chris Growe, Stifel.

I don't want to be [rude on here], but I did want to ask the question and then Andrew got to the question I wanted to ask, essentially. But could you say, maybe this way, what the profit per pound at Michael Foods was in the first half of the year?

The profit per pound at Michael Foods was (multiple speakers)

I'm sorry, the egg business, of course --

The egg business was in excess of $0.30 a pound.

Okay. Your historical average had been more like $0.15 a pound, is that right?

$0.15, $0.16 a pound.

In aggregate.

In history -- in aggregate, right. Okay, yes. Thank you. Then I thought maybe related to that, there's been a -- there was a little avian flu outbreak recently. Just, is there any update in terms of avian flu that you have heard? Any other instances of that occurrence?

No. First, that was a low path outbreak. Last year's was high path, which was the particularly harmful strain. That's the only one we have heard about.

Okay. And I had a question in relation to Active Nutrition. Just to understand how the Dymatize business is progressing. Did it have a positive EBITDA contribution this quarter? It's hard to discern with how much Premier's contributing versus, say, Dymatize. I understand how there's costs associated with moving to third-party suppliers, just to get a sense of where that business stands within Active Nutrition?

It was essentially breakeven. The volume growth was attractive sequentially but still remains well below last year given the decision to walk away from what was mostly a private label and co-manufacturing business. But the performance in the quarter was breakeven. That's in part driven by heavy spending on relaunching the brand.

Okay. Then just one quick follow-up if I could, which is you mentioned, call it, incentive compensation, a bit of a reversal next year, is that right? So is that up a lot this year? Have you talked about how much that could be working against EBITDA in 2016?

We have not given that number. That number is not finalized yet. But as we hit these outsized levels of performance, it triggers higher bonus levels that would naturally reverse next year as we reset bonus targets.

Okay. That's very helpful. Thank you for your time.

Thank you.

Cornell Burnette, Citi.

Congratulations on the quarter. Just want to just go back to Michael Foods quickly. I have one last question, obviously with everything going on with AI and the premium pricing you are getting, we're seeing the EBITDA margins obviously explode to like 20%. I think historically, over the past five years, they have been consistently between 13% to 15%. As we move forward, is kind of that historical level maybe on the higher side of 15% more of the right way to think about the business?

Yes. That goes back to, I think it was, Andrew who was asking about where it lands. Directionally, above history but certainly well below current.

Okay. Then if I could move on to cereal. 2.7% price increase in the quarter, I think is pretty remarkable given the commodity environment. I just want to know what drove that pricing increase within the portfolio. What's the behavior like in the cereal category? How do you see pricing laying out going forward?

I would characterize it not so much as a 2.7% price [decrease] but a walking away from some very inefficient spending on trade promotion. So trade -- promoted volumes were down pretty substantially. So, it really is more a reflection on the mix between promoted sales and baseline sales.

Is this something you are seeing broadly amongst your competitors in the categories --?

I would extend that beyond cereal to say more broadly in CPG, it appears there is just less. As a result of less effective trade spending, some of that is coming down and the shift is moving from increment to baseline. It's generally a healthy trend.

Then one last question. I know you gave some numbers surrounding the synergies. But just -- you talked about things on a run rate basis, but just in terms of incremental, what are the incremental MOM synergies that are baked into the budget for FY17 over synergies captured in FY16?

We are not going to go into specifics on 2017 details. I was highlighting more conceptually that synergies realized throughout the year will have an annualization impact in 2017 because they were realized -- not all on October 1 of 2015. So it's merely a timing issue of when they flow through the P&L. As we get into planning for 2017, we'll give more detail and have more detail around that. But I really don't want to go into specific line item discussions on FY17.

But I would say there's carryover from cost [initiative] projects that were implemented in FY16, but then there will also be the addition of -- some of the new upsize projects that will flow into FY17 as well.

That's right. The annualization of that which has already been realized, plus realization of the increment.

Okay. Thanks a lot, guys. I will pass it on.

Thank you.

Tim Ramey, Pivotal Research Company.

Congratulations on blowing us all away. A couple of things, I'm sure you have this model on your desk every day, Rob, looking at the notional value of the interest rate swap versus its perceived benefit. You are never shy about taking a cost if it will improve down the road cash flow. What does it look like to think about exiting the slot, taking -- paying the penalty, buying that back and moving on? Or is that just too hard to figure out?

No it's not hard to figure out at all in that, so let's divide it into two different areas. One is, the purpose of the swap was to hedge refinance risk related to our bonds that become callable next year and have call dates thereafter on a consistent basis. From a perspective of the hedge, the bond -- the swaps are working as intended. If you track the value of our bonds versus the marks, they are highly correlated, as exactly as you would expect them to be.

So the second part of your question then becomes more of a trade. What is the best time to execute a trade? Once we do that, we've started breaking the hedge nature of the transaction and moved it into a trade, which we tend to not to. The question of that trade is, what do we think about interest rates going forward from this point in time? We would be breaking that hedge, turning it into a trade at a pretty low point on the interest rate cycle. That's why we have been pretty poor prognosticators of interest rates.

So, for the time being, we are going to continue to treat it as a hedge unless something fundamentally changes in our interest rate outlook that makes us think we are entering a pervasive deflationary environment and that [mark] is going to grow in a manner that won't be reflected in a corresponding increase in the value of our bonds.

Presumably, the increasing value of your bonds takes away some of the risk on refinance. That has to come into the equation as well, correct?

Yes. When I talk about the increasing value of our bonds, I am using, of course, the inverse of that as our new issuance costs.

Right. Then just back on [MFG] for a minute, you've emphasized mix and I think it's -- you've talked about reducing the customer list, dramatically reducing the ingredient egg portion. It strikes me that the piece many of us seem to be missing is how powerful that is to the improvement in margins, rather than the particular margin that you might charge any one QSR. Can you elaborate at all on that?

Only to reinforce my earlier comments, that directionally that theme is quite correct. But that we are not going to put a finer point on it until we are closer to our 2017 planning and have a better sense of where the channel mix lands and what the pricing environment is.

Okay. Then just any update on -- as you talk about maybe entering FY17 will the mix of Company-sourced eggs versus contract eggs change versus historical? It seems reasonable that it might actually shift a little bit towards Company, but I might be wrong on that.

No. We'd expect to get back to the mix that we had before, which is about 75% external, 25% internal. Right now, we're buying more on the market than we historically would have. We would expect to move more back to grain-based supply when all the farms are back online.

Okay. Terrific. Thank you so much.

Bill Chappell, SunTrust.

Just a couple quick questions on, one on private brands on the margins going down year-over-year. Maybe I don't really understand that, but was that not adjusted out for the losses on the restructuring or the plant closure? Or how should I look at that going forward?

The primary driver of the margin decline for private brands is a mix-related issue. So we commented about the lower volume on nut butters, almond butter, cashew butter, which tend to have a higher-margin. We've replaced a lot of that volume with more traditional peanut butter, which while nicely profitable has a lower margin structure than the more premium nut butters.

So I should look at it like this going forward.

Well, obviously, we're going to continue to work on increasing our mix back to the more premium products. But there is more competition in the market that we need to work through.

Okay. Then tax rate we should be looking at going forward?

That's our favorite question. (laughter) The GAAP tax rate is really not very helpful for modeling purposes because it fluctuates dramatically from quarter to quarter. In our case, because of the fact that we are near breakeven sometimes with some of these mark-to-market adjustments.

Right.

So, I think the best guidance we can give you from a cash tax perspective is to use the guidance we have provided previously. As profit is incrementally higher, apply a 35% tax rate to the increment of that profit.

Okay. Then last one, just in general, Rob, how are you looking at the cereal business going forward? When I say that, I mean, what's internally deemed as good? Is it 1% growth? Is it 1% decline? Is it flat? Because basically you have a lot of moving parts and different focus and there's going to be volatility in a quarter. But I just don't know from a focus standpoint, when do say, wow, that was -- we're just like we want or this is below plan?

So, I am not going to respond to good or bad. I'll give you an answer in terms of how we look at it from a perspective of our long-term planning. That's to have a zero volume rate of change. That growth in cereal is about mix management and cost reduction over time. That's the elegance of the MOM/Post Foods combination.

So this quarter would be good or bad?

This quarter would -- at roughly zero would be in line. I am looking mostly at base rather than increment.

Perfect. Thanks so much.

Ken Zaslow, Bank of Montreal.

Just a couple questions, one is, where are you actually finding the additional synergies from MOM? What is the process to continue to reveal or find these additional synergies?

If you create four buckets of activities -- administer, sell, make, and move -- we have today focused on administration and sales as a source of synergies. The more complicated bucket of synergies are in the make and move. So now with the ERP conversion behind us, what we are able to do is focus on the physical aspects of the business, such as the number of distribution centers, the location of those distribution centers, optimizing production planning across platform technologies to maximize throughput. Things that are more complicated with respect to moving the site of distribution or the site of production. That's why it's taken us longer to articulate them and will take a little bit longer to deliver them.

But you are still working on them, so there is a logical conclusion there may be more to come, rather than less to come?

Hopefully, you all recognize that we tend to err on the side of caution. So, we are giving you the most appropriate number we can give within the context of looking at the risks and opportunities inherent in this process. At some point, Ken, we will stop talking about synergies and just look at total cost. Because we are very diligently focusing on cost and if it's the result of the merger, great.

But if it's a cost reduction, that could have been achieved by either Company on a standalone basis, while technically not a synergy, it has the same effect. So we don't expect to talk more about synergies once we get through this next implementation. What we intend to talk about is ongoing cost reduction.

Is there a possibility to start reviewing revenue synergies? Or is that something that is not really part of the game plan? How do you think of that?

As we have mentioned previously, we will not be on a combined trade management tool until early in FY17. The way to optimize our -- the effectiveness of our merchandising and promotion partnerships with our trade customers is by combining our trade analytics onto one tool and looking across portfolio. Whether that will result in better efficiencies or not, time will tell, but we are not baking that into any planning. We certainly are hopeful that will produce positive results but nothing we have done was predicated upon it.

Great. I appreciate it. Thank you.

Thank you.

Bryan Hunt, Wells Fargo.

Maybe just to beat a dead horse. When you talked about moving product, logistics warehousing distribution, that associated with your ERP implementation, that's the additional $25 million? Or -- I'm just making sure I am correlating the correct information.

You are.

Okay. Great. Next -- because most of my questions have been answered, two easy ones. A lot of packaged food companies have been talking about their commodity basket improving as we've gone through the last couple of quarters. Can you give us a better understanding of maybe what your back half looks for your commodity basket? Any initial look into 2017?

For the cereal business, we previously commented that on a 2015 to 2016 basis, that our basket of commodities was a modest unfavorable. As the year has progressed that modest unfavorable has turned into a slight favorable. So it would be fair to say that the commodity impact in the second half of the year should be slightly favorable to the first half of the year. The other pocket of commodity that falls to the bottom line significantly is in our Active Nutrition business, where on the Premier side, we are benefiting from lower milk protein. That, we expect to continue through the remainder of 2016.

On the Dymatize side, we are not benefiting because we are working through a contract that was at higher prices that had long volumes on it. In terms of 2017, although it's early, we -- our current view, which is always subject to change as you know, but our current view is that the grain outlook is benign, so we would expect that the low commodity environment we are currently in will continue. Same would be true for energy and to a lesser extent but into the beginning of 2017, we also see the low milk protein continuing as well.

On the nut side, I mean do you pass through most of your stuff on private label? Because tree nut prices have dropped precipitously.

Yes. So tree nuts, the biggest fall through benefit for us is on the cereal side, because of the significant almond buy that we do. So that gives a favorable component in the outlook into 2017. It's about 50/50 in terms of the benefit on the nut butter business because there's quite a bit of pass-through of pricing in that business.

Then my last question. Rob, you've touched on your bond prices more than once. Your implied bond pricings and your credit metric improvement has been material. It would imply that the ratings agencies have you all mis-rated by a notch or two. Can you talk about your most recent discussions with them? Or do you have a planned discussion with the agencies anytime soon?

We talk to the agencies on a regular basis. I would describe their view as, they are pleased with the improvement in the credit profile, but are hesitant to make any ratings changes because they understand that part of our strategy is ongoing M&A and to flex our leverage as we do M&A. So they're hesitant to make an upgrade only to be followed by a downgrade as we go through that M&A cycle. But they certainly are viewing the current trends favorably.

Thank you for your time.

Heather Jones, BB&T Capital Markets.

Congratulations on the quarter. I had a quick question on the cereal business. I was wondering when we should see in the numbers you cycling the shift from incremental [debates]. I guess more just like I think about when we should start to see flat volumes and you get that mix to where you want it to be.

The heavily promoted period should cycle through this quarter. This quarter being the -- our third fiscal quarter.

Okay. Perfect. How much is co-pac? I would assume that has -- maybe it's a wrong assumption. But does that have a depressive effect on price mix? But more than offset by what is helping on the volume side? Is that how we should think about that?

Yes. It absorbs some fixed costs.

Okay. Then going back to -- something you said earlier about biosecurity costs. So, higher biosecurity costs -- you mentioned that being helpful to margins. Is it basically -- not only -- you are passing more -- through more than what it's really costing because basically to compensate you for the hassle of increased security? Is that how we should think about it?

I think you should think about it more in a holistic sense that, as we have increased state-of-the-art biosecurity and we have that as a competitive advantage given the size of the business and the reliability of the supply, that suggests that there will be potential opportunities to earn from that increased value proposition. Not specifically that it's like a cost-plus pricing.

I see. Given the biosecurity measures you've put in place, do you feel like -- Michael Foods specifically -- feel protected against further outbreaks? Or do you think there needs to be more diversification in where your flocks are located, et cetera?

Well, certainly, the only way that we will ever know that with certainty is if there is a significant outbreak and then to test how we are impacted by it. I think if we all have our druthers, we will never have good insights into that answer. The diversification of flock is something that we have somewhat tiptoed into because diversification also has a costing implication that is negative. So we are regularly reviewing that very question, not only in the context of biosecurity but in the context of this ongoing migration to cage free.

Okay. My final question is, you mentioned this mix shift to higher value add, is that business you already have won? Or is it just that you're anticipating you'll win because of all these advantages you noted, like biosecurity, dependability, et cetera?

So it's a little bit of both in that, it's business that we have but to say we have won anything is not realistic because we haven't had supply -- the whole industry hasn't had supply. So, it's the residual business shrunken from pre-AI levels and the anticipated re-emergence in a somewhat different mix construct.

Perfect. Thank you so much.

Thank you.

We have reached the allotted time for questions. I will now turn the floor back over for any closing remarks.

Thank you, everyone, again. We look forward to talking to you in August. Have a nice weekend.

This concludes Post Holdings' second-quarter 2016 earnings conference call and webcast. You may now disconnect your lines.