Post Holdings Inc (POST) 2016 Q3 法說會逐字稿

Welcome to Post Holdings third quarter 2016 earnings conference call and webcast. Hosting the call today from Post are Rob Vitale, President and Chief Executive Officer; and Jeff Zadoks, Chief Executive Officer. Today's call is being recorded, and will be available for replay beginning at 12 PM Eastern Time. The dial-in number is 1-800-585-8367 and the pass code is 46697305. At this time all participants have been placed in a listen-only mode.

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

Thank you and good morning. Welcome to the Post Holdings conference call, where we will discuss results for the third quarter of fiscal 2016. 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 we will be available for a brief question and answer session.

The press release that supports these remarks is posted on our website in the Investor Relations section and in the SEC filings section at PostHoldings.com. 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 the call and Management undertakes no obligates to update or otherwise 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 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. Thank you all for joining us. We are pleased to share with you our third quarter results; we had another great quarter with strong adjusted EBITDA performance across segments. On a consolidated basis revenue was $1.2 billion and adjusted EBITDA was $231 million. This morning I will discuss segment highlights and our strategic outlook. I will also provide some directional insights into how we are thinking about 2017 as we begin our planning process.

Michael Foods continues to perform well. Repopulation following last year's outbreak of avian influenza is nearly complete. Our own farms were operating at full output by the end of the fiscal third quarter. Third party contract farms continue to repopulate and we expect them to reach full production capacity by the end of calendar 2016. During the quarter we continued to reverse some of the temporary, incremental AI pricing.

In the egg business we continue to see mix favor high-margin value-added products. Our volume within the food service channel continues to normalize but the food ingredient channel has been slower to normalize. Our continued long-term optimism about our egg business is grounded by its leading market in a position in a growth category. We have had a successful year and well-navigated the AI crisis. In the short term, we anticipate declining margins and profit levels from the egg business.

Meanwhile we have plans to mitigate the decline elsewhere in our portfolio. We continue to make great progress at Post Consumer Brands. We are focused on executing synergy and productivity savings, and our plans continue to be on track. Our ERP is conversion is behind us and we are implementing a new trade tool which is targeted to be completed early in the first quarter of fiscal 2017.

Recall we announced our plans to spend $25 million on a corporate-wide basis on brand building and cost reduction. Post Consumer Brands has incurred approximately $11 million by the end of the third quarter with approximately $4 million of spend planned for the fourth quarter. We remain cautiously optimistic on the cereal category. It continued to moderate this quarter, with a dollar decline of .2% and a pound decline of .4%.

The category continues to benefit from stable base performance and lower losses from incremental sales. In fact, base dollars increased .5% and base pounds increased .4%. In the quarter the category saw significantly lower losses from incremental sales compared to the losses in the prior two quarters. We continue to be encouraged to see sales mix shifting to base from promotion as we believe this is long-term healthy. As a reminder, a shift towards base sales is beneficial for us as we have historically under-indexed on our share promotion.

Specific to Post, our consumption dollars increased .4% and pounds declined .8% for the quarter. Our primary focus is on supporting our four core 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 four core four. (Dropped audio) primarily driven by incremental volume declines of 2.5%. The brand lacked merchandising events in the drug and in the drug channel --- .

Pebbles and our main Great Grains products continue to see solid consumption growth with pounds growing 7.2% for Pebbles and 3.7% for these Great Grains products. Malt-O-Meal branded bags had good consumption growth of 5.4%. This was driven by base volume consumption growth of 5.6% Overall, consumption base sales for Post Consumer Brands increased .9%, while higher-promoted prices and less merchandising support reduced incremental consumption. We are quite pleased with the synergy realization that has come from this combination. It has exceeded our original plan.

Heading into 2017 we expect to benefit from the annualization of synergies realized in 2016, and the partial year impact of incremental synergies. Also, we expect to benefit from the pullback of the incremental spending occurred during 2016.

Turning to Active Nutrition, Premier Protein performed exceptionally well this quarter with shake sales up over 40%. Premier continues to have strong growth in the club channel and is showing great growth in the food, drug, and mass channels as distribution expands. We now have five shake flavors available with other new products planned for fiscal 2017.

Early responses from our renovation efforts at PowerBar have been positive, as introduced cleaner ingredients, reduced sugar, and new packaging. We are seeing modestly-improving results at Dymatize, revenue increased 5% sequentially with revenue for our three core product lines up 13% sequentially. Our Dymatize expectations for fiscal 2016 continue to be modest, as we have shifted marketing dollars to the fourth quarter to support a brand relaunch.

This will be the first packaging update in the brand's 15-year history. The first round will ship this month with additional products targeted to ship throughout the rest of calendar 2016. During our fourth quarter, we are investing heavily in marketing support across each of Premier Protein, Power Bar, and Dymatize.

This will result in a sequential margin decline for the quarter but well-position the segment for an exciting 2017. We are expecting growth from Active Nutrition in 2017, full year impact of distribution gains for protein shakes, strong velocities, and the normalization of costs at Dymatize to support our expectations.

Our private brands business saw good volume growth this quarter. Our granola business is operating at capacity, and we are in the process of expanding. We are also adding nut butter capacity and expected it to come on line during fiscal 2017. This capacity will fuel modest growth in 2017.

You may have seen that in connection to our capital markets transactions last week we raised fiscal year 2016 guidance. We also announced that we expect adjusted EBITDA for fiscal year 2017 to exceed $900 million.

You may recall that last quarter, we indicated our expectation that in 2017 we would grow from our then-current adjusted EBITDA guidance which was $893 million, to $913 million. Our business has improved since last quarter, but our normal course is to conduct full planning in the August/September time frame. Our announcement was intended to bring forward our prior expectation, but not to further inform the outlook for next year.

As is our practice, we will give full guidance for 2017 during our call reviewing the 2016 full year results. From a strategic perspective, I would encourage listeners to not equate quiet with inactivity. We continue to be highly focused on using M&A as a tool to identify growth opportunities or to improve the quality of our existing businesses. We also continue to review platform acquisitions that provide scale and interesting categories at reasonable prices.

With respect to our ability to execute M&A, we are better positioned, both from a financial and operational perspective, than at any time in our relatively brief history. I expect that we will take advantage of that positioning. On the other hand we do not feel pressured to acquire.

If we do not see external value, we will consider all other alternatives for deploying capital. With that, I will turn the call over to Jeff.

Thanks, Rob. Good morning. Starting with the Michael Foods Group, net sales were $518 million on for the third quarter. On a comparable basis, net sales decreased 11.4%. Our egg volume declines continue to abate with a decline in the current quarter of approximately 13% compared with a decline of approximately 16% in the second quarter. Egg revenues decreased 15.5% as we continue to roll back the temporary component of AI pricing to grain-based customers.

We also lowered pricing to our market-based customers in line with earner-bearing market prices, primarily for food ingredients and retail chalet customers. We plan to further roll back AI price adders during our fiscal fourth quarter, as our layer repopulation efforts have progressed as expected. Potato and cheese continue to benefit from the exit of lower margin business, although volumes have declined approximately 3% and 1% respectively as a result. In pasta, volumes grew nearly 12%, primarily from gains in food ingredients and private label.

Michael Foods Group adjusted EBITDA was $109.2 million. Adjusted EBITDA benefited from an attractive price/cost relationship and favorable product mix across all four products. This resulted in improved margins and improved profitability on both an absolute basis and per pound across all four products.

Moving to Post Consumer Brands, third quarter net sales were $434.5 million. On a comparable basis net sales increased 1% with volumes up approximately 2%. Volume increases for Malt-O-Meal branded bags, Pebbles, and [CorleyBid] business were partially offset by declines for MOM boxes, Raisin Bran, Shredded Wheat, and licensed brands. Net pricing declined approximately 1% on a comparable basis.

Post Consumer Brands adjusted EBITDA was $104.7 million for the quarter, adjusted EBITDA benefited from manufacturing and SG&A synergy savings. This was partially offset by approximately $5 million of increased spending which was related to the incremental corporate-wide investments targeted to brand building and cost reduction.

Turning to Active Nutrition, sales were $156.1 million and increased 4.7% on a comparable basis. Strong sales growth for Premier Protein shakes more than offset a 22% net sales decline for Dymatize, which is impacted by our strategy to exit the private-label powder business. We also saw soft international sales primarily driven by competitive pricing pressures arising from the strong US dollar. Active Nutrition adjusted EBITDA was $24.1 million and benefited from a higher non-promoted volumes and lower raw material costs at Premier; and manufacturing savings associated with the PowerBar and Dymatize facilities closures.

During the third quarter we invested approximately $2.3 million in incremental marketing spending for the Premier Protein and Power Bar brands. This spending was related to the incremental corporate-wide investment. We expect an additional $3 million of investment for these initiatives in the fourth quarter.

Moving to private brands, third quarter net sales were $137.9 million, an increase of approximately 1% over the prior year. The sales increase was driven by increased volumes for organic and regular peanut butter, dried fruit and nut products, and granola.

This was partially offset by reduced volumes for tree nut butters, as we are lapping a period in which certain tree nut customers moved to dual-sourcing. Private brands adjusted EBITDA was $15.2 million and benefited from interest increased volumes. This was offset by unfavorable mix in the nut butter business, and higher co-manufacturing costs in the granola business.

Before moving to guidance, I would like to comment on our interest rate swaps, capital market transactions, and net leverage. We continue to have interest rate swaps with an aggregate no-show amount of $1.6 billion in place to hedge a portion of the interest rate exposure related to reaching the future refinancing of our fixed-rate debt. During the third quarter we incurred a non-cash mark-to-market loss on these swaps of $62.6 million as long-term interest rates once again fell significantly.

However, we continue to see significant appreciation in the trading value of our outstanding fixed-rate bonds. As I mentioned last quarter, this indicates the potential for lower refinancing costs which we opportunistically acted upon earlier this week by issuing $1.75 billion in aggregate principal amounts of 5% senior notes due 2026. These 2026 notes why used to fund a tender offer for our 7.375% senior notes through 2022.

Approximately $1.24 billion of the 2022 notes were tendered, leaving an agriculture gate outstanding principal balance on those notes of approximately $133 million. We also used funds from the 2026 notes to repay the $374 million principal balance on our term loan.

For the total note and term loan principal balance repayment, this refinancing will result in a net annual cash interest savings of approximately $25 million. Additionally, the refinancing extends our debt maturity profile while increasing our secured debt capacity.

On a proforma -- our proforma net leverage is 3.8 times, as measured by the terms of our credit facility, and giving full credit for these capital market transactions and cash on hand. 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 fiscal 2016 to be from $915 million to $925 million. Of the previously announced incremental $25 million investment in brand building and productivity, we expect approximately $9 million to be incurred in the fourth quarter of fiscal 2016. Additionally, we expect margins in the Michael Foods egg business to continue to normalize, and we expect fourth quarter margins in the Active Nutrition segment to be lower as we had significant promotional spending planned for all three brands in the segment.

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

(Operator Instructions). And your first question comes from the line of John Baumgartner with Wells Fargo.

Rob, I would like to ask on the egg business; your comments on food ingredients being slower to normalize there, what sort of an impacting is that having or will it have on your business and for the broader industry. And as you think about the emerging friends as you move to cage-free, what is your desire to serve that segment; how well-position are you to meet that demand going forward?

So the normalization of the ingredient segment is, in part, driven by a surprisingly low level of urner barry pricing that is allowing some of the more price sensitive customers to move back down the value chain or the value-added chain to shelled eggs. So those are the lower margin customers within the overall ingredient channel. The ingredient channel remains an important one for us and we want to be in the right spot within that channel and we believe we are.

We believe the key to that channel normalizing consistent with the balance of the portfolio is a more normal urner barry pricing which we expect to eventually cure itself.

Much like other commodities, the solution for low prices is low prices and it will, we expect, normalize in the relatively near future. With respect to cage-free, and John, repeat the question on cage-free?

In terms of just what is your desire to serve that market? And how well-positioned are you, given your current footprint to go and do that, versus incremental CapEx or (indiscernible) M&A after that?

First, let me start with that Michael is the largest cage-free provider in the country already. And we are committed to aggressively supporting our customers' announced and already active moves to cage-free. So we would expect that over a long time frame; and let us average that as roughly a decade, which if I if you look at most of the announcements, the announcements last out in that time frame, we would expect a significant redeployment in our supply chain towards cage-free.

That redeployment one is a complicated one. It will involve commercial of existing facilities. It will involve greenfield facilities. And it is a process that is done in tandem between our own farms and our third-party contract farms.

So the capital commitment, which is significant, is shared among a supply chain that involves us and third parties, subject typically to a contract that we provide those third parties. Ultimately resulting in a final solution that tends to be a higher-margin product for us.

Great. And just one follow-up on the MOM business, that business has not been as widely distributed as your legacy Post cereal, historically. Yet when you look at the velocities, they are just as good as, if not better than the Post business. How do you think about distribution expansion for MOM going forward, whether it is in fiscal 2017 or further on down the road?

Sure, you are quite right in that MOM has very high loyalty and relatively lower awareness than some of the other competitors. So what we have seen as one of the benefits of the combination with legacy Post foods and its very high ACV is to try to expand MOM into retail outlets and distribution points in which it previously did not play. We are then supporting that with an increased level of advertising behind the MOM brand. So we think that that velocity, once we get the better distribution, that the Post food system may help provide -- portends well for the ongoing growth of the segment.

Great. Thanks, Rob.

Thank you, John.

Your next question comes from the line of Chris Growe with Stifel.

Good morning.

Hey, good morning, Chris.

Hi. I just had two questions, if I could. Let me start first with Michaels. Just to understand, has that business, if you look at it on a profit per pound basis, as it moves back towards historical averages, I just want to get a sense of when that should normalize. Is it as simple as when the volume is fully in place, say the fourth calendar quarter of this year, or first quarter of 2017? And I guess to that point, we talked before about potential to better manage your mix, and could the profit per pound stay at a higher level coming out of this AI-influenced environment?

So it is a relatively complicated answer, but let me give it a shot, in that the price dynamic is certainly the key to it as supply comes back online. But the timing of supply coming back online and the timing of volumes normalizing have a potential mismatch as we increase our grain-based supply, and our selling own a market basis with respect to -- and the mismatch is -- with respect to where that market-based pricing is compared to a grain-based pricing.

So it is a multi-varying answer which involves both the timing of grain-based supply coming back online, the timing of volume coming back online, and the related market pricing compared to grain-based pricing. So what we believe is that across 12 months, that will normalize but there may be some choppiness along the way as it is unlikely that that will be a perfectly smooth transition back to normalcy. All of which is factored into our planning for 2017.

Just to be clear, is that normalized, sort of over the course of 12 months when volume is back online fully, or from this point forward?

We get closer and closer each quarter. Our best guess would be halfway through 2017, we are entirely normalized. But at this point we are early in our planning process, so we will have more for that in the next quarter call.

Sure, that is helpful. Thank you. And just a question, you have increased advertising this year across the business and Post Consumer Brands and Active Nutrition have gotten some of that money. So I am just curious about the decision to pull back on the spending next year. Did it not work, is an easy first question. But beyond that, what was the motivation behind the increase in spending and why not continue that spending in 2017?

So going into fiscal 2016 we had what we considered to be an appropriate level of spending behind A&C. Given the strength of the year, we chose to increase it above what we considered to be an ongoing level of required A&C, and entering 2017 we will have a budgeting start point of normalcy. To the extent the business supports it, we would continue to reinvest in A&C, but that is not our starting point.

We view it as more of a dynamic budgeting tool than a fixed decision with which we enter the year. So I would not at all want to say it did not work. It looks in fact like it did work but it was an unusually high level, so we are simply creating cushion around the overall portfolio performance by normalizing the budget.

Okay. That is very helpful. Thanks for your time today.

Thank you.

The next question comes from the line of Bill Chapell with SunTrust.

Good morning. Hey, Rob, in your prepared remarks, I think the comment was the expectation for the egg business profit ability would be down sequentially but we will offset that with other parts of the business in the fourth quarter. I missed what other parts of the business were going to be picking up the slack.

So my comment was more intermediate than specifically to the fourth quarter, although the fourth quarter could participate in that as well. The balance of the portfolio that will pick up the slack was the comments I made around annualizing synergies already achieved, incremental synergy, and I am in our cereal business now. Annualizing synergy is already achieved, incremental synergies that are being realized in 2017.

The pullback of the incremental spending, I just mentioned with Chris; within Active Nutrition the normalization of costs at Dymatize, ongoing growth of the Premier shake business with new distribution, and terrific velocities. And finally, within private brands, the growth in each of the lines of business that result in the capacity expansions that are currently underway.

So the comment is true in the fourth quarter but really a longer term, more intermediate comment than that.

Okay. Thanks. Maybe you could just address the thesis, especially now we are closer to year-end, that the Company has been over-earning on the egg business this year which leaves for a very tough comp into next year. Any visibility into whether that is the right way or the wrong way to look at it?

Well, that is what I am attempting to address. Is making a distinction between the Company over-earning and an individual segment within the Company over-earning. We do expect to see some mean reversion within the Michael business to be the other side of that over-earning, but that it be offset by other opportunities in the balance of the portfolio, such that the conclusion on a 2-year basis will be that the Company did not over-earn, even though one segment may have over-earned.

Okay. And last one for me, a year ago you had done some kind of short-term financing expecting what sounded like some M&A activity. There has not been anything in the past year. Would you characterize that more because the Company has been focused on one large platform transaction or because prices out there for some of the things that have come have just been too high?

I am not going to comment specifically on where our focus has been, other than that we have had a rich pipeline throughout the year. We have looked at a lot of opportunities. And in a year in which our business was growing as significantly as it has, perhaps our focus shifted slightly towards an internal orientation but that we are no less engaged in M&A than we ever have been.

And part of what we are paid to do is sometimes not do M&A when the opportunity is not the right one. So we are quite active in the M&A market, and as I made the comment in my prepared remarks, that quiet and inactivity should not be construed as, or quiet should not be construed as inactivity. There is a lot of activity.

Sounds great. I will turn it over. Thanks.

Thank you, Bill.

Your next question comes from the line of Jason English with Goldman Sachs.

Hey. Good morning, folks.

Hey, Jason.

Thank you for allowing me to ask a question. Not to beat a dead horse but I do want to come back to Michaels real quick and see if we can get a little more specific. You mentioned return to normalization but as I think Chris Growe touched on; A, there is been presumably some degree of underlying growth in the business from what normal used to look at. There is been some mix shift. There is been some productivity. What does normalized profit look like for Michaels? That is part one, if you can give us color on that. Secondly, in answer to that question; effective I think you have been net short spot egg markets because you have had to dip into the supply. Your comment on your supply shifting to more grain base as capacity comes online but you are still selling on some of the spot prices. It sounded to me like you may actually flip and kind of go net long egg prices at a time when they are down. So even on a path to normalization, we could undershoot and maybe have to suck up some pain here for the next couple of quarters. Is that fair? So that is, I guess, a multifaceted first question.

So let me start with normalization. We think normalization lands at a premium to the pre-AI levels as a result of better mix and an AI insurance premium built into our go-forward pricing model. I think you are accurately reflecting the potential. I would not necessarily want to tie it specifically to the next couple of quarters because there is some uncertainty about the timing of the grain-based supply and the interactions with the urner barry, but that is a potential that exists in the near to intermediate term as we see those different variables operating in different directions.

So that is why I caution that it is better to look at Michael over a 12-month basis than to try to make any near-term prediction on one or two quarters. And we will try to further illuminate that when we come back with a fourth quarter call.

Okay. I look forward to the further illumination. Real quick on the cereal business, you talked about annualization and some of the cost (inaudible) next year, plus some incremental on the synergy target. Plus, maybe a pull-back of some of the incremental spend you put in there going to next year. Can you give us some numbers around those. What is the synergy, or how much of this synergy cost saves from this year bleed into next? What is the new incremental step up? And how much costs -- incremental costs just from discretionary investment could come out?

So we will give you the incremental spend. In aggregate it is $25 million. On PCB it is $15 million specifically. What we are not going to do is line item go into synergies. What we are wanting to come back with is consistently improving profit and margin levels such that the synergy is self-evident, but that we do not want to be focused on and accountable for delivering a specific synergy so that we can make realtime dynamic decision it is throughout the year that may choose to lead into something different than a synergy number. The synergies are real and significant and will be baked into all of our guidance numbers but we are not going to line item provide them.

Very good. Thank you.

Thanks, Jason.

Your next question comes from the line of Cornell Burnette with Citi.

Good morning.

Hey, Cornell.

So you guys made some comments on the cereal category being down very modestly in the June quarter. Pricing looks disciplined. And of course we have an outlook for another big crop in the US here this fall. With all of that in mind, should we take away a high level of conviction that the incremental $15 million of spending that is in consumer, which comes out next year, along with all of the cost savings that you are getting from MOM, that all of that essentially is just going to drop to the bottom line in the consumer business? Is that a fairway to think about it next year?

So that is somewhat what I was alluding to in the -- my answer to Jason, is that we will make on a dynamic basis decisions around investing in longer term so that if we have the opportunities, as we did this year, to lean into certain programs with less near-term but more long-term benefit, we may do that. Otherwise the answer to your question is "yes."

Okay. And then also in the Active Nutrition segment, we see EBITDA margins there around 15%, up nicely as you lap the issues last year from Dymatize. Do you feel that margins and Active Nutrition are an appropriate level? Or do you see room to take them higher going forward once you pass all of the spending that takes place in the fourth quarter? And if so, what what are some of the drivers that have?

If you look at EBITDA margins, we in all likelihood would want to maintain it at that level or actually bring it down as we spend more behind the brand and see additional growth and distribution in velocities. It is a very rapidly-growing brand and we do not want to bleed it by over focusing on margin structure during its growth phase of its product life cycle.

So what you are going to see in the very near term is a heavier marketing spend, which will have a dampening effect on near-term EBITDA margins. Long-term we think it is a mid- to high-teens EBITDA margin structure business once you get to a more mature segment or a more mature portion of its product life cycle and we are spending less behind A&C.

And you were talking about, I believe, in the Dymatize business a normalization of costs next year. Can you talk a little bit about exactly what is going on there and possibly quantify what that could mean?

Sure. Specifically what we are talking about is the input costs that they have been incurring for their primary protein inputs, raw materials. As we have commented before, they were along a higher-priced contract compared to market throughout this entire fiscal year. We are now seeing visibility into the fact that towards the tail end of our fiscal fourth quarter, we will start to be able to get through that contract and buy on the open market. And we discussed before the order of magnitude, if Dymatize was able to buy on the current market, which of course is not a given but if it could for a full fiscal year, the order of magnitude is in the $12 million to $15 million range.

Okay. Very good. Thanks a lot.

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

Thanks a lot. The demand for quick service eggs seems to be strong and we are sort of doing this analysis on a static basis, but the backdrop is good demand growth. Wondering about Post's ability to increase volume 12, 18 months out to meet that demand?

Well be the predicate for being able to do that, of course, is the return of full supply. And we would anticipate, as we mentioned in the comments, that that would occur by year-end. So in the time frame that you mentioned, we certainly would have the capacity to pursue and meet that demand.

Okay. And then we talked about maybe the contract structure for QSR contracts changing to include some sort of a risk premium for AI, which would have the effect of improving perhaps margins longer-term beyond where we were before AI. Can you update us on where the Company is at in achieving some of those goals?

Really no update since last time we talked, and my earlier comments that we expect, between the shift and that premium, there to be a normalization at a higher level than pre-AI. Throughout this year, because of some of the unusual characteristics of the AI phenomenon, we have been trying to give previews into 2017 and a bit longer term than we frankly are comfortable giving, given the timing of our planning process.

So many of these questions will become more clear as we go through our annual planning. So I am going to limit it to directionally, rather than put a specific quantification of it. Again, directionally, we think it will be better. Quantification will take a little more time.

Sure. And just remind me as we enter the fourth quarter, Dymatize will be roughly a normal comp year-over-year -- in other words (indiscernible) the damage?

Last year's fourth quarter had the significant write-offs in it, if you recall. So last year's comp is very negative. Look at it more sequentially. We expect third and fourth quarter to be relatively comparable, although there is some investment, as we mentioned, occurring in the fourth quarter in the Dymatize brand as well. So it probably will be slightly down on a sequential basis. Sorry. Go ahead.

No, I was just thinking about it from a top line perspective. Are we kind of past -- we are past the damage on Dymatize at this point?

We are past the damage but again the comps are not comparable because the fourth quarter would have been the first quarter last year, after we have we had closed our plant.

Sure. Thanks so much.

Thanks, Tim.

Your next question comes from the line of Ken Zaslow with Bank of Montreal.

Hello?

Hi, Ken.

Just two quick questions. One is holistically, how do you compare your long-term growth algorithm to the packaged food? And how would you assess yourself relative going forward to the growth algorithm of your packaged food peers in your portfolio?

Well, we have -- you almost have to go through that segment by segment. The cereal business is a flat to potentially 1% up business, with cost reduction allowing us to manage EBITDA to the 1% to 2%, and I am making that comment on the other side of full synergy realization. So that really does not kick in until 2018. We see significant growth in our Active Nutrition portfolio well ahead of the CPG peer group.

And then within the Michaels segment, once we get past the AI supply situation, we think that is a mid-single digit grower as the increased consumption of protein portends well for its unit volume growth as it represents one of the cleanest and most affordable forms of protein consumption. Private brands is very specifically tied currently to a few segments of nut butter, which have some very positive dynamics behind it.

So on average I would say we have an internal growth algorithm which is slightly ahead, on a blended basis, of our peers. And then I would argue we have potentially greater M&A optionality.

And my last question is, Active Nutrition, what is the margin potential for that, going forward?

As I mentioned, we think about it in the terms of the mid-teens for EBITDA.

Perfect. Thank you.

We have reached allotted time for questions and answers. I will now turn the call back to the presenters for closing.

Well, as always, thank you for your participation, and next call we will look forward to giving you both the results of a really solid fiscal 2016 and give you our formal guidance as we look further into 2017. So thank you and we will talk to you soon.

This concludes today's conference call. You may now disconnect.