Post Holdings Inc (POST) 2016 Q4 法說會逐字稿

Welcome to Post Holdings fourth-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 Financial Officer. Today's call is being recorded, and will be available for replay beginning at 12 PM Eastern Time. The dial-in number is 800-585-8367 and the passcode is 1081077.

(Operator Instructions)

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

Good morning, and thank you for joining us today for Post's fourth-quarter 2016 earnings call. With me today are Rob Vitale, our President and CEO; and Jeff Zadoks, our CFO. Rob and Jeff will begin with prepared remarks, and afterwards, we'll have a brief question and-answer session. Our press release supporting these remarks is posted on our website, in both the Investor Relations and the SEC filing sections at PostHoldings.com. In addition, the release is available on the SEC's website.

Before we continue, I would like to remind you this call will contain forward-looking statements which are subject to risks and uncertainties that should be carefully considered by investors, as actual results could differ materially from these statements. These forward-looking statements are current as of the date of this call, and management undertakes no obligation to update these statements. As a reminder, this call is being recorded, and an audio replay will be available on our website.

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

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

Thanks, Brad. Thank you all for joining us. We are pleased to share our fourth-quarter and FY16 results. We finished the year with solid performance, and we are encouraged heading into 2017. In yesterday's press release, we introduced our FY17 adjusted EBITDA guidance of $910 million to $950 million. This morning, I will discuss segment highlights, and our strategic outlook.

We had a successful year at Post consumer brands. We ended the year achieving our revised synergy goal, which exceeded our initial expectations of both amount and time to achieve. Like most of our peers, volume growth is a challenge, so we are lasered-focused on cost management. The process of integrating Post Foods and MOM brands has provided a foundation for continuous cost reduction efforts which are now engrained in our culture.

We implemented a new trade tool in early October, and are now operating an integrated trade strategy. While early, the potential is promising. We expect to drive improvements in promotional efficiency and effectiveness, while providing our sales teams with greater insight and accountability for managing the substantial spend.

I would characterize our outlook on the cereal category as cautiously optimistic. The category declined this quarter 1.6% in dollars and 1.2% in pounds. Fewer items on shelf, lower quality promotional activity, and less depth and promoted prices contribute to lower incremental volumes for the category. As in previous quarters, the category saw deeper losses from incremental sales, and then from [base] sales. However, incremental sales declined at a slower pace compared to prior quarters.

In contrast, Post's consumption strengthened in this quarter. Our consumption dollars increased 2.3%, and pounds increased 1.9%. We saw growth in both base and incremental sales. For the quarter, our dollar and pound share increased to 18.8% and 21.4%, respectively.

Recall our focus is on four core brands, Honey Bunches of Oats, Pebbles, Great Grains, and the Malt-O-Meal branded bags. They represent approximately 80% of sales. Consumption dollars and pounds grew for three of the four, the exception being Honey Bunches of Oats.

Honey Bunches of Oats' consumption performance faced pressure from lapping both discontinued products, as well as a merchandising event that did not repeat. Despite tough consumption comps, shipments for the brand remain healthy.

Pebbles turned in a great quarter with pound consumption increasing 11.6%. Great Grains saw good pound consumption growth of 3.8% overall, and 9.5% for the core SKUs for which we introduced new advertising support. Malt-O-Meal branded bags performed well during the quarter, with pound consumption growth of 8.5%. Overall, consumption results for Post Consumer Brands were strong, as we saw growth in both in base sales and incremental sales behind planned higher merchandising support.

Michael Foods continue to perform exceptionally well. We anticipate the entire impact of avian influenza to be a two-year phenomenon, beginning in the second half of FY15 and ending in the second half of FY17, with the final stages pressuring earnings.

During the fourth quarter, mix continue to favor high-margin value-added egg products. However, we expect to see mix weaken in 2017. Volumes continue to improve towards pre-AI levels, albeit at a slower place than expected. Despite near-term challenges, as we emerge from the impact of AI, we continue to be highly optimistic about our egg business model and competitive positioning. Once fully through the final stages of repopulation and volume recovery, we expect the resumption of a less volatile modestly growing business.

Beginning in 2017, we are implementing the transition to cage free for several of our customers. In August, we announced our plan to convert our Bloomfield, Nebraska egg farm to a cage-free facility. We continue to expect to expand our cage-free eggs supply, in alignment with our customer's time frames to transitioning to cage-free housing.

Turning to Active Nutrition, the high growth rate of the Premier Protein shake business continued in the fourth quarter, with sales growing more than 30%. Premier continues to grow velocities and distribution. PowerBar is stabilizing, we plan to continue investing in the brand to drive growth.

Dymatize grew 10% year-over-year this quarter, as we are cycling the reset base line business. It's three core product lines grew 52%, compared to the prior-year quarter. Sequentially, sales declined as inventories were [ground] down in advance of shipping rebranded packaging. Entering 2017, costs at Dymatize have normalized, and we expect the brand to contribute modestly to adjusted EBITDA.

Within private brands, our granola business continues to perform well. Our capacity expansion is on track to come online in the back half of FY17, and we expect this to drive margin leverage. We also just recently brought on new capacity in our nut butter business.

While not in evidence in 2016, M&A remains a central theme to Post's strategy. We analyzed many opportunities this year. In fact, we spent approximately $6 million in expenses related to exploring acquisition candidates. Despite this commitment, our M&A during 2016 was modest. Be assured, we will continue to work to find opportunities at a sensible value.

Our capital structure remains quite liquid. At year-end, we had cash on hand of $1.1 billion. We are more accepting of leverage than most, nevertheless, our net leverage ratio was a modest 3.7 times, and our debt is 100% fixed rate. In short, we are confident in our ability to identify and execute opportunities in a dynamic environment, we have the patience to allow them to develop.

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

Thanks, Rob. Good morning. As Rob mentioned, we finished the year with solid performance. Fourth-quarter revenue was $1.3 billion, and adjusted EBITDA was $219.5 million.

Starting with Post consumer brands, fourth-quarter net sales were $442 million, relatively flat compared to prior-year. Volumes were up 0.7%, with increases for Malt-O-Meal branded bags and Pebbles, offset by 0.8% lower average net selling prices, and declines from MOM branded boxes and Great Grains.

Additionally, the prior year quarter contained 3 more invoicing days for the legacy MOM business. Adjusting for the invoicing days, sales grew 1.7% with volumes up 3%.

Post consumer brands adjusted EBITDA was $106.8 million for the quarter, and benefited from synergies and other cost savings. This was partially offset by a higher trade rate, higher advertising and promotion spend, and $1.8 million of increased spending related to the incremental corporate-wide investments targeted to brand building and productivity.

Moving to Michael Foods group, net sales were $522.6 million for the fourth quarter, a decline of 16% on a comparable basis. Our egg volumes increased 8%, as we began to lap prior-year periods impacted by reduced egg supply caused by AI. Egg revenues decreased 21%, as we continued to roll back the temporary component of AI pricing to grain-based customers. We expect to further roll back AI pricing adders in the first quarter of FY17. We also experienced lower pricing to our market-based customers, in line with Urner Barry market prices, primarily for ingredient and retail shell egg customers.

Potato volumes increased 2%, driven by growth in retail mass sales. Also we have lapped the exit of lower margin business. Cheese volumes declined 6%, as we exited additional lower margin business during the fourth quarter. As a result compared to FY16, we expect cheese volume losses throughout 2017, but with only nominal impact on profit.

Pasta volumes declined 2%, as the prior-year quarter benefited from high volumes with a food ingredient customer that did not repeat at the same level this quarter. Michael Foods group adjusted EBITDA was $97.5 million, and benefited from the acquisition of Willamette Egg Farms, higher egg volumes, and a favorable price cost relationship in pasta. This was partly offset by reduced pricing within the egg business.

Turning to Active Nutrition, sales were $159 million, and increased 17% compared to prior-year. Premier Protein shake net sales grew more than 30%, while Dymatize net sales grew 10%, and as we lapped prior-year product supply and production issues. Dymatize international sales, however, continue to be soft, driven by competitive pricing pressures arising from the strong US dollar.

Active Nutrition adjusted EBITDA was $14.4 million, and benefited from higher volumes and lower raw material costs at Premier, and manufacturing cost savings associated with the Dymatize facility closure. This was partially offset by anticipated increased advertising and promotional spending across all three brands, including the PowerBar and Dymatize brand relaunch efforts. $3.3 million of this spend related to the incremental corporate-wide investments.

As expected, fourth-quarter Active Nutrition adjusted EBITDA margin of 9% was lower than other quarters in FY16, resulting from the aforementioned heavy in-store promotions, and increased spending on brand building. Recall, the quarterly margins in this segment fluctuate significantly, depending on the timing of promotional activity. For the full fiscal year, Active Nutrition adjusted EBITDA margin was 13%. Through operating leverage, we expect FY17 annual adjusted EBITDA margins to be in the mid to high teens.

Moving to private brands, fourth-quarter net sales were $137.2 million, a decline of 2% from the prior-year. Volume increases for organic peanut butter and granola, were offset by reduced volumes for dried fruit and nut and conventional peanut butter. The higher conventional volumes peanut butter in the prior-year related to a low margin industrial customer that did not repeat this year.

Sales revenue also were negatively impacted by lower net pricing for almond products, related to declining almond prices. Private brands adjusted EBITDA was $17.4 million, and benefited from higher granola volumes, and favorable nut butter product mix. This was offset by reduced net pricing in the nut butter business, and higher co-manufacturing costs in the granola business.

Now turning to outlook, we expect adjusted EBITDA for FY17 to range between $910 million and $950 million. We believe the pacing of adjusted EBITDA will modestly favor the second half of the fiscal year. We expect the Michael Foods group segment adjusted EBITDA to decline significantly from FY16 to FY17. This will be offset by phasing in of incremental cost reductions within the Post Consumer Brands segment, Active Nutrition growth, and cycling approximately $50 million related to incremental investments in brand building, and above target incentive compensation related to FY16's superior performance.

Regarding our capital expenditure outlook for FY17, we plan to invest between $180 million and $200 million. This includes $60 million to $70 million related to growth activities. Finally, we estimate cash taxes for FY17 will be approximately $135 million, based on the midpoint of our guidance range.

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

(Operator Instructions)

Chris Growe, Stifel.

Hi, good morning.

Hey, Chris.

Hi, I just had two questions for you.

If I could ask first on, when you look at the EBITDA guidance for the year, it's bracketed in a relatively wide range. Two things I had, just to ask in relation to that, could you talk about what factors could push us, say, to the upper end of the range, the lower end of the range? Is it purely just the volatility in Michael Foods? And then, related to that, the level of EBITDA growth for the year, just to understand the factors are that benefiting it: of the $50 million of lower incentive comp and advertising spending, are there other factors as well, we should consider in terms of the growth of EBITDA year over year?

Sure. So I think, admittedly, we are, as a result of exiting AI, in a year in which Michael has higher than ordinary level of volatility. So we factored that into both our guidance and the establishment of the range. So with respect to what could cause us to be on the low side, higher volatility from our expectation, changes in the competitive environment in the cereal business, or really in any of our business, are the key components of being on the low or high side of the range.

With respect to items beyond the $50 million that drive growth, we would include cycling synergies that were realized partially in FY16, so the annualization of those synergies, incremental synergies coming out of PCB, organic growth within Premier, and organic growth in private brand, supported by the repatriation of the co-manufacturing that we're doing this year, resulting from our capacity limitation.

Okay. Have you said how much the synergies are that you've achieved so far, from combining Post and MOM?

What we've said is, that we met the target of $50 million as we exited last year, FY16.

Okay. Is that a run rate, or that's what you've achieved in 2016?

That was achieved in 2016.

Okay. Thank you for the time.

Thank you.

Cornell Burnette, Citi.

Hello, good morning.

Hey, good morning.

Okay, great.

Hey, just wanted, a few questions here. The first one is in RTE cereal, a number of your competitors cited headwinds in the quarter from inventory destocking on the retailer level. What impact did that have on your cereal volumes in the quarter? And do you expect shipments into the retail channel need to accelerate going forward, given that retail takeaway data that we see from Pulse has been pretty strong? I think sales were up 3.8% the latest 12 weeks of data.

So we did not see a significant inventory issue in the quarter. And we would expect, with the exception of some volatility of inventory levels at retail, the shipments to track consumption. So barring some changes in inventory, we would expect some acceleration in shipments following the strong consumption that we've seen.

And then, what are your comments on just generally what you're seeing in pricing in the category? Are you still seeing things, mostly discipline and promotions remaining in check, across the category?

The quick answer is, yes. There's always some timing from quarter to quarter around promotional events, but in general, the environment I would characterize as more of the same.

Okay. And then lastly, when you comment and say that the EBITDA this year seems to be weighted little bit more, tilted towards the back half, is the biggest driver of that coming from processed eggs? Or is there anything else that we should be aware of?

The drivers of that more have to do with the slope of the growth in Active Nutrition, and the timing of the incremental realization of synergies. So as synergies flow through PCB, that EBITDA level should increase throughout the year, barring decisions to make incremental investment in brand building.

So then, would you say that in the process egg business, obviously there is volatility from quarter to quarter in terms of seasonality? But for the most part, excluding general things and seasonality, that business is going to be somewhat stable in terms of the type of EBITDA that we see coming across the year in that segment?

No, I would not characterize it that way. I would caution drawing too many conclusions about quarterly cadence within the egg business this year, because of the relatively higher level of volatility. So we've looked at it from half to half, and made the comment that we've made, that we're not going to try to be more precise on the quarterly cadence within Michael because of that phenomena.

Okay. That's it for me. Thanks a lot

Thank you.

Andrew Lazar, Barclays.

Good morning, everybody.

Hey, Andrew.

You've guided to a significant decline in segment EBITDA year over year in 2017 for Michael, from the $447 [million] level in 2016. Is there any framework you can provide or suggest to help us think about the potential order of magnitude, to figure out what significant might mean?

We have modeled everything up to a $100 million decline.

Got it.

And factored that into our guidance.

Got it, thank you.

National Pasteurized Eggs: can you remind us of how big that business is in terms of sales and EBITDA? I think we've seen maybe a $50 million figure for sales in an article from a couple years ago, but not sure if that is still a relevant figure? And then, maybe an EBITDA margin structure more or less?

We can't remind you, because I don't think we've ever said, but the EBITDA for 2017 is modest. It will be in the $5 million to $10 million range, and then we would expect significant acceleration in 2018 as a result of synergies. It's a highly synergistic acquisition.

Got it. And that's obviously incorporated into the $910 million to $950 million range going forward --

Correct.

Okay, in 2017, okay. And then, I think that is about it for me. Thank you very much

Thank you, Andrew.

John Baumgartner, Wells Fargo.

Hi, good morning.

Hey, John.

Just starting off in cereal, so you've referenced the trade strategy tool; you're just now beginning to implement there. And in light of that, can you speak to the returns that you've been seeing on the incremental spending you placed into the market in that business in the back half of FY16? And maybe what those returns might tell you about your flexibility to maybe reduce that trade promo going forward, as you really get into the analytics?

Well, the incremental spend we put in, was less around trade than it was around advertising. So we stepped up our advertising in the last quarter for a more overall investment in brand equities, and that's a long-tail return. So I wouldn't necessarily speculate on its short-term impact in either the quarter or immediacy into 2017.

The trade tool we expect to be a valuable investment, because of the degree to which it will improve our overall planning with customers, allow us to have a calendar not targeted at each other, as was historically the case, each other being Post and MOM; to more tightly control the overall spend under Post foods. It was a highly decentralized checkbook, in which the individual sales teams were controlling the spend. Under our new trade tool, it's a highly centralized spend. So it's more about planning, measurement, and efficacy yet to come, than a immediate return that I can provide you.

And then, just a follow-up for Jeff: you mentioned about the focus on cost. I'd like to ask, on the corporate expense line, it's been elevated for you relative to your competitors. And I understand there are a number of factors that go into that, from diligence expenses and so on. But now that you're moving past the large acquisitions and the integration of MOM, how would you characterize the opportunity to [revisit] the underlying spending corporate? Can I come down appreciably going forward, or is this the run rate to think about?

Well, there's a lot of variables in there in 2016. You mentioned a couple of them. The M&A spending, as you know, is not necessarily tied to transactions that we closed. Obviously, when we do close a big deal like the MOM transaction, it will spike up. But in the current year, there was quite a bit of spending on transactions that actually did not close, and that's something that, while difficult to predict from period to period, is something we would expect to be part of our baseline costs going forward.

Other things that impacted 2016 that cause an appearance of an elevated level, again the corporate incentives. So we talk about incentives; incentives also were elevated at corporate, based on the overall performance. So we would expect those to normalize in more normal times. And then we incur costs for our equity compensation on a mark-to-market basis. So with the performance of our stock during the year, as it ran up during the year, so did our cash-settled stock compensation, which again may or may not repeat itself year after year.

But to your general comment, I would say that there's certainly opportunities. However, we tend to think of our corporate spending a little bit differently than others, I think, in that we look to have scale to continue to grow, and oftentimes make those investments in advance of the actual M&A activity that brings the growth. So we believe that we're situated such that we can add some significant M&A without incrementally adding to our corporate spend at this point.

Great. Thanks, Jeff.

Tim Ramey, Pivotal Research Group.

Good morning. Thanks so much.

Tim.

Just cycling back to MFG, thinking about the drivers of top line, there are two that are somewhat knowable. I would think volume on a recovery basis would be somewhat knowable, and volume on an organic growth basis would be somewhat knowable. Probably price is not so knowable. Can you give us some help on those first two metrics for top line, for MFG for 2017?

So we don't necessarily make a distinction between recovery volume and organic growth volume. We look at it as a two-year cycle, in which organic growth is really precluded by the supply shock that occurred with AI. So we have a mid single-digit volume growth, not necessarily trying to parse it in the manner that you have. So that's as precisely as we can answer the question.

Mid single digit for the full year?

For the full year.

Okay. That seems lowish, given that you only really had one quarter of recovery in the 2016 year, is that fair to say?

It potentially is a conservative assumption, but it's also coming off of the addition of Willamette. So rolling over Willamette has reduced the growth rate in 2017 versus the core organic. I just used the same word you did, but the core overall growth rate of legacy Michael that would have occurred without Willamette, flowing through the 2016 numbers

Got it, okay. And then, just on the recontracting, if that's correct to assume, for your QSR customers in the egg business, is there anything you can say about where you're at in terms of updating pricing, including a risk premium for AI? Or any sort of structural change in the pricing mechanism?

The short answer is there is a permanent AI adder. It's not a -- we're going through the renewals, as the renewals come up. So it's a customer-specific negotiation that takes place. But there's definitely a permanent component to the bio security cost, et cetera, that's being passed along in our renegotiated contract. But the general structure of the contract is as before, just with that incremental cost adder included

Great, yes. I guess my question was, is there a way to say we're halfway through that, or a quarter of the way, or --?

Well, from our prepared remarks, you should note that we're significantly lower now in terms of pricing than we were at the peak of the AI adders. And we have one more quarter to go, so we would expect that the first fiscal quarter of 2016 will still maintain some adders that are above the, what we'll call the permanent level. And then starting calendar 2017, we would expect to be fairly close to what we would consider the permanent level of pricing.

Okay. Thanks so much.

Thank you.

Bill Chappell, SunTrust.

Thanks. Good morning.

Good morning.

Hey, Rob, on the M&A front, I understand it's an active market and there are things out there, but have things changed over the past year in terms of valuations, or just your ability to go after things? Because spending $6 million looking at different deals? Obviously, one larger deal wasn't for sale after all; and so just trying to understand, can you really consummate some of these deals, do you feel confident in that? Or have valuations gotten away from where you're comfortable?

Well, we can certainly execute. I think if anything has changed, and I'm not sure if anything has dramatically changed, we continue to try to approach M&A from a perspective of finding value, not just executing M&A. But the nuance, I would say, is that where in the first several years of our corporate evolution, we cast a wider net, looking at platforms, looking at opportunities that would be new channels or new product categories for us, i.e., Michael Foods. As our portfolio has grown and matured and has had internal success, what we are doing is narrowing our focus to where we have the opportunity to really drive competitive advantages within our portfolio. So it has made the M&A pipeline more narrow, but deeper.

Now I don't want to leave you with the impression that we would not add a platform opportunity; if it came along and made sense, we would do so. But the more near-in, attractive opportunities are things that have some nexus to our portfolio.

Got it. And then, just switching back to Michael's, just to try to make sure I understand, where are we on supply? And what are your assumptions of when you're back to full supply as we move through this next year?

The supply is pretty much coming back along the lines that we've been talking about throughout this process. So for the most part we would expect to be back to full supply by the time calendar year 2017 starts. There's been some small movement in that, at some of our larger farms, of our larger third-party contracted farms, where there's been some conscious decisions to go a little bit slower, based on what we're seeing in the market in terms of the supply/demand equilibrium. But largely back to full supply at the start of calendar 2017.

Okay. And then, just to make sure I understand, so it's also you shedded, I guess shedded is the wrong word, but some of the smaller customers you weren't servicing during this time frame, is the expectation they all come back as well over the next year?

Well, that's obviously part of the challenge and part of the reason for the commentary about supply coming back more slowly than originally anticipated. We would endeavor to bring back the customers that are margin-enhancing. Some of the customers that we lost or walked away from were some of the lower margin customers that, all else equal, we would not pursue. But clearly, part of the challenge for the Michael Foods business in 2017 is to continue to sell the value proposition for our products, and to bring back those customers over time.

Got it. Thanks so much.

Brett Andress, KeyBanc Capital Market.

Hi, good morning.

Hi, Brett.

I'm just trying to better understand what you guys have said on eggs. So you did just under $100 million of EBITDA, in what is probably the absolute [trough] of egg pricing this past quarter. So with volumes starting to pick up into October and November, why wouldn't first-quarter EBITDA for Michael's be at least comparable to what you did in the fourth quarter?

So the margins for eggs actually came down in the quarter, so I'm not sure I would agree that, that was the peak of the egg pricing. The offsets between the first and fourth quarter are simply pricing generally coming down, and volumes growing. So the dynamic will have a result that could deviate from the fourth quarter of 2016. Again, because of what we, in general, don't give quarterly guidance, and with the potential volatility around Michael, certainly don't want to add to a level of precision that's not appropriate quarter to quarter this year. We've given as much as we are comfortable giving about cadence.

No, that's fair. Do you guys have a goal, internally, of what a normalized EBITDA dollar run rate is for this business as you start to look out even past 2017?

Well, let me go back to the acquisition case. When we acquired the business in 2014, we indicated that it had a $250 million baseline EBITDA, with a 3% to 5% EBITDA growth rate. The thesis is intact. When we mentioned our long-term optimism on the category, once we get past this two-year phenomenon, we continue to believe that the business represents a business that grows within that context, at a relatively low level of volatility. We just happen to have a period of time covering two years, but three fiscal years, in which we have had a disruption of the business model. We would argue that the business model has worked through that time frame, but that it has made it more challenging to reveal the consistency of its underlying core performance. So if you run that 3%, $250 million, and then add in the acquisitions we've done, we're ahead of that trajectory, and we would continue to believe that trajectory is intact.

Thank you.

Bryan Hunt, Wells Fargo.

First of all, I'd like to touch on the RTE cereal category. If you look at the beginning of this current quarter, your Nielsen data has accelerated nicely for the four-week period and the 12-week period, versus what you're doing, a 52. And I was wondering if you could put the growth in context for us, whether it's promotional timing, product line extensions, shelf space gain, and just help us understand if this is a good pacing going forward as well?

Well, I think in this category, we would be imprudent to necessarily sign up permanently for the rate of growth that we've seen this quarter. So I would be loath to do that. We've had success around some merchandising innovation, we've had success around some key events, we've had success around the positioning that we have in the overall category. The consumer seems to be more attractively responding to the value segment than the overall category. All things that are more a continuation of [same] than new phenomenon. But this was a particularly strong quarter for consumption

Great. And then, my second question is, when you look at Dymatize, you had mentioned you would expect it to go from a loss to actually contributing in 2017. Is there any way you can characterize the loss from FY16, just so we can understand the potential bridge?

We haven't given that amount, but it's a relatively immaterial amount in the total, in both FY16 and FY17. So it's a single-digit number, the swing is a single-digit number

All right, great.

And then, my last question is, when you look at your broad portfolio of costs, excluding Michael Foods because that's well-documented on what you do there in terms of pass-throughs. But when you look at your portfolio of costs outside of Michael's, is there anyway you can give us some context of what you're anticipating for overall inflation or deflation across your materials for 2017?

Sure. Let me go by segment, because the impact is different by segment. In the Post consumer brand segment, we're seeing the input costs as a small tailwind, so a benefit from 2016 to 2017, primarily because our nut costs for almonds are going down, some lower wheat costs, while energy and sugar costs are higher. In the Active Nutrition segment, we see that protein is a small benefit for us as well. In the other businesses, it tends to be more of a pass-through phenomenon, like the eggs, so the impact is smaller.

Very good. I appreciate your time.

Kenneth Zaslow, BMO Capital Markets.

Hello?

Hey, Ken.

I just have a couple of housekeeping, but then to add to that, so when you talk about that $50 million, I'm assuming $25 million of that is brand equity, and $25 million is the comp. Is that fair?

It is.

Okay. On the $25 million, I notice you addressed, but maybe not as clear as maybe as I'm just -- what is the return on that, and why would you not keep that going? I understand that you're trying to meet an EBITDA target, but is it more about adjusting to get an EBITDA, or getting the returns on $25 million? Because it seems like -- I'm trying to figure out which one you're trying to do here?

Well, I think that, given our leverage profile, it's very important that we have a predictable consistent cash flow, so we do want to consistently meet our EBITDA targets. However, the spending that we leaned into in 2016, a goodly portion of that is advertising. And in any given period of time, advertising can fluctuate around a 100 scale from 80 to120. And its long-term efficacy is unchanged as long as the multi-year progression is not too negatively biased. With respect to the portion that was non-advertising, they were discrete projects that have been initiated, and are either completed or ongoing. To the extent, that we have positive [NPV] projects like those in the future, we would certainly undertake them. So I am not necessarily suggesting that we're abandoning productivity products, because we're trying to hit a target. That's not the case.

Okay. The same question: you said on Michael Foods, the base case was $250 million EBITDA. I'm assuming that's just for the egg business, not for the whole business, right, just for egg business?

No, I'm talking about, as of date of acquisition, which was just Michael Foods, exclusive of Dakota, exclusive of any M&A that's occurred since then, it was $250 million

Okay. And then, what I'm trying to figure out is, once you get to this normalized range, whatever the normalized range is, and whenever the time period is, what's the next step for Michael Foods to grow that business, outside of, again, the AI issues or whatever? But what are you going to do, once you normalize it, what's the strategy beyond that, to actually grow the business through the volatility of the margins?

Sure. Well, the original thesis remains intact; the long term, the transition from shelled eggs to value-added egg products is a benefit to both food service customers and retail consumers. So driving that change, and within value-added egg products, increasingly driving customer benefit, by moving them up the value chain from liquid to pre-cooked to frozen, et cetera. So that's a continuity of the strategy to which we invested; it's not a new strategy. Obviously, on top of that, there's tactical M&A. So between the organic growth of the category and tactical M&A, we think there's an attractive growth story

Okay. And then my final question is, again, it was kind of touched on, but how come acquisitions did not get done in the last year? Was it valuation? Was it, again, you guys are clear that you want to get things done; what was the holdup? Again, there seemed to have been some assets available. What was the hang-up?

Well, that's a case by case answer. And acquisitions that makes sense on paper, don't get done for any one of several reasons, whether it's ultimately valuation, or operational intensity, or specific risks identified. There could be any number of reasons. And I think we do want to acquire, but we want to acquire the right assets at the right price.

Okay. Thank you very much.

Thank you

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

Thank you all. We're pleased with the year. We're excited about the year starting, and we look forward to speaking with you again in February. So meanwhile, have a great and healthy holiday season.

Ladies and gentlemen, this does conclude today's conference call. You may now disconnect your lines.