Post Holdings Inc (POST) 2017 Q1 法說會逐字稿

Welcome to Post Holdings first-quarter 2017 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. To dial in, the number is 1-800-585-8367 and the passcode is 48363175.

(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.

Good morning, and thank you for joining us today for Post's first-quarter 2017 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 will 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 filings 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, and thank you all for joining us to discuss our first-quarter results. As Jeff will review in greater detail, 2017 is playing out as expected with a meaningful reduction in the Michael Foods Group adjusted EBITDA, being offset by growth in Post Consumer Brands and Active Nutrition. This quarter, our only outlier resulted from executional issues within Private Brands. With that as context, I will discuss segment highlights and capital allocation.

Post Consumer Brands' focus continues to be completing the integration of the legacy businesses, while building upon our market momentum. Last April, we consolidated ERP systems, and are now able to execute against production and distribution, network optimization, to ensure the lowest possible delivered cost. More broadly, our efforts remain focused on continuous cost reduction across the organization. While cereal has not been a growth category, we have confidence in our ability to drive modestly increasing cash flow to support strategic objectives.

Recent cereal category trends have continued. The category declined this quarter1.9% in dollars and 0.5% in pounds. However, unlike recent periods, this quarter base volumes declined and incremental volumes grew. Our consumption was strong, with dollars increasing 3.4%, and pounds increasing 4.7%. As with prior quarter, we grew in both base and incremental sales. For the quarter, our dollar and pound share increased 19% and 21.8%, respectively.

Consumption dollars and pounds grew for three of our four core brands: Malt-O-Meal bags, Pebbles, and Honey Bunches of Oats. Consumption of Great Grains fell because of SKU rationalization. Malt-O-Meal bags performed well this quarter, with pound consumption growing 11.4%, driven by additional items on shelf and higher base prices.

Pebbles too, had a great quarter, with pound consumption growth of 13.1%, while Honey Bunches of Oats had pound consumption growth of 3.7%. Pebbles continues to see strong base turns, and both brands benefited from increased merchandising support in the quarter. We are returning Pebbles to its box-only format. The brand's strong performance and pricing strategy makes this a good move for Post and its retail partners. We expect Pebbles to continue to grow through better advertising, better taste, and better innovation.

Great Grains consumption comparison remains negatively impacted by products discontinued in 2016. The fourth quarter will be the first fully comparable period, nonetheless, our continuing core Great Grains products saw pound consumption growth of 3.7%.

Overall, our consumption performance benefited from a promotional plan more heavily weighted to the first quarter of FY17, in comparison to our lowest promotional period of 2016. This is not a change in our promotional strategy, rather our focus last year was on consolidating sales teams. On a full-year basis, we anticipate FY17 trade levels to be comparable with 2016.

Michael Foods performed as expected this quarter. We continue to expect to lap the impact of avian influenza during the second half of FY17. Market egg supply has returned to pre-AI levels, while low shell egg market prices have delayed some customers' return to value-added egg products. As a result, the normalization of our demand has lagged the return to normal supply conditions. This timing difference was baked into our 2017 plan, and has developed as we expected.

Compared to prior year, the Michael Foods Group adjusted EBITDA decline was approximately $26 million for the first quarter. Last quarter, in providing our 2017 outlook, I mentioned that we had modeled potential adjusted EBITDA declines in the Michael Foods Group segment of up to $100 million, which we expected to be offset by growth elsewhere in our portfolio. There is no change in our underlying assumption.

Recall that on an adjusted EBITDA basis, last year's second quarter was our peak quarter. This year's second quarter is expected to be our lowest quarter for the Michael Foods Group segment. Accordingly, comparability will be most difficult in the second quarter, and will ease in the balance of the year. As I have said before, AI created short-term volatility, but we remain highly optimistic about our egg business model and its competitive positioning.

Active Nutrition continues to show great growth, driven by Premier Protein shakes and bars. It is now a material contributor to our portfolio, and a large component for the confidence we have that declines of Michael will be offset. I want to highlight that promotion and marketing timing caused this segment to have meaningful swings in intra-year margin structure. I encourage you to look at growth in the margin structure on a trailing year-end basis, rather than quarter by quarter.

Within Private Brands, our granola business continues to show modest revenue growth. Our capacity expansion remains on track to come online in the back half of the year, with margin leverage to follow. Our nut butter and fruit and nut businesses had a disappointing quarter. Frankly, our execution was poor, and we have moved to address it. I would expect to see profit recovery in Private Brands this year, as we tighten our operational execution.

With respect to capital allocation, volatility in our share price created an opportunity for Post to buy shares under our repurchase authorization. We purchased 1.7 million shares at an average price of $76.32, for a total of $133 million. Our remaining authorization is approximately $167 million.

We continue to have significant amount of cash on hand at approximately $870 million. We are assessing a variety of M&A opportunities, and we are working to find the best opportunities at appropriate values. With that, I will turn the call over to Jeff.

Thanks, Rob, and good morning. We had solid performance during the first quarter, with consolidated net sales of $1.25 billion, and adjusted EBITDA of $230.1 million.

Turning to our segment results, and beginning with Post Consumer Brands, net sales were approximately $421 million, up 2.2% compared to the prior year. Although volumes declined 0.5%, product mix and average net selling prices improved, as branded volumes increased and volumes for lower-margin co-manufacturing and government bid business declined. Sales volume increased for three of our four core brands: Malt-O-Meal branded bags, Pebbles, and Honey Bunches of Oats. Volumes for our fourth core brand, Great Grains, declined slightly.

Post Consumer Brands adjusted EBITDA was $108.9 million for the quarter, and benefited from manufacturing cost savings, improved product mix, and modestly reduced consumer advertising and promotion. This was partially offset by a higher trade promotion rate during the quarter. We expect first quarter to be our highest promoted period in the fiscal year, based on the timing of promotional activities.

Next, Michael Foods Group delivered net sales of $540 million, a decline of 12% on a comparable basis. Our egg volumes increased 12%, as we continue to lap prior-year periods impacted by reduced egg supply caused by avian influenza. However, egg revenues decreased 13%, as we completed the rollback of the temporary component of AI pricing during the quarter. We also continue to experience lower pricing to our market-based customers, in line with Urner Barry market prices, primarily for ingredient and retail shell egg customers.

Cheese volumes declined significantly, as the result of exiting certain private label business in the fourth quarter of FY16; however, the segment profit impact of the lower cheese volumes was very modest, given the low margin profile of the lost business. Michael Foods Group adjusted EBITDA was $92.3 million, and as expected, well below the comparable prior-year period as we continue to progress through the egg market recovery from AI. We expect our second-quarter performance gap in this segment to be greater than in the first quarter, before shrinking during the second half of the year.

Moving to Active Nutrition, net sales were $154 million, an increase of 33% compared to the prior year. Growth in Premier Protein shakes and bars was partially offset by declines for PowerBar and Dymatize. Dymatize sales were soft, primarily driven by the weakening US specialty channel.

Active Nutrition adjusted EBITDA was $31.1 million, and benefited from higher Premier volumes and lower material cost. This was partially offset by increased SG&A expenses related to higher headcount to support growth. Recall, the quarterly margins in this second segment fluctuate significantly, depending on the timing of promotional activity and levels of consumer-marketing spending. We expect to see higher trade and marketing levels in the second and fourth fiscal quarters, and we continue to expect FY17 annual adjusted EBITDA margins to be in the mid to high teens for this segment.

Turning to Private Brands, net sales were approximately $136 million, flat compared to the prior year. Volumes grew for granola, and organic peanut butter, and declined for regular peanut butter, and fruit and nut. Sales revenues were also negatively impacted by lower net pricing for almond and walnut products related to pass-through of the declining input costs. Private Brands adjusted EBITDA was $13.5 million, down from $19.1 million in the prior year. This decline was driven by manufacturing inefficiencies in nut butter, and fruit and nut, and higher co-manufacturing costs in the granola business, only partially offset by higher granola volumes and a favorable nut butter product mix.

Before reviewing our guidance, I'd like to comment on two material items impacting our GAAP results this quarter. First, we recently reached agreement to settle class-action claims against Michael Foods related to antitrust lawsuits that were pending prior to our purchase of Michael. We recorded a pre-tax charge of $74.5 million in our SG&A this quarter for these settlements. Second, as we have commented in the past, we have swaps in place to hedge a portion of the interest rate exposure related to future refinancing of our fixed-rate debt. During the quarter, the interest rate curve steepened and credit spreads narrowed, resulting in a $145 million non-cash mark-to-market gain on the swaps, which we recognized in our statement of operations.

Concluding with our outlook, we narrowed the adjusted EBITDA range for FY17 to between $920 million and $950 million. We continue to believe the pacing of adjusted EBITDA will modestly favor the second half of the fiscal year. With that, I would like to turn the call back over to the operator for questions. Operator?

(Operator Instructions)

John Baumgartner, Wells Fargo.

Good morning, everyone. Thanks for the question.

Good morning, John.

Rob, can we start out, just thinking about the South Korean bird flu impacting the US egg prices, and maybe directly or indirectly at Michael this year? Some of the Urner Barry prices we've seen, have really shown a pretty big spike in prices over the past two or three weeks. So do you have export opportunities? Do you anticipate benefits for your value-added business to be sooner than you thought, back in November? How are you thinking about that?

So first of all, yes, we do have export opportunities. That tends to be lower-margin business, but we are responding to the demand abroad, driven by the AI incidents that you've noted. Secondly, with respect to it impacting the US market, and our value-added conversion, it will certainly have a positive impact. What the timing is, and whether it will be impactful in the next couple of quarters, or a longer tail than that, is hard to evaluate. We have continued to bake in the assumptions around recovery that underlie our original estimates, and have not updated them beyond what we've embedded in our guidance.

Okay, great.

And then, in active nutrition, just to follow-up there, you maintain your margin target for the full year. And despite the recent uptick we've seen in some of the whey concentrate prices in the spot market, can you speak to your hedge position there, or expectations for incrementally larger cost inflation this year? And at Dymatize, with the specialty channel softness, can you elaborate on that a bit, and maybe speak to some of the opportunities to offset that, and maybe with e-commerce?

So with respect to protein prices, and we're in quite good shape throughout FY17 and partially into FY18, so we have no real exposure around the protein prices that drive Premier. We do have some on Dymatize. There's a array of protein products that we acquire, and we have various positions in each different category. A lot of the benefits to margin at Premier are driven by scale, and also are driven by, as Jeff mentioned, the timing of market promotion, and the timing of incremental campaigns.

With respect to Dymatize and the specialty channel, we certainly have seen weakness in the specialty channel, as the more traditional channels have encroached upon its territory. And we are trying to respond with better innovation, more unique product category, better packaging aimed at the specialty channel, to try to remain distinct and unique in the channel. But ultimately that channel has to develop a more compelling value proposition, that enables it to compete more effectively with [FDM], than it has done at least thus far this year. So we're watching this very carefully, about how much to rest our future entirely upon the specialty channel, versus looking at the overall strength of that channel.

Great. Thanks a lot, Rob.

Thank you.

Chris Growe, Stifel.

Good morning.

Hey, good morning.

I just want to ask you first, a follow-up on the egg business. I'm just curious, is your egg supply developing like the industry overall? Are you back now to full supply? And then if I can add to that, does your outlook incorporate improving prices through the year? So did South Korea help with your pricing assumptions, or is it just you've kept your original assumptions in place for the year?

Yes. So with regard to the first part of the question, we are following the industry, and are more or less back to pre-AI supply levels. With regard to the second, our plan did anticipate prices increasing throughout the year. The prices during the first quarter were actually a little bit lower than our plan had anticipated, and therefore there was some headwind in the first quarter. But the expectation built into our plan was that there would be growth in the market prices throughout the year.

And did that change at all because of some of the current situations like South Korea?

Not dramatically. The comment earlier about the market prices increasing recently is, in fact, true, but in line with our longer-term view as to where we thought the market was going to go.

Okay. Thank you for that.

And then, just a quick question for Rob. You made a comment about acquisitions, and we talk about this every quarter, it seems like. But maybe I could ask, are there any divisions where -- if you make a broad statement about acquisitions and multiples broadly across the business, but are there any divisions where you're seeing more activity or more potential, maybe from where it was last quarter?

Active nutrition is the segment that has the most frequency of opportunities, because you have so many small businesses being formed that are naturally targeted towards that growing consumer segment, but they tend to be smaller, a bit more volatile. So we've been cautious in that area. We tend to look at M&A as an opportunity to look at two different types of opportunities. One, picking larger businesses that have less volatility, usually lower multiples, but less potential to grow hyperbolically. And then, in contrast, the situations like Premier, where you have hyperbolic growth, but the downside of that product lifecycle could be equally steep. And we're trying to be very cautious in the way we navigate through that.

A number of opportunities in that sector. There are numerous opportunities in private label as well, but they, too, tend to be very small. And then, as you get into our larger businesses, the opportunities get to be higher-quality businesses, just fewer and further between.

Okay. All right. Thank you for the time.

Thank you.

Jason English, Goldman Sachs.

Hey, good morning, folks.

Good morning.

Congratulations on solid EBITDA performance this quarter.

Thank you.

Can you give us some color as to why it didn't translate into cash flow? What some of the leakage was? And any consideration factors we should be thinking about, as we think about the cash flow statement for the remainder of the year?

So the big driver was the settlement payment that we made for the antitrust, which was $75 million. So clearly, that's not something we would expect to continue. The other driver in the first quarter is our bonus payment period, which, as we commented last time, were at max levels, so also something that's not going to repeat every quarter. Those were the two big drivers. And if you factor those out, I think you'd see a much more normalized operating cash flow based on our recent trends.

Okay. That's helpful. Thank you.

And then, coming back to Michael Foods real quick, a pretty cautious commentary, in terms of expectations for next quarter. Can you help us with any more specificity? I think you mentioned the lowest EBITDA quarter for the year. Any sense of magnitude? And then, second question on Michaels, you seem to be downplaying the recent lift in spot prices. It seems like it could be more helpful to me than either of you are suggesting. So it seems, this market conditions that we were in for a bit of a lower-for-longer price environment, and this may have accelerated it. Were your expectations really for such a rapid acceleration? And why shouldn't we be looking at this as a likely scenario that lifts the downside worst-case scenario in terms of EBITDA decline out of Michael's?

So you asked two questions. One, comparability of quarter two, so let me direct you on that one first. I think your starting point for that should be the increase in adjusted EBITDA from quarter one to quarter two last year. Because last year was the peak performance with respect to the impact of AI on last year's earnings.

Yes.

So then, if you assume some modest Michael decline in Q2 of 2017, you can then start to ballpark the magnitude of the decline. But it is as much driven by the dynamic last year and a less volatile, but a pattern that flows this year, with Q2 being down from Q1, and Q2 being the trough quarter for Michael, that produces a growth in that delta, from Q1 comparability to Q2 comparability, and then starts to shrink in the second half of the year. So before I move on to the second question, is that clear as mud?

Yes, exactly, rather thick mud. So to make sure I get it, your EBITDA jumped from Q1 to Q2 by around $4 million. That $4 million delta seems like perhaps the right magnitude to think about, in terms of fall-off from 1Q to 2Q? Is that a reasonable interpretation of what you said?

It's a little more cautious than that, because we expect Q2 to be the low point of 2017, whereas Q2 was the high point of 2016.

Okay.

So what you've accounted for so far is just the high point aspect. There's another low point aspect that needs to be accounted for, all of which is baked into our guidance.

Okay. Got it, thank you.

With respect to the second part of your question, in terms of egg prices recovering, certainly there is some opportunity around that. But the cycle of recovery involves changing ingredient requirements, packaging requirements. It's not a flip of the switch, with egg prices returning. So there is little doubt that it will have a positive impact. The question is, will the positive impact occur on a time frame that accelerates into FY17, or will it lag longer than that? So perhaps we're being on the cautious side on that, but if we are, so be it.

Very good. Thank you, guys. I'll pass it on.

Thank you.

Cornell Burnette, Citi Investment Research

Good morning, and congratulations on the quarter.

Thank you, Cornell.

Just wanted to first start off -- go back a bit to active nutrition. I know you gave some color around the margins, and why they were pretty nice in the quarter, but I wanted to look at the sales growth at 33%. It seems like that was all driven by Premier. I was hoping you could give more color on that. Was it just more built on distribution gains, and moving into new channels? And then going forward, how sustainable is that number, especially in light of the commentary that you gave, signaling that you've got more marketing and promotions in store for later in the year relative to what we've seen in the first quarter?

So approximately 60% of that growth is velocities, and 40% of the growth is distribution, so it's a mix of both. We, by no means, would argue that, that level of growth is sustainable. We continue to be very pleased with the results, but are not signing up for that kind of growth rate in anything approaching a multi-year horizon. But the product is very well-received. Customer loyalty is very high, repeat rates are very high, and household penetration is very low. So we're excited about the product and the opportunity, but we're equally excited about the opportunity to grow the balance of our portfolio with some new marketing and new products.

We just launched our clean start campaign for our new Clean Whey PowerBar, and we are optimistic about the results. We're optimistic that the results will be attractive, very early in the launch. So we continue to be very optimistic of the overall business.

Okay. And then, in cereal, it looks like some of the retail takeaway data would suggest shipments up 4%, but yet your reported numbers are bit below that. I was wondering, are you in a situation where you're shipping below consumption? Or is the delta just really related to maybe some unmeasured channels in some of the co-man business that you talked about in the press release?

All three of those. There's no one of those which are terribly large, but all three of those contributed to the dynamic you described.

And then, lastly, on the cereal, I know you talked about maybe having higher promotions in the first quarter, the year-on-year comparison. But when I look at the reported numbers, it looks like net price realization looks to be up over 2%. So was just wondering what drove that, in light of your comments on the promotional side?

It's mostly a function of channel mix, and actually even more specifically, customer mix, where we did very well with customers that have an EDLP strategy. So we did well with promoted volume, but we did even better in an EDLP environment. So promotional drove the increment, but we have very strong EDLP performance that drove average pricing as well.

Okay. Thanks a lot. Appreciate it.

Brett Hundley, Vertical Group.

Hey, good morning, guys. Thanks for the questions.

Just two high level ones for you. First, would you be ready, or willing to share some of the qualitative factors that could push the top end of your guidance range up for the year?

I don't think at this point in the year we would be ready to do that. We're pleased with the results of the quarter. We're looking at derisking the guidance, but three months in, I don't think we want to talk about upside.

Maybe I can place another one there instead, specifically on the Michael business, eggs. With the spread of AI in parts of Asia, Europe, I know pricing remains relatively weak, of course, but have any jitters related to that, or anything else forced a willingness by customers to move back towards grain-based cost-plus contracting away from the spot market at all that you have seen?

So if you go back into the Michael business model, customers were on a grain-based model, because it was good for them, and it was good for us, not because they were trying to game spot versus grain-based. We think ultimately, the dynamic that drove the success of that model is firmly intact, but that there's a timing delta, simply because, while you know you were going to make that move, the persistence of low pricing has slowed the move. So we think the only difference is going to be pacing, not if or when it happens.

Okay. And then, gentlemen, last one for me, I wanted to come back to your M&A filter, and I wanted to ask you a question related to geographies. As I think about cross-border M&A, I want to understand your views under the current political backdrop. And basically I'm looking at three borders. I'm looking at US/Mexico, US/Canada and then the UK/EU. And of these three borders or situations, are there any that stand out as potentially dangerous for a buyer today in your eyes? Any that are more accommodative? We would just love to hear your thoughts on that. Thank you.

The ultimate answer is, I really don't have a clue. So if the question is aimed at the proposed border tax, our sensitivity is more Canada, because we have plants in Canada. From an M&A perspective, I think it's such a bespoke question that I would be hard-pressed to apply the limited clarity we have around where tax and policy could go to specific M&A situations. I know that's not a very helpful answer, but unfortunately, I think the best we can give you at this time.

That's all right, I tried. Thank you, guys. (laughter)

Bill Chappell, SunTrust.

Thanks, good morning.

Good morning, Bill.

A simple question: if the egg business, the outlook is still the same, and it sounded like the private brands business actually was a little worse in terms of execution than expected, what was the driver of raising the low end of your EBITDA guidance for the year?

Well, we think that some of the conditions that we've talked about, the strengthening of price resulting from the international AI does derisk the downside. So we baked in more potential downside in our original forecast than is appearing to develop. We think the problems with private brands are fixable. And we think they're fixable in relatively short order. So given that outlook, we decided it was appropriate that we raise the bottom end.

So just to maybe put words in your mouth, maybe $100 million loss year-over-year for eggs is really the low point, and maybe overly conservative?

Well, I don't think I'm going to necessarily characterize any one assumption as conservative or aggressive. Rather I would say that within the context of what we're seeing in eggs, and within the context of what we're seeing on the balance of the portfolio, we felt confident to do what we did.

Okay. And then, can you just give me a little more color on the private brands execution issues, and just how you fix that? And on the positive, Pebbles? I think it's your second largest brand, and that's a pretty strong growth for the quarter, how sustainable that might be?

Sure. So on private brands, the business that we have is the result of a series of acquisitions of small businesses. And I had advocated a position of waiting for a larger-scale acquisition to bring together some necessary system conversions that would allow for greater efficacy of things like demand planning and service fill rates. And it, frankly, what has happened is, by having sub scale disparate systems, we've allowed some inefficiencies and some service levels to [built] in, and they became costly this quarter. We made the decision that we can no longer wait for the right M&A answer to that problem. And we need to form one system, one go-to-market, one demand-planning organization, to make those executional issues go away. It's a relatively clear path, it just requires the will to execute against it.

Pebbles, we're very pleased with the performance of Pebble. We think we've done good things around innovation, packaging. We think we've made some taste improvement. So I would hesitate to try to attribute anything to one silver bullet. It's basic blocking and tackling across all aspects of the product, the marketing mix, the sales execution, that has driven really quite impressive performance.

Okay. Great. Thanks so much.

Thank you.

Tim Ramey, Pivotal Research.

Thanks so much.

Hey, Tim.

Good morning.

A couple questions, and I know the first one is kind of unfair. But you bought back stock at a price, a fairly significant premium. And Jeff, did you say $76.32? If I could just get that number correct?

Yes.

To last issue price. And I know, all decisions are incremental and real-time. But did that give you any particular angst? Or was it just the best available option at the time?

We live in a mark-to-market world, and we decided that, based on where the share price was, and based on the prospects that we saw, that it made a lot of sense to do so. I think embedded in the question is, do we wish we didn't had sold equity at the price we did last time? We are frequently one to try to make judgments against where we see our opportunities, and sometimes we're wrong, and sometimes we're right. On that one, we added more capital to the balance sheet than we needed at the time, and did so at a price that in retrospect was not a great price. So the fact that we made that decision last year, is in no way going to inhibit us from doing what we think is the right thing this year. Or maybe that was two years ago. Two years ago.

And then, just speaking of two years, we're two years or almost two years into all-day breakfast, or the impact of expanded menus on breakfast in QSR. Do you have any thoughts on what that's doing to the demand picture in QSR eggs?

The demand in QRS eggs is generally flat. The demand issues we're having around eggs are more in the less value-added segments around ingredients, and even some of the retail more value-added projects. But the QSR segment is generally flat. Our market share is unchanged. Where there is some weakness in food service is more in a casual dining segment.

Got it. So what are the QSR operators thinking, that they over-expanded? Or they need to prune SKUs? Or it's just steady as you go?

Well, I can give you just what I read from the various McDonald's and other analyst reports. I think they're very pleased with the results of the expansion of all-day breakfast. I think their challenge is, what next; not, was that a good expansion or not?

Got it. Thanks so much.

Thank you, Tim

Ken Zaslow, Bank of Montreal.

Everyone.

Hey, Ken.

Just a couple questions, what was the reason behind the decline in baseline cereal sale?

The three points that I think Cornell made were, one was just timing of inventory. Two, we had -- in the prior-year some co-man business that did not repeat itself. (inaudible) And then, the third was the government bid business.

Okay. And then the $15 million to $20 million of [market] dollars, of marketing, discretionary spending, where do you stand on that? And how does that progress throughout the year?

So that was spending that we pulled the trigger on last year.

Yes.

So it is not reflected in anything going forward this year. We will make decisions on incremental spending as the year unfolds. But as of now, there's no plan to repeat it.

Okay. And then, my final question is, just real quick, how much conversion is left from your AI contracts to a feed contract? Are you almost there? Where are you in that evolution?

So there really wasn't any conversion of contracts. The contracts that we had remained in place. We simply didn't have the eggs to supply to some of those customers, and those customers were forced to go out in the market to buy eggs at the time. And getting some of those volumes back, converting them back, is what we're working on. But the base contracts, it really followed their normal course. And we have contracts that renew throughout the year, and throughout multiple year periods.

Okay. Thank you

I will now turn the conference back to Rob Vitale for any closing remarks.

Thank you, everyone. I think we're very pleased to start the year as we have. We've consistently, through 2016 and now into 2017, tried to convey this message, that while we expect the decline in Michael to be meaningful, that we expect the balance of the portfolio to cover that. And so far that appears to be developing, and we feel confident that it will. So thank you, and we look forward to talking to you in May.

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