Post Holdings Inc (POST) 2018 Q2 法說會逐字稿

Welcome to Post Holdings' Second Quarter 2018 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 12:00 p.m. Eastern time. The dial-in number for the replay is (800) 585-8367, and the passcode is 2635919. (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 second quarter 2018 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 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 that 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.

Thank you, Brad. And thank you for joining us to discuss our second quarter results and our outlook for the business. We had a solid quarter with adjusted EBITDA of $314 million, in line with our expectations. We continue to expect full year results of $1.22 billion to $1.25 billion in adjusted EBITDA with modest favorability towards the fourth quarter.

Meanwhile, we are making good progress with respect to reviewing alternatives for Private Brands. The process includes a dual path evaluation of a carve-out IPO and transactions that include third parties. We will have further announcements as appropriate.

The U.S. cereal category improved a bit this quarter. Tracked channel dollars declined 1.2%. However, our estimate of untracked channels offset the decline, resulting in a flat total category. Competitive pressures remain high as manufacturers explore new alternatives for growth, including additional bag SKUs. Nonetheless, our performance continues to demonstrate strength in our core bag franchise in the Pebbles products and in our recent innovation.

On the other hand, we continue to see weakness in Honey Bunches of Oats and Great Grains in Nielsen tracked channels. The integration of Weetabix North America is proceeding well. In February, we announced our plan to close the Clinton cereal plant. We expect to save nearly $8 million annually, but we will not realize the savings until fiscal 2020 as the plant will operate into late next year.

Turning to Weetabix U.K. I want to ground you with respect to its outlook and cadence. This is our first year of ownership, we had some seasonality. We expect a meaningful lift in adjusted EBITDA from first to second half, but with only a 1% increase in volume compared to prior year. Our full year adjusted EBITDA outlook for Weetabix is approximately GBP 50 million behind our underwriting case, the majority of which has occurred year-to-date.

The shortfall from our expectation is primarily from 2 issues. First, the pricing channels we highlighted last quarter. Essentially, we have overpromoted and have chosen to pull back some promotion incurring some near-term volume loss. Second, we had an unusual level of inventory write-offs in the first half of the year, resulting from the overhang of an ERP conversion.

Our corrective pricing actions are showing positive initial results. We believe we are through the inventory issues and we are back on track with our continuous improvement targets. As a result, we are confident in our ongoing estimates. Our Refrigerated Food business includes Michael Foods and Bob Evans. These businesses are being separated into foodservice and retail operations. However, they share an integrated supply chain and are reported in one segment. This segment had a strong quarter with adjusted EBITDA of $119 million. The growth story is shaping up nicely with foodservice eggs and pro forma potato volumes growing approximately 6% and 10%, respectively.

Meanwhile, pro forma retail side dish volumes grew 14%. The pro forma basis relates to the Bob Evans acquisition, and it's defined in our press release. To be fair, we benefited from the timing of Easter. Nonetheless, the volumes are quite strong, even giving effect to timing. We did have some weakness in some of our smaller categories, including retail eggs and cheese.

Synergy realization is proceeding on track, and we remain highly confident that we will achieve $35 million to $40 million in cost reductions by fiscal 2020. We are equally pleased that the strategic rationale of organizing by channel is paying dividends. We have better coverage within the foodservice channel with the combined footprint. Further, we are able to segment retail by daypart and merchandising strategies as we begin to manage Bob Evans and Simply Potatoes on an integrated basis.

We've received questions about Michael regarding whether high spot egg prices are driving unsustainable profitability. For context, recall that earlier this year, we indicated that we would continue to reduce the imbalance of eggs sold on a market price but purchased with a grain-based cost. We have been successful in reducing the imbalance to less than 10%, but we expect this imbalance to contribute approximately $25 million to $30 million to our fiscal 2018 adjusted EBITDA. This amount is modestly above expectations and poses a potential headwind in 2019.

While we have not entirely eliminated market volatility, we have materially reduced its impact and will continue to do so. The structural profitability of our foodservice business has improved as we migrate our mix to more value-added products. Moreover, we expect further improvement in margin structure when our new precooked egg facility in Norwalk, Iowa comes online and supports our continued demand towards higher value-added products. We have articulated a 4% to 5% long-term EBITDA growth rate for this business and our volumes and mix support this assumption.

This quarter again produced attractive growth in our Active Nutrition business with net sales growing 16%. Growth was widespread with better velocities, expanded distribution and new products. We continue to be optimistic with respect to our mix of businesses. We have an attractive blend of high cash-generative businesses and growing businesses. Consistent with that optimism, during the quarter, we repurchased 1.1 million shares for $83 million or an average price of $74.

We continued to repurchase shares after the end of the quarter. And earlier this week, we announced a new share repurchase authorization of $350 million. As of May 2, we had repurchased approximately $488 million under our prior authorizations. Also during the quarter, we purchased $112 million in longer dated bonds. We continue to believe in our approach that over time balances share repurchases and debt reduction is an efficient allocation of capital.

We continue to explore M&A opportunities. However, as you may anticipate, integration activity of Michael Foods, Bob Evans and Post Consumer Brands, along with the ongoing Private Brands process, render significant M&A a lower near-term priority. Be assured that if a great opportunity develops, we will respond, but we are not aggressively pursuing such opportunities.

With that, let me again thank you for your support, and I will now turn the call over to Jeff.

Thanks, Rob, and good morning, everyone. Before detailing our business [year] results, as a reminder, our segments have been realigned this quarter and our historical results have been adjusted to conform. The primary change was to move our granola and pasta businesses into the Private Brands segment. We also established the new segment, Refrigerated Food, which is the combination of the legacy Michael Foods, egg, potato and cheese businesses and our recent Bob Evans acquisition.

Beginning with Post Consumer Brands. Net sales were $462 million, relatively flat on a pro forma basis. Pro forma volumes grew 1.8%, driven by increases of Honey Bunches of Oats in the club channel as well as licensed products, Malt-O-Meal bag cereal, government-bid business and private label. Meanwhile, adult and kid classic brand of products experienced declines. An unfavorable mix and increases in trade spend and slotting fees resulted in an decline in average net pricing.

Post Consumer Brands adjusted EBITDA was $124 million, benefiting from a continued integration cost savings and higher volumes, offset by increases in trade spending, commodity cost and freight rates. Weetabix segment net sales were $109 million, a pro forma increase of 15% compared to prior year, primarily behind the favorable pound Sterling to dollar foreign exchange translation rate. This favorability was largely offset by reduced volumes and lower average net selling prices, resulting from an unfavorable product mix that favored private label sales compared to branded sales. Segment adjusted EBITDA was $28 million.

Net sales in our Refrigerated Food segment increased nearly 9% on a pro forma basis. Foodservice pro forma net sales increased 11% with foodservice egg volumes increasing nearly 6% and foodservice potato volumes increasing 10% on a pro forma basis.

On the retail side, net sales increased 4.7% with volumes increasing 4.6% on a pro forma basis. Retail side dish volumes grew 14% behind growth in consumption and distribution. Adjusted EBITDA for this segment was $119 million, including 2.5 months of contribution from Bob Evans, which performed in line with our expectations.

The legacy Michael Foods business achieved significant year-over-year improvement as we lap the low point in egg business profitability in the prior year second quarter. Adjusted EBITDA benefited from higher volumes and improved net pricing, which was somewhat offset by freight rate inflation.

Our Active Nutrition segment posted net sales increase of approximately 16%, fueled by shake net sales growth of 34% from both distribution gains and continued organic growth. Active Nutrition adjusted EBITDA grew approximately 18% to $33 million as inflation and protein raw material input costs and freight rates partially offset the benefit from volume growth.

Our Private Brands segment now includes nut butter, healthy snacks and pasta. Segment net sales were $213 million, an increase of nearly 10%. Volumes increased 9% as each of the 3 product lines achieved volume growth. Private Brands adjusted EBITDA was $26 million.

Before we open up the call for Q&A, I would like to make a few comments on freight cost, SG&A and leverage. As referenced in each of our segment discussions, like most of our peers, we have experienced year-over-year freight cost inflation.

In the second quarter, we estimate rate increases for outbound and inter-network freight, resulted in an aggregate freight expense increase of approximately $9 million compared to the prior year. We expect the year-over-year headwind in the second half of our fiscal year to be between $10 million and $15 million. This higher level of freight expense is fully contemplated in our adjusted EBITDA guidance. Second quarter SG&A included $21 million of transaction costs primarily related to success fees paid in conjunction with the completion of the Bob Evans transaction and $13 million of integration costs, both of which were treated as adjustments for non-GAAP measures.

As Rob mentioned, we were aggressive in executing share repurchases this quarter. Our net leverage at the end of the second quarter, as measured by our credit facility, was approximately 5.9x. We previously articulated our net leverage expectations to be 5.5x by the end of fiscal 2018. Our expected adjusted EBITDA and free cash flow are consistent with achieving that target. However, in the short term, we allocated more capital to share repurchases than debt reduction. As a result, we now expect net leverage to reach 5.5x in early fiscal 2019 with the caveat that future decisions around share repurchases may accelerate or decelerate this timing.

In estimating future leverage ratios, we are not including proceeds from a potential Private Brands transaction. We expect any such transaction to be, at worst, leverage-neutral and likely to result in a modest amount of deleveraging.

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 Andrew Lazar of Barclays.

First, with respect to Weetabix international. I think you had talked about that business as being around GBP 120 million in EBITDA. And if that's right, is that the sort of the level at which you would shave off, call it, GBP 15 million or so? And then the question is, is that really just an issue for this year and you ultimately expect to get that back in fiscal '19? Or is that really the new base from EBITDA, which we would grow going into '19? And then I've got a follow-up.

So the GBP 120 million included a modest contribution in North America and it also assumed a loss in China, which we view as somewhat of an option to develop that market. That loss is coming down towards breakeven in '19. So I think the answer is that it will take us through '19 to rebase back to the base case assumption and then we would expect to be growing from there; growth largely driven by some of the cross-selling opportunities. It's essentially a flat, high cash-generative platform. We don't look for a lot of core growth coming out of the Weetabix business.

Got it. You -- and I knew that you had spoken about the Michael and the Bob Evans business having an integrated supply chain and therefore, kind of being in one unit even though they run sort of separately. But is that what makes it difficult to report these businesses, I guess, as separate segments? Because one is foodservice and one is retail. Both have what appear like reasonably good sort of growth profiles. And I guess, I'm just curious why those wouldn't be reported separately from a reporting standpoint to show the profile of those businesses independently.

At the current time, the reason it's difficult is because not only is there a shared supply chain, but the way their costs are tracked within their respective [GL] systems doesn't make it easy to get a pure foodservice and retail split. Over time, as we migrate our IT systems, we would expect that, that ability to be more clean and clear would improve.

Okay. And then just the very last thing is, Rob, I think you mentioned that you're happy at the stage with sort of the -- or optimistic about the mix of businesses that you have, and each play different roles. But I guess -- I do hear this from time to time that the portfolio, with all the activity that you've been involved with, has gotten more complex. And maybe for some, it's somewhat harder to track or follow. Some of these businesses are more trackable with publicly available data; others, less so. So I guess I'm just curious more just to get your comments and thoughts on that as it relates to the way your portfolio is currently sort of structured.

Well, I think if you look at it, we have 6 platforms currently. And with the Private Brands transaction, we're in some way responding to the reality that you comment on, that there is complexity and we're trying to do 2 things, one, get some greater transparency around that with the various places within the portfolio in which Private Brands have previously been embedded; and second, allow for direct capital to it. As you, I would think, know from our history, we constantly ask that question and make judgments around what is the appropriate composition of the portfolio. And not just composition, but organizational structure, vis-à-vis, more than one security. And for the time being, we're happy with the composition, but that's a dynamic question.

Your next question comes from John Baumgartner with Wells Fargo.

Rob, 2 questions for you on cereal. First, you touched on the uptick in bagged cereals introduced by your competitors. So can you speak a bit more about what you're seeing in terms of your portfolio's velocities as the competition there picks up? And I guess, how the bag section is being merchandised by retailers, are you seeing -- is it getting linear feet? Is there more SKU churn? How's that kind of evolving?

So kind of picking up in the middle of that, the answer is there is more linear feet being dedicated to bags, which we think is obviously net positive from our perspective. We would -- if you look at it on a SKU by SKU basis, the -- some of the introductions have resulted in some lower growth rate in some of the SKUs that have been directly affected. But still, the portfolio of bags is growing attractively. We expect the bag category to grow as a percentage of the total cereal category and think that these new entrants reflect that reality.

Okay. And then on Bob Evans. We saw very nice volume growth there in Q2 on side dishes. I guess, the big opportunity long term is distribution. So I guess, how are you thinking about the pacing of distribution, the amount of runway you have on the capacity side to meet that? And then maybe on the execution front, in terms of generating trial, what do you see that can be done differently or better relative to the legacy business or what competitors are doing in that category?

Yes. So when they're going in the low double digits, we're not going to question their ability to generate trial and growth. They're doing -- where they have distribution, they are doing extraordinarily well with gaining trial. And I think it's really more of the same. The distribution opportunity is significant, particularly when you go west of the Rockies, where the distribution starts to thin. But frankly, it's really more of continuing to follow the strategy that Bob Evans have previously been on and where we can tweak it. But it's really more supporting continuity of what they've been building upon rather than a meaningful change. I think your question about capacity is a good one in that as we continue this growth, at some point, we'll likely have to add capacity. But one of the things that we are seeking to do in this integrated supply chain is look at the footprint of our combined factories on a systemwide basis and allow the creation of some latent capacity that we -- exists to be activated. And we think that will defer the need for capital compared to the needs that both companies would have had on an independent basis. It also affects our freight lanes in a very positive manner once we get this network fully optimized.

Okay. And just one last one for me for Jeff in terms of the freight exposure. I think back in November, the view is that you would not be able to take price to offset the inflation there. And I guess that pressure is worse than initially expected. So is the lack of pricing still the case in your full year outlook? Or have you seen some incremental flexibility on the pricing front emerge in your last couple of quarters?

Really have to bifurcate that between the businesses. On our foodservice business, there's a little bit more opportunity to pass along price, and some of that has taken place or will take place in the second half of the year. So you noticed, if you followed the commentary, that the second half headwind is a little bit smaller than multiplying Q2 by a few times. So some of that is because of being able to pass through cost on that side of the business. There's some opportunity on the private label as well, but there's a delay as we go through bids, et cetera, to that taking effect. And then on the retail side of the business, it's much more difficult to do so at the current time, although we certainly will look for opportunities to try and balance that with the cost we're seeing.

Your next question comes from Jason English of Goldman Sachs.

Thank you for the comments on Weetabix. Obviously, with the new segment reporting, it's hard to track how Bob is doing. Can you give us an update in terms of where the EBITDA is tracking, what the cadence looks like and how you're tracking towards your full year target for that asset?

Yes. So the -- as Jeff mentioned in his comments, Bob performed according to forecast for the quarter. It had some -- for the quarter prior to our ownership during the pendency of the transaction, it had met its sales objectives, but it had some cost issues. So it would not have met its EBITDA for that quarter, and we do not expect to make that up. But we expect to be in line for the balance of the period under our ownership with our original forecast. So the sales are tracking nicely at or ahead of plan. Costs are now approaching back in line, particularly as we get this integrated supply chain fully rolled out. So I would say essentially it's in line with our expectations.

Good news. And then I'd like to better understand the thought process behind delaying the achievement of your leverage targets to give yourself some leeway to buy back more stocks -- more stock. What was the thought process and the motivation behind that?

Well, we look at the relative returns of reducing leverage versus buying shares at whatever the [then] price would be and made the decision that at the trading prices, we'd be rather be more opportunistic on share buybacks. I think when you look at our bond ladder, we have 6 years without any amortization, which gives us some flexibly with respect to managing down the refinance risk we ultimately face. So we -- as we've tried to articulate previously, we feel very comfortable with our ability to manage that down to an appropriate level with the time we have. And we wanted to take advantage of some volatility in our shares in the near term to allocate capital differently.

And last question, and I'll pass it on. If we stack and rack sort of the puts and takes you gave, I think it sounds like you're absorbing around $20 million to $25 million of incremental net freight cost versus where you initially set your goal. $15 million of lower EBITDA in Weetabix offset by maybe $25 million to $30 million of upside at Michael's. That nets to...

That's [GBP 50 million].

Oh so I got to gross that up a little bit. All right, so it's good to net to something close to, in aggregate, $10 million incremental headwind to EBITDA. Clearly, you're holding your guide. Are those the right 3 buckets? Are there other puts and takes? And what's giving you the flexibility to continue to hold the guide in light of what is in the headwind for you?

Well, I think those are -- first, you're reading it correctly. Second, I think that the -- much of that has been absorbed to date with the exception of the freight. The freight is ongoing. There are other levers at any given time in a portfolio as broad as ours that we can push or pull. And we have some hedge in our guidance that gives us the comfort that we can maintain it.

Your next question is from Cornell Burnette of Citi Investment.

So you made comments on kind of the cereal category overall being flattish when unmeasured channels are kind of added to the equation. It's a big difference perhaps from some of the declines that we've seen in cereal over the past year. So just wondering if I could get your take on perhaps what's driving some of the sequential improvements in cereal. And then as you go forward, what's your outlook for cereal for the remainder of the year?

For however many quarters we've been trying to guess cereal, we've been wrong. So the -- I think the change in cereal of late is a more acceleration into non-measured channels. And we have seen some decent modulation of the rate of decline in measured channels. So the attribution, I think, would be some better innovations from the category leads, some better marketing from the category leads, all bringing better traffic down the aisle. I think that we specifically are doing quite well in the value segment, particularly bags and presweetened. So I think better execution across the board and, again, some better growth in unmeasured channels in terms of outlook. Our outlook tends to always make the assumption that the trend is continuity and not try to anticipate changes from that trend until we have enough data to really extrapolate something meaningful. So we continue to be cautious. We continue to look at continuous improvement programs under the assumption that we are going to be in a declining category. And if the category is flat, that's a little bit of upside to our planning horizon.

And then another thing. I think in the more recent data kind of 12 weeks ended in late April in measured channels, your market share improved by about 50 basis points. So just wondering given your leverage to some of the better parts of the category, namely bags and children's cereal, do you think that you can continue to be a share gainer over the remainder of the year?

We don't plan for share gaining. We plan for share continuity. We expect there to be meaningful competitive response, and we want to be cautious in the way we approach that assumption. So we will certainly strive for it, but we don't plan for it.

And if I may get in just one last point here. We see major contractions in packaged food multiples over the past year in the U.S. From an M&A standpoint, does this get you more optimistic in your ability to continue to execute your M&A strategy with assets being priced more attractively now?

I think that in general, we find periods of volatility uncertainty as attractive. I think one of the things that we pride ourselves on is an ability to adapt to a current environment and react to it quickly. So I think that in a period where there's a lot of change and uncertainty, we will find opportunity. Whether that's through M&A or through something else, I don't know. But we like choppy waters.

Your next question is from Chris Growe with Stifel.

Just had a question for you, Rob. When you indicated some modest favorability to the fourth quarter, are you talking about EBITDA dollars there? Is that a way to think about your kind of second half EBITDA guidance -- kind of guidance for the year?

Correct.

And in dollar terms, to be clear, right?

Yes.

Okay. And then you had earmarked I think previously an increase in advertising this year for cereal. I'm just curious, given what you're seeing in the category, maybe some increased competitive conditions that occurs at least in bags. Are you shifting that at all? Are you increasing your investment or really maybe towards promotional spending or price investments? I'm just curious how you see that in the category and how your spending is kind of earmarked for the rest of the year.

Yes. So if you look year-over-year, we had a modest increase in advertising. If you look sequentially, we had a modest decrease in advertising. And some of that is a reallocation from where we expected to go into some more trade. So we have an ongoing process of allocation between consumer and trade decision-making and compare-- again, compared to last year, it was a step-up in consumer. But compare it to where we expect it to be, it was a step-down with more incremental focus on trade. And in general, the bags respond better to trade.

And to be clear, your overall levels of spending probably doesn't change much. It's where you're allocating it, is that correct?

Correct.

Okay. And then I just want to be clear on the -- on your cost inflation as you see it. Maybe you can give kind of an overview of cost inflation. But you did indicate on freight an increase for the second half of the year. I think you had already baked in some increase in freight. Is this over and above that? I'm just trying to understand where that is, this is in relation with what you thought before?

It's some of both, Chris. So it's a little bit higher than what we had anticipated when we originally put out our guidance, moderated a little bit by the success we've had in some parts of the business with passing on cost.

Okay. I had just one quick one if I could and that's for Weetabix. You had been using a British pound level that was below the current British pound rate. Is that still true? Or kind of within your assumptions, is your planning assumptions still to that lower rate?

Well, to give you the order of magnitude, this quarter, the rate was an average of $1.39. And we had articulated that we've been planning based on low $1.30s. That benefit was about $1 million on the EBITDA line this quarter. So the order of magnitude is not that great.

It's small, yes.

(inaudible) forecast and -- as you -- if you follow it, it's trading at $1.35 or so, $1.36 more recently. So we'd characterize it as in the noise and not big enough to move where our guidance range stands.

Your next question is from Tim Ramey with Pivotal Research Group.

A couple of questions. First, on the margins [sort of] tracking down 100 plus basis points year-over-year. And you've detailed some of that. Is that how we should be thinking about second half? Or are there other things that we're not factoring in?

I think the margins are largely consistent with the exception of some timing favorability and SG&A that won't repeat. So if you look at our guidance, it doesn't -- it's closer to the average of first and second quarter than it is just the second quarter.

Got it. And on the combined side dish business. I understand where you're trying to go with cost side changes. Is there anything that you would highlight relative to either revenue synergies or revenue decrements? I mean, sometimes when you get 2 businesses put together, a brand manager will decide they're going to deemphasize one brand over another. And 1 plus 1 doesn't equal 2. Any thoughts on that?

Yes. No, I don't see that exposure because our 2 brands play in meaningfully different niches with each of the brands being a smaller component in the other party's niche. For instance, Bob Evans really has a strong share in refrigerated mashed potato, whereas Simply has a very significant share in cut potatoes. So one plays in the dairy case as a breakfast daypart, the other in the refrigerated or meat case as a side dish for the dinner daypart. So we don't expect there to be any meaningful revenue decrement. And we think that by integrating them and having multiple price points across the category, we actually have some revenue opportunities.

Good. And then just on the refrigerated, trying to kind of relearn that business now that you recasted in terms of its seasonality. Would we normally expect the June quarter to be weaker than the March quarter in the new presentation for refrigerated?

Yes, primarily Easter and the holidays are the peaks, so Christmas and Thanksgiving holiday.

Right. So sequentially, it's a little weaker in the third quarter?

Right.

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

So I just have a question. One is can you talk about your capital spending and what return you'll expect from that over what timeframe?

So the key capital spend that I think you're asking about is this sort of planned [previously mentioned]. And we would expect a very attractive premium M&A type of return on capital in the mid to high 20s. The other significant source of capital that we're spending is on cage-free, and that's a bit lower because there's an element of requirement in order to do that -- in order to maintain our share position.

And then just on the idea that you decided to buy back stock and increase your leverage, how has leverage changed or made it difficult for you to operate within your confines? Has it limited you in your ability to operate in order to -- or ability to spend CapEx or do anything and operate? Does it limit you and how does it limit you?

Yes, I would tell you that in the time that we have been an independent company, there's not a single decision that has been affected -- a single operating decision that has been affected by leverage. There's not been a single capital investment that has been deferred by leverage. The only area that leverage implicates is structuring M&A. And given the very long timeline, we are extremely comfortable with the way that we would handle all the reduction in leverage at the appropriate time. And when I reference timeline, I mean, until we have an amortization, which again is not until 2024. I also want to just back up on something you said in terms of decision to increase leverage. The way we are approaching this is we're not increasing leverage. What we are doing is slowing the rate of decline in leverage by using P&L-generated cash for a purpose other than deleveraging. So we are not using our balance sheet to buy back shares. We're using our P&L to buy back shares. And that's, I think, a very important demarcation because, again, what we're doing is changing the rate of deleveraging, not increasing leverage.

Okay. And another question is, after -- hypothetically saying that the -- I know you haven't been that satisfied with your valuation. But let's hypothetically say you sell the Private Brands and the valuation kind of stays where it is right now. What would the next course of actions would you take to create shareholder value outside of operating the business? And can you discuss the different permutations?

Yes. I mean, I don't think we're ready to answer that with any degree of specificity right now. We have. As you can imagine, a number of scenarios that we would explore and are always considering. But now is not the time to do anything. What we want -- or to talk about anything. What we want to do is execute on Private Brands, continue to deliver on our year, continue to deliver through '19 and then always evaluate portfolio composition.

And then my final question is, what management changes are you making at Weetabix? And what's the timing of that?

Are you referring to U.K.?

Yes, please.

That has been done. So the management changes were made several months ago. So we think we have the right management team, and they're performing nicely.

Your next question comes from Bill Chappell with SunTrust.

Going back to Weetabix. Just trying to understand how much of this was a surprise? Or how much was this you kind of expected as you're going to through due diligence about a year ago? And just trying to understand I certainly wouldn't expect this to be a Dymatize-type situation. But just trying to understand if there's other things we should be looking for or this was not outside of the realm of possibilities when you bought the company?

So I would say it's fundamentally not similar to Dymatize. This is a degree of optimization, not a fundamental change in the quality of the business. I think that the -- when you look at the history, the last couple of years, there had been a decline in average pricing and then average pricing flattened between '16 and '17. And I think that we had maybe gotten too much comfort around the fact that, that flattening was sustainable and it took another dip because of the introduction of a larger box size that was then heavily promoted. So I think it was an inflicted -- self-inflicted wound coming at the end of, I think, '17. And as it relates to trying to drive volume with bigger box sizes overpromoted, which basically just traded dollars between pack sizes and base versus promoted. So the volume of the biscuit category is unchanged. Our share of the biscuit category is unchanged. I think we made a self-inflicted mistake on promotional strategies that can be remedied. And I think that qualitatively, there's no change in the business. In our diligence, we understood that there were some risk around the ERP limitation that they made at the end of calendar '16. Some of that came home to roost in the form of some inventory that aged out because of just the disconnect between the visibility in the new ERP and the way that it was being implemented. So those are some onetime charges that won't be repeated as we work through or -- and as we have worked through better understanding of the utility aspect of the ERP system. So we feel -- we hate starting with a miss, but we feel like qualitatively, there are no fundamental changes in the assumptions and that this will be a solid investment. It'll take a year to correct some of these things.

Okay. And then switching to Private Brands. I mean, I understand the dual process. But you're still expecting to have some decision, I guess, or some action by fiscal year-end? So at May 4, shouldn't we have a pretty clear idea in the near future which way it's going to go? And I mean, would we expect to see some kind of announcement between now and the next time you report?

Yes.

Your next question is from Brett Hundley of Vertical Group.

If I can, I'd follow on the question on Private Brands with the potential to get another comment just related to -- given some changing people and views within the private label industry, it seems like there could be some potential assets out there on the market during the next 6 to 12 months. So just 2 questions. I mean, one, does this complicate any potential sales effort of your Private Brands business? And then, two, does this add any desire to spin your Private Brands business just such that it can create value by potentially rolling up additional assets?

Well, I'm not entirely sure which of the variables in the market you're referring to. But just generally let me answer by saying that underlying our desire to do this and frankly, what we're seeking to do is just to reconfigure ownership of Private Brands so that we have an ongoing participation, whether that's in a private transaction or a public transaction, and allows us to participate in an area that we think is rich with opportunity. And that opportunity is created by change. It's created by change at the retail level. It's created by change in the manufacturer level. It's created by change in ownership of some of the manufacturers. So I think that the things that you're referring to all are predicates for the decision to make this move and allow us to more rapidly act upon some of those opportunities. Does that answer your question?

Yes, it does. I think there's only so much of an answer you can give, but I just wanted to run the thought by you. I also wanted to ask you about your foodservice efforts as it relates to BOBE. I think your ERP system is in, at least as it relates to foodservice. And you guys have walked up cost synergies on this business. But what might be helpful for me is just getting some type of a hypothetical from you on what the refrigerated foods market opportunity could be from a dollar standpoint just as it relates to the pursuit of foodservice opportunities at BOBE. Can you talk about that at all?

So I'm shying away from anything that really starts to get into guidance for '19. But let me just share with you qualitatively that if you look at the development of the Michael Foods portfolio, it is built around -- and I'm speaking of the foodservice portfolio. It's built around the conversion of customers from shelled eggs to value-added eggs. And the same opportunity is what drives the opportunity in foodservice potato, which is to drive customers up the value curve from the -- from fresh potatoes to value-added potatoes and then degrees of value-added potatoes. So if you look at the evolution of Michael and the egg business and then adjust for category size, that's the nature of the opportunity that exists on the potato side.

Appreciate that. And then my last question is, you guys called out -- if I heard you right, you guys called out a potential drag next year from opening that new Michael plant. Do you have an estimate for what that drag might be? And wouldn't it be more of a fiscal '20 effect versus a fiscal '19? Or am I wrong about that?

No. So I didn't mean to call out a drag on Michael as a result of that. We have some capacity limitations that will make our incremental volume in our highest value-added category a little less profitable next year, not the base business, but the incremental business as we rely on co-packing. But the planned capacity expansion should come on towards the end of the '19, beginning of '20 and be considerably margin-accretive. So just to be clear, there's no drag on current earnings. It has some potential to have a margin impact in the very near term until the capacity comes online.

We have reached our allotted time for questions. I will now turn the call back over to Rob Vitale for any additional or closing remarks.

Thank you again for joining us. We feel good about the quarter. We feel good about the balance of the year in a challenging environment. And we, of course, look forward to talking with you all again in August.

Thank you. This does conclude today's conference call. You may disconnect your lines at this time, and have a wonderful day.