Post Holdings Inc (POST) 2021 Q1 法說會逐字稿

Welcome to Post Holdings First Quarter 2021 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 p.m. Eastern Time. The dial-in number is (800) 585-8367, and the pass code is 1539554. (Operator Instructions)

It is now my pleasure to turn the floor over to Jennifer Meyer, Investor Relations of Post Holdings for introductions. You may begin.

Good morning and thank you for joining us today for Post's First Quarter Fiscal 2021 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.

The press release that supports 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.

Good morning. Thanks, Jennifer, and thank you all for joining us. The year started with a quarter very much in line with our expectation, and the first half is shaping up in the same manner. Our expectation remains that EBITDA will dip in Q2 and will accelerate in the second half versus the first half.

After I briefly review the business, I will share some additional color regarding our expectations. Our U.S. cereal business had a solid quarter. However, it was hampered by supply constraints. During November and December, our COVID absenteeism at our Battle Creek facility required us to temporarily suspend production for 1 building. In fact, this resulted in a highly publicized Grape Nuts shortage. Production was also suppressed on Honeycomb and peanut butter products. We are back to full production, but it will take through early spring to restore inventory levels. We estimate the first quarter impact was a loss revenue and adjusted EBITDA of approximately $10 million and $6 million, respectively.

Longer-term, COVID has revealed some areas in which we can improve supply chain effectiveness and efficiency. The demand surges and the supply pressures are testing our demand planning and production planning. These learnings are constructive, and we expect to emerge from COVID with improved processes. While most pronounced at Post Consumer Brands, supply chains across the company are learning and improving from the experience.

For some time, we have sought more fundamental cereal category innovation. While quite early, I am cautiously optimistic about 2 of our efforts. Premier Protein cereal has launched with great success at limited distribution. This launch combines our heritage strength in cereal with our competence in protein and, we believe, delivers great-tasting cereal with high protein. Second, we have launched snacking products, which leverage our iconic brands into more rapidly growing dayparts.

Weetabix continues to perform exceptionally well. COVID has helped the category, and Weetabix has gained share in the category. Similar to the U.S., we have an intriguing innovation pipeline that we will soon introduce.

Our core refrigerated platform, the Bob Evans side dish business, continues its rapid growth by increasing consumption dollars 21% over last year. Volume grew a healthy 11%. Meanwhile, our retail branded egg business also turned in a solid quarter, with volumes increasing 13%.

The weak spot remains our cheese business. In addition to commodity price volatility, production delays from a co-packer resulted in lost sales volume.

BellRing will be holding a separate call. The business continues to rapidly grow as a core ready-to-drink franchise. Transportation costs accelerated faster than expected and pressured gross margins. We expect to mitigate the margin pressure in Q3. Further, we are excited to share that Dymatize too is growing nicely. You will have seen BellRing reaffirmed its guidance for the full year.

In 8th Avenue, we continue to be encouraged by recent trends. Like several of our categories, peanut butter is supply constrained. We also expect 8th Avenue to be more active in looking to add to its portfolio.

That leaves Foodservice, which is born in the front of the COVID burden. We had an encouraging quarter in that there is a near-perfect correlation between our increased demand and the loosening of COVID restrictions. As expected, late in the quarter, restrictions tightened in many key markets across the country. That pressured demand early in Q2, with an expectation that it reverses entering Q3.

Because of the reduced demand, noncontracted pricing is generally weak, therefore, the EBITDA decline remains more than linear to the volume decline. Category capacity has not expanded. In fact, it has modestly declined. Therefore, we expect this will reverse with demand recovery.

Finally, the quarter saw the beginning of what has turned into a rather substantial run-up in commodity costs. Our pass-through pricing model captures this increase, but there is a lag between the cost change and the pricing change. Jeff will speak more about this.

In terms of recovery, we remain highly confident across the channels, with the possible exception of business travel. We expect business travel to lag recovery in other segments. So to summarize, we have a growing confidence in demand recovery and its implication on profitability, but we remain cautious in trying to estimate the timing of the full recovery.

With respect to capital allocation, we have been quite active. This quarter and continuing into the second quarter, we were aggressive in repurchasing shares. We also announced 2 tuck-in acquisitions that we expect to be highly accretive. Both have since closed.

As I mentioned last quarter, there seems to be more opportunities available than since the pandemic started, and we have an interesting pipeline. I want to close with some comments on our outlook. We have -- we gave first half outlook in November and continue to expect to deliver on it. The implied sequential decline from the first to second quarter was planned. We continue to expect the second half to materially outperform the first half. The 2 key drivers of this cadence are: first, BellRing's normal quarterly promoted pricing fluctuations and the timing of its marketing spend, the results in Q2 being a slow point, with the second half materially more profitable; and second, our planning assumed Foodservice would dip in the second quarter as a result of tighter COVID restrictions during the winter months.

We expect even the limited rollout of the vaccine, along with more favorable weather, will drive material improvement to each of quarters 3 and 4. The more effective and rapid the vaccine rollout becomes, the more material we expect the improvement to be. Again, this is entirely consistent with our planning assumptions. The increase in grain prices exceeded our short-term expectations, but we plan with sufficient conservatism to allow for this type of short-term volatility.

In closing, we expect to meet our targets for the first half. And with the additional clarity, we hope to have -- when we announce second quarter, we intend to then provide specific second half guidance.

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

Thanks, Rob, and good morning, everyone. Consolidated net sales were $1.5 billion, and adjusted EBITDA was $284.4 million for the first quarter. Although the COVID effect was less pronounced when compared to prior quarters, each of our businesses continues to be impacted by COVID dynamics.

Starting with Post Consumer Brands. Net sales grew 1% with volumes -- with -- while volumes were flat. Favorable mix drove a 1% improvement in average net pricing. Legacy Post branded cereals had a great quarter, with sales up 9% in the aggregate. Partially offsetting these results were declines in private label and government bid business as we intentionally exited certain low-margin business as well as softness in licensed brands and Malt-O-Meal bag cereal.

Adjusted EBITDA increased 3.6% compared to prior year, reflecting the net pricing benefit and SG&A reductions. Offsets to this growth were manufacturing inefficiencies, inflation in raw materials and freight and increased COVID-related compensation, screening and PPE expenses. And as Rob discussed, Post Consumer Brands results were achieved despite COVID-related shutdowns and employee leaves at our Battle Creek facility.

Weetabix net sales increased 11.8% over prior year. This reflects 8.3% and 0.7% improvement in volume and average net pricing, respectively. Volume growth benefited from increased at-home consumption, particularly for cereal biscuits. We also saw solid growth in extruded product sales, private label and exports. The export growth was partially driven by shipments that accelerated ahead of Brexit. A stronger British pound to U.S. dollar exchange rate resulted in an approximate 280 basis point tailwind to the net sales and adjusted EBITDA growth rates.

Overall, Weetabix segment adjusted EBITDA increased 16.9%. Our Foodservice business continue to be significantly impacted by COVID, with net sales and volumes declining 16% and 20%, respectively. Our acquisition of Henningsen Foods was a slight benefit to these results. Additionally, volumes benefited approximately 370 basis points from our participation in government-backed food initiatives such as the USDA Farmers to Families Food Box Program. Our participation in these programs largely came to an end in November.

The overall foodservice declines continue to reflect lower away-from-home demand in reaction to COVID. Our volumes continue to be highly correlated with the degree of restrictions imposed on consumer mobility and gathering. As the first quarter progressed and COVID counts and restrictions increased, we experienced a corresponding decline in demand, which continued into January. We continue to anticipate a full recovery will likely take through fiscal 2021.

Adjusted EBITDA declined 46.3% to $40.4 million primarily resulting from loss profit from reduced volumes as well as unfavorable pricing and mix. In addition, our egg business began to face headwinds from the timing of commodity input costs versus the timing of repricing grain-based sales contracts. Until grain prices plateau, we will face these headwinds, in particular, in our second fiscal quarter.

Refrigerated Retail net sales and volumes increased 5.3% and 1.1%, respectively. Side dish volumes grew 13%, reflecting strong growth for both Bob Evans and Simply Potatoes. Partially offsetting this growth were declines in egg, cheese and sausage volumes. Overall net pricing improved, reflecting favorable mix, targeted side dish price increases and higher branded cheese pricing.

Growth in sales and volumes led to an 18.3% year-over-year improvement in Refrigerated Retail segment adjusted EBITDA. Higher side dish manufacturing costs, freight inflation and higher sale input costs were offsets to this growth.

BellRing net sales increased 15.7%, and adjusted EBITDA increased 3.6%. Premier Protein sales increased 17.4% driven by distribution gains for both existing and new products and incremental promotional activity. Dymatize net sales increased 16.2% driven by distribution gains. You can hear further detail about BellRing's results on their conference call later this morning.

Turning to cash flow, we had a strong quarter, generating $114.5 million from operations, including $23 million from BellRing. We had favorable working capital trends and benefited from the timing of interest payments, which are lower in our first and third quarters. Our net leverage at the end of the first quarter, as measured by our credit facility, was approximately 5.7x.

During the quarter, we repurchased 1.7 million of our shares at an average price of $93.43 per share. Between January 1 and February 3, we acquired approximately 800,000 additional shares at $97.48 per share. On February 2, we received a new Board authorization for up to $400 million in share repurchases. This replaces our prior remaining open authorization.

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

(Operator Instructions) Our first question comes from the line of Andrew Lazar of Barclays.

I guess first off, Rob, I'm curious, is there any reason to think that margins in the Foodservice segment would be sort of structurally different, either higher or lower, when demand returns to prepandemic levels? Because I heard you kind of discussed supply chain learnings really across all of the segments in the business. And just trying to get a sense if there's any learning, specifically in Foodservice, that make you feel that maybe there's some opportunities on the upside when ultimately demand returns.

Yes. I think there are some puts and takes. I think that we have had some learnings that will improve our supply chain. We have continued to invest capital to drive productivity. And we continue to see, as I mentioned, some modest decline in overall category capacity.

However, on the other side, on the demand side, this gets a bit crystal ball-ish. The most likely scenario would be that the customers that gain share as a result of the pandemic are the larger chains that tend to have better volume pricing. So there may be some offsets on pricing that are matched by improvement on cost. Where that exactly balances out yet, it's a bit early to predict, but there are certainly some puts and takes.

Okay. And then I guess, year-to-date, as you talked about, Post has already bought back, I guess, roughly maybe 4% of its shares, and that follows the purchase of around 8% of the shares in fiscal '20. And obviously, share repurchase sometimes can be viewed as sort of a benchmark right against which other capital allocation decisions are measured. I guess are these actions more a reflection of a challenge in finding significant opportunities for other uses of capital, not overlooking the 2 smaller acquisitions which closed recently, or simply the higher potential return you see from your own shares at this point?

Well, as I think we've talked about on prior calls, we think of it as a hierarchy of decision-making. And one is, have we vetted all the internal opportunities for capital expenditures. Assume that, that is a yes. And then is there a compelling need to deleverage? Assume the answer to that is no. And then how do multiples compare for opportunities that are external versus opportunities that are internal? And what I would share with you is that when we're that active in buying our shares, I think the assumption would be that the multiple is much more attractive on an internal than an external basis. That does not mean that there aren't interesting opportunities abound. It means that there is some multiple disparity that we're not ready to address, and we may need to look at more creative solutions if we want to advance more structural M&A.

Our next question comes from the line of John Baumgartner of Wells Fargo.

Rob, I wanted to ask, just big picture. During the last couple of years, Post shifted its focus from bolting big platform on to the core to more of a focus on organic growth. Now we're seeing the extension of Pebbles from cereal and to Dymatize, Premier into cereal. You mentioned some forthcoming activity at Weetabix U.K. as well. So it seems that the integration and collaboration is much tighter at this point. So not sure if I'm reading into it too much, but can you speak to this as an insider? How are you changing or tightening the sharing of market analytics and idea and segmentation internally across the businesses?

Well, I think if you reflect on the way Post is organized, we think about it as a bit of a hub, with the operating companies being the spokes. And in order for there to be good collaboration across the organization like that, a certain amount of trust and relationships have to develop, and that takes time. So if you look at the period from 2013 to 2017 or so when we were pulling this together, it was a pretty steady flow of new faces and new businesses. And there was step 1, which is get to know those businesses, make sure we understand the strengths and weaknesses over time as opposed to just in the rush of diligence.

And then the next more nuanced phase is trying to find those peer-to-peer opportunities to collaborate, which you've just described. And I think it's a really significant opportunity for the business to work together to leverage where we have strengths and mitigate where we have weaknesses across the business. And I think that's one of the real nuanced upsides of the portfolio that we've built. And I couldn't be happier with the way some of these brands are crossing the portfolio, specifically the ones you mentioned with Fruity and Cocoa Pebbles now being the fastest-growing protein powder in the country and the comment I made about Premier Protein cereal, which, again, while it's early, I'm very optimistic about.

Great. And then Jeff, just one for you real quick. You mentioned some expenses for PP&E in your prepared comments. How are you thinking about the year-on-year COVID expense really as you get into the back half of F '21 or even thereafter? How much of the expenses do you think are temporary versus more permanent in nature?

Yes. The magnitude of the cost that we incurred this quarter were in the neighborhood of about $5 million for those sorts of things. But about half of that was for labor-related costs. And I'm excluding the commentary that Rob had about the Battle Creek profit, by the way. So this is incremental to that. So about half of that cost was for things like PTO for people who are either quarantined or sick and for overtime for people to replace those lost hours. We would expect, obviously, that sort of thing to go away when we get to more normal times. But the remaining, call it, $2.5 million or so that related to PP&E or other cleaning costs and those such things are likely to be more permanent in nature.

Our next question comes from the line of Bill Chappell of Truist Securities.

Rob, I'll ask both questions on one sentence you had in your prepared remarks. Can you talk a little bit more about what highly accretive means for these recent acquisitions? Any more learnings or synergies or thoughts like that?

And then maybe give some more color on highly interesting pipeline of deal activity, just kind of -- not necessarily that you're going to talk about what you're going to buy next. But are you looking more or less in foodservice? Are you looking more or less in retail? So just trying to understand if your focus has changed as it has been over the past kind of year as valuations have moved up and down.

Yes. So I would characterize the highly accretive as opportunities in which we're buying well below the Post multiple. And that's a result of purchase price and synergy realization. It also includes some tax benefits. So significant discounts to where Post is trading.

In terms of the current pipeline, as you point out, there's not much that I really can say. But what I can tell you, from both a quantitative and qualitative perspective, is that it is increasing. I think there was a period of time during the pandemic when either inbound or outbound M&A was perceived reasonably so as a distraction from our core objective, and in this context, our meaning across the industry of just making sure that we were delivering on our base commitment. So M&A was not particularly forefront. And I think that sense is passing. So this year, quantum of opportunities is increasing. And in terms of qualitative, the opportunities that we're looking at are near in -- because of the answer that I gave about the hierarchy of our M&A decision-making, if we're going to look at M&A right now in a traditional structure, it tends to be closer to some component of our business where we can drive operating synergies and get that multiple where it needs to be to justify the investment.

Our next question comes from the line of David Palmer of Evercore ISI.

A couple of questions on food. A couple of questions on that Foodservice business. Could we go through that mix again in terms of channel? You have some major chains like Starbucks and Dunkin', they're adding units. And one would presume that they will have more of a full recovery and perhaps more immediate, and then you would have some other channels, perhaps travel-related that might have a longer recovery, and then some other stuff in between. Perhaps you can give us some dimensions of that mix.

Yes. The bigger channels -- we've historically talked about there being 4 broad channels that are affected by COVID: full service restaurants, quick service restaurants, education and travel and lodging. And the first 2, we expect to come back reasonably quickly and strongly. And when we say quickly, the implication should mean in correlation to vaccine deployment and mobility restrictions being lifted. So whether that's quickly measured in time from today or not, we're less confident on it, really means quickly in terms of response to some intervention.

Then the third channel, of course, is education, and we've talked historically about that being binary -- excuse me, those first 2 are roughly in tandem, about 30% of the total affected channels. Education is another roughly 10%, which is binary. Again, we've talked in the past about kids are going to be back in school or not in school and are -- I think it's fairly obvious. We believe that they will be back in school at some point. Exactly when, again, it's a question mark. And that leaves 10% to travel and lodging. And travel and lodging is a fairly big category or a fairly big definition in that it includes things like cruise lines, leisure travel, casinos, and then it also includes business travel and extended stay in full-service hotels and motels as well as airlines. We think that's the most susceptible channel to some longer-term structural weakness.

Makes sense. And with regard to egg prices, I have a feeling I could be educated here as well. Last year, I remember there was an egg price spike that happened in the spring so you'll be lapping a spike. And you were mentioning in your prepared remarks that there was -- that you'll be dealing with a bit of a pinch in terms of timing on pass-through. Could you talk about how that will play out? And perhaps any magnitude in terms of how you're thinking about margins from an egg pricing standpoint?

The -- I'm not going to specifically comment on margins in Foodservice right now because they're fairly volatile. With demand moving around as much as it is, it's quite difficult to bucket the real range of margins. What I would share with you is that we feel very confident in our range of estimates in aggregate. But there could be some continued meaningful volatility in Q2. And then hopefully, that Q3 and 4 is a much more steady state progression upwards as we get a return to normalcy.

Jeff, anything you want to add to that?

I don't know if your question is referring back to our remarks. But just to give a little bit more color around the pricing model for the majority of our contracts, the way it works is we have a repricing every quarter. So the beginning of every quarter is based on a 90-day look back. It's based on the prior quarter's second month. So to put that more specifically, the prices that went into effect on January 1 were based on a 90-day look back from September, October, November. So that drives how we pass-through the cost. And obviously, as there's volatility either up or down in grain prices, that can either be a good thing or a bad thing, depending on which side of the -- which side of that curve you're on at a particular quarter.

The other thing I would say is it's pretty common for prices of bags to go up in the spring because of Easter. There's a seasonal spike because of Easter. Whether we see that this Easter or not is obviously hard to say given the pandemic situation. But in normal times, you'll see that spike every spring.

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

A couple of questions. So first, I think your side dish business had some supply chain disruptions pre-COVID. Have you worked through all those kinks? Is your supply chain humming on both sides of your cold chain business?

No. We continue to see a fairly significant labor shortage that we're continuing to -- having to manage around. It's a combination of location. There's some impact of COVID. I think there's some impact of simply lack of interest in some of these entry-level positions. So we're still having some workarounds to be dealt with across the cold supply chain.

Sounds reasonably transitory, though. I think pre-COVID, you actually had some machinery equipment issues. Am I right?

Pre-COVID, we had some installation issues that were -- yes, some discrete miscues that have been dealt with. These are transitory, but they could take a while to work through just as we get through that. The unemployment benefits are creating a bit of dislocation in the employment markets. So we're working through some lack of interest right now that were -- that are resulting in some pretty significant open positions. But as you say, we will work through that.

You report your cold chain business through 2 segments: retail and foodservice. Is there any reason to view them as 2 separate businesses? Or are they effectively fully integrated, with just 2 different selling arms?

No. I think it's fair to say there are 2 separate businesses that share what is largely a transportation and warehousing network. We are actually moving the manufacturing functions more closely aligned with each of the businesses. They have shared some manufacturing. But what we're trying to do is make the manufacturing very responsive to the individual business objectives and then get leverage where it's highly scale sensitive, specifically around the logistics network.

And do you think both of these businesses are being fairly valued within Post and how it's trading today? I presume the answer is no, given your aggressive share repurchase activity. And if the answer is no, why not pursue more aggressive strategic activity to unlock that value?

Well, I think that specific elements of value are not something that we talk about in a public forum and would tell you that our actions are probably the best indication of our opinions. And I think with respect to the second part of your question, we are always exploring different ideas. There are ideas that make a lot of sense on a blackboard that have some operational execution issues. And this is a constant work in progress. And I would not exclude any of those opportunities from the realm of possibility.

Our next question comes from the line of Chris Growe of Stifel.

Just had a question for you, first, on -- kind of follow-up on the cost inflation. I think you addressed cost inflation for the eggs -- egg business and the structure of that business. I was just curious about cost inflation for your retail businesses. And perhaps you could discuss hedging and generally -- and kind of where -- when do you expect to start seeing those costs? And then do you think you can price to that cost inflation? Or do you expect generally to see that pricing come through in those retail businesses?

So inflation is fairly apparent across our portfolio right now as you would expect. And within our grain complex, we've got good coverage through -- for the most part, through the balance of this year. And the implications of inflation are more oriented towards how we think about pricing, trade and cost reduction in fiscal '22. We would expect to be able to protect that inflation. Exactly how we do it at this point, it is too early to answer.

Within the cold businesses, as Jeff talked about, it somewhat adjusts within foodservice and within our Bob Evans franchise. We continue to be aggressive in making sure we protect margins from inflation in the same way as I just talked about with our cereal business, but the 1 segment of that, that is much more trade sensitive is our sausage business. We use a trade tool to manage up and down short-term swings in sales, which really can't be hedged.

And then within the dairy franchise, we've seen some pretty significant inflation as well. You'll hear more about that a bit later, but we, again, would fall back on the same tools. We're going to look at freight pricing and cost reduction to make sure that we've got the margins protected long term.

Okay. And then just a follow-up question from an earlier question on acquisitions and on capital allocation. And you certainly are holding a lot of cash today and depending on how you use that cash, it certainly could push up your debt levels overall. I think Jeff cited debt-to-EBITDA around 5.7x today for Post overall. Is there a concern with that going over 6, for example? I'm trying to pick a number there, but just trying to get a sense of where you're willing to push the balance sheet to take advantage of any short-term dislocation or opportunities you see with, say, buying your stock back.

Yes. So I think I've made these comments before that maybe more than most, we make a distinction between leverage and liquidity. So clearly, we are very liquid. We are also somewhat leveraged. The solution to being a tad higher leverage than historical is not so much to change our capital allocation but to change our recovery -- not to change our recovery, but deliver upon our recovery. Because the reason the debt has crept up is -- well, the debt has not crept up, the leverage has crept up, is because of the weakness in foodservice year-over-year. So once we cycle through that and start to show EBITDA growth year-over-year, that will organically come down. We're confident enough in that outcome that it does not cause a great concern for us right now, but it's obviously something we very aggressively manage and monitor.

Our next question comes from the line of Michael Lavery of Piper Sandler.

I just was hoping to get a little bit more color on some of the thinking on the first half guidance. I know you've given some of that. But nice first quarter, and then you've held the full half, and I think you called out grain cost as one watch-out for the second quarter. But just curious how much there may be some conservatism in your thinking there. Or what else, if anything, should we have in my mind as a potential watch-out?

Well, in my prepared comments, I went through really the areas that we would attribute the sequential decline, too. And those are -- BellRing has a natural cadence. The first quarter tends to be very strong as we ship into a new year, new you. The second quarter tends to lag the first quarter. So a portion of that is simply the cadence of the BellRing quarter.

The balance of it is really specific to foodservice and directly related to COVID in that we saw and expected the highest incident rate to come with the coldest weather prevaccine. I think if you recall last quarter, I called out that our second quarter would be the most challenging to forecast simply because of all the ambiguity around where we are in COVID vis-à-vis infection rates and vaccine. That has proved to be true. The infection rates, of course, soared in November, December. And when that does, our volumes decline.

And then -- so one, BellRing; two, COVID restrictions; and then the third is the move in commodity prices was the one that was not baked into a planning assumption but we had enough conservatism to absorb. We feel very good about the balance of the half. And again, we feel confident in the acceleration into the balance of the year. In terms of how much conservatism is, I don't know. You're conservative, though you're not. We think it's the right approach, but we live in uncertain times, and only time will tell.

That's helpful. And just on your announcement with Hungry Planet. I was wondering if you could give a little bit more color there, maybe what kind of products that might involve. And any sense of the economics even just in a very high level like, for example, is it a situation where you get distribution revenue? Or is there anything more than that? Or how do we think about what impact that might have on the model?

Sure. There are 2 sources of economic opportunity. One is we wanted to have a plant-free offering for both our foodservice and retail business. We think that our -- both of our franchises in foodservice and retail need that offering. And it was a buy-or-build decision. It would have taken us years to get to where Hungry Planet was if we attempted to do it on an internal basis.

If you recall, we had previously mentioned a distribution arrangement with JUST Egg. So we're trying to make sure that we've got an appropriate, both defensive and offensive, posture with respect to the whole move towards plant-based proteins. So first, it's a distribution agreement on both sides of our retail and foodservice cold chain. Secondly, we made an equity investment, a modest equity investment in Hungry Planet. And we have a meaningful ownership position with the ability for that position to increase with a series of options if the opportunity proves to be valuable.

Our next question comes from the line of Rob Dickerson of Jefferies.

Just a question for you, Rob, kind of more broadly, just in terms of the kind of prior acquisitions you've done as of late and then kind of the go-forward pipeline and thought process. Obviously, kind of historically, you do still have kind of a protein tilt to the business, obviously, right? And you have Hungry Planet as you just mentioned. There's Peter Pan. I saw there's a small -- kind of smaller, more venture investment, PeaTos, and then Almark, obviously, as to -- still eggs.

So like if we step back and think about kind of where Post was even just a few years ago and where we are today, that protein theme is still existent and seems like it's getting bigger. So as you think kind of going forward, is that like really a part of the positioning and the strategy? I mean there's the plant-based side, but alternative, right, you have protein snacks, sounds like you might want to get more into snacks. I'm just trying to think about kind of what the broader go-forward strategy is and your positioning with the retailers.

Well, in each case that you highlighted, we were attempting to either add a capability or add something that was very close to the portfolio and could be tucked in at a very attractive price. I wouldn't characterize it as we sought to be more protein oriented or we sought to be any other more macro nutrient oriented. If we had an interesting opportunity in cereal or in cheese or in some other segment that shored up a weakness or expanded a strength at a reasonable value, we would pursue it. We tend to be more opportunistic than to say we want to be bigger in a particular macro nutrient or a particular segment. So we're much more value sensitive on that front.

The small PeaTos acquisition you mentioned, very, very small, well smaller than what was reported. And it's -- we have a notion that we want to be more entrepreneurial and realize we're not really sure what that means. So we decided to really -- to make a small investment in an entrepreneurial company so we could try to understand even what we mean by that. So I wouldn't read too much into that other than we are willing to pay some tuition in order to learn some skills. And that was what that was about.

Okay. Fair enough. Makes sense. And then just quickly, kind of back to the cost inflation/pricing potentially promotional topic. Just in terms of cereal, right, obviously, if cereal has done well through the pandemic, you continue to execute well. Business seems sound. Every company is speaking about trying to retain increased household penetration. But what does that mean, right? Is there more brand spend required to kind of retain that household penetration? Is there more promotional activity forthcoming kind of on the heels of some grain-related inflation? So how do you kind of foresee the back half of that year in terms of the competitive dynamic within the category and kind of how you execute through it?

Yes. I mean it's a tough question. I think that as we begin comping the COVID surge, I think it will be interesting to see how everybody across the food landscape reacts and whether there becomes pressure to try to accelerate that volume and be aggressive on pricing or just recognize that, that's going to be a tough comp to measure against. So I don't particularly worry too much about specifically what happens in the back half relative to our prior year. We're looking at the back half relative to the performance in the first half, which is what we've been trying to benchmark against so that we can see that the overall business is getting back to where we expect it to be.

I think the question that we spend more time on is following the totality of this 2-year period, what has the experiment and all this trial meant to the long-term growth rate of these categories. And our assumption is that it's a positive number. Whether that's a positive 1 or a positive 3, I think there's an element of putting your finger in the wind. But we think it's a positive number and has implications on how we think about innovation, capacity management and well beyond.

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

My first question is can you talk about your private label cereal business? You would think under a recessionary environment that there would be greater share that can be gained by private label. That obviously has not been the case if one could argue about stimulus checks, things like that. But how do you foresee that business emerging out of COVID? And to what extent does that either balance or cannibalize any part of the other businesses? Can you talk about that first?

Yes. I've said before that going into this, we would have expected private label to perform better than it has broadly, not just in cereal, and have speculated that there is a supply side equation here that as supply chains got tested, that private label was not able to maintain the same surge in output because of the SKU count that it's forced to maintain. So that to some extent, there is a supply phenomenon translating into what looks like a demand phenomenon. And I stress to some extent because there's a very persuasive counterargument that consumers are reverting to brands that they know, et cetera. But I would continue to contend that there's a meaningful supply side dynamic.

I believe that will pass and that the normal trends that drive private label will resume and that private label continues to have a perfectly reasonable outlook once it gets past this very choppy period of time. So we are no less interested in developing our private label business than we were, with the caveat that while we are demand constrained, we are making some choices to not participate in some of the more marginal private label businesses that Jeff referenced in our decision to walk away from in his comments.

Okay. My next question, and then I'll leave it here, is the cereal category seems to be almost aberrational across the packaged food group, right? They -- the cereal category continued to promote spend promotions despite probably the absence of needing to do it. They're going to face increased commodity pressure. How does that play out in a competitive set to be able to offset the pricing -- the input cost inflation in an environment where the competitive set seems to have intensified and, one could almost argue, maybe a little bit irrational? Can you talk about the category dynamics? And I just feel like it's aberrational relative to the other categories across basically packaged food.

Ken, it's a terrific observation, a great question and one that I have no intention to answer.

And ladies and gentlemen, we have reached the allotted time for questions. We thank you for participating in today's call. You may now disconnect.

Thank you all.