Brad Harper - Post Holdings, Inc. Robert V. Vitale - Post Holdings, Inc. Jeff A. Zadoks - Post Holdings, Inc..

John Joseph Baumgartner - Wells Fargo Securities LLC Andrew Lazar - Barclays Capital, Inc. William B. Chappell - SunTrust Robinson Humphrey, Inc. Christopher Growe - Stifel, Nicolaus & Co., Inc. Cornell R. Burnette - Citigroup Global Markets, Inc. Timothy S.

Ramey - Pivotal Research Group LLC Kenneth Bryan Zaslow - BMO Capital Markets (United States) Brett Hundley - Vertical Group.

Welcome to Post Holdings' Second 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 12:00 PM Eastern Time.

The dial in number is 1-800-585-8367 and the passcode is 12400165. At this time, all participants have been placed in a listen-only mode. It is now my pleasure to turn the floor over to Brad Harper, Investor Relations of Post Holdings, for introduction. Sir, you may begin..

Good morning, and thank you for joining us today for Post's second 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'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..

Thanks, Brad. And thank you for joining us to discuss our second quarter results. We previewed these results when we announced our Weetabix acquisition. This morning, Jeff and I will go into detail on the quarter and provide some information on how we intend to integrate and report Weetabix.

Our second quarter results were in line with our expectations, as Michael Foods Group adjusted EBITDA declined materially and was largely but not entirely offset by growth in each of our other segments.

In general, this year is shaping up as expected, with our cereal business moving into the final stages of the Post Foods-MOM Brands integration, our value-added egg business cycling over extraordinary comparisons, our protein business experiencing above-market growth, and our Private Brands business generating steady performance after a brief operational slip.

More specifically, with respect to each segment, Post Consumer Brands continues to execute on synergy opportunities and to build upon market momentum. This quarter, we continue to take actions to optimize our production and distribution network, and we expect to implement plans throughout the year.

Our initial network optimization effort resulting from the Post-MOM merger, will be completed early next year. Additional opportunities resulting from Weetabix will develop over a longer timeframe. As always, we remain focused on continuous cost reduction across the organization. Recently, cereal category trends have worsened.

This quarter, the category declined 3.2% in dollars and 2.1% in pounds. A more segmented analysis shows that in comparison to category averages, declines are most pronounced in the adult brands, about average in all-family brands, the kid cereal is growing in pounds with dollars flat.

Our consumption performance was strong with dollars increasing 1.1% and pounds increasing 1.4%. We grew both base and incremental consumption. Post dollar and pound share increased 19.2% and 22.1% respectively. Performance benefited from a promotional plan, more heavily weighted to the first half of fiscal 2017.

On a full year basis, we anticipate fiscal 2017 trade levels to be comparable with 2016. Pebbles and Malt-O-Meal bags each had a great quarter. Pebbles grew pound consumption 11.4%, driven by strong base turns, and Malt-O-Meal bags grew 8.1%, driven by additional items on shelf.

Honey Bunches of Oats consumption was pressured by distribution losses, but incremental pound consumption grew 8.2%, resulting from increased merchandising support. Great Grains consumption comparison remains negatively impacted by products discontinued in 2016. Our fourth quarter will be the first fully comparable period.

However, core Great Grains consumption performance was soft this quarter, with modest gains in base consumption performance, offset by incremental losses. Michael Foods performed as expected this quarter. We continue to expect to lap the impact of avian influenza during the second half of fiscal 2017.

Recall, we planned for a reduction in the Michael Foods Group EBITDA, resulting from an AI-driven imbalance of oversupply of grain-based eggs versus grain-based demand. Essentially, we are selling higher cost in grain-based eggs at persistently low market prices.

We now estimate the decline in this segment's EBITDA at the high side of our previous range of $50 million to $100 million, which has been factored into our guidance. Active Nutrition continues to show great growth, driven by Premier Protein shakes and bars.

The Premier Protein brand is driving category growth and we continue to see great potential for the brand. PowerBar continues to be weighed down by distribution losses, Dymatize has stabilized, however the specialty channel continues to be weak. Within Private Brands, second quarter results are burdened by co-manufacturer expenses.

We expect it to be able to in-source granola manufacturing for which we had undertaken a capacity expansion. We experienced a small fire that will delay the new capacity coming online until next fiscal year. At our nut butter and dried fruit and nut businesses, we have moved to address inefficiencies including eliminating unprofitable SKUs.

We're also narrowing our focus to less complex product solutions. Before turning the call over to Jeff, I want to preview some organizational changes and discuss our value creating algorithm. We are quite optimistic about our pending acquisition of Weetabix. It diversifies our portfolio with a leading iconic UK brand in one of our core categories.

It expands our presence in the world's second largest active nutrition market. It is the leading producer of organic and non-GMO, ready-to-eat cereal products in North America. It creates optionality for us in the UK and in Europe to grow organically and through M&A.

Upon closing the Weetabix transaction, Weetabix UK and Ireland will be a stand-alone business within our portfolio. And Weetabix's North American operations will be combined into Post Consumer Brands. Additionally, it's the right time to bring all our cereal brands under one unit.

With this in mind, we will also move the Attune Foods cereal and granola business into Post Consumer Brands. Attune and Weetabix North America are both tightly focused on the health and wellness segment of ready-to-eat cereal.

This will allow each business to share best practices, manage costs on a combined basis and leverage the capabilities and strengths of the combined business. Beyond the UK and North America, the Weetabix acquisition creates holding company wide scale in certain international markets.

In these key markets, we will create a consolidated presence to support resources in each market. In closing, I want to review our value-creation algorithm. Including Weetabix, we expect to consistently add 4% to 5% to our EBITDA and generate cash flow in excess of $400 million.

The impact of EBITDA growth and debt reduction produces a mid-teens long-term rate of growth and equity value at a constant multiple. Moreover, we hope to allocate capital to more attractive purposes than debt reduction. Over time, we will tend to invest in larger, slower-growing companies and smaller, faster-growing companies.

In this manner, we can maintain both the capacity to leverage our cash flow and the potential to grow it. With Weetabix, we will acquire a slow growth business with synergies and enormous amount of optionality. We will finance it without incremental equity. In fact, we are increasing our leverage and reducing our cost of capital.

The transformative diversification of our cash flow, including Weetabix, produces this outcome and enables us to continue seeking attractive investment opportunities. With that, I will turn the call over to Jeff..

Thanks, Rob, and good morning, everyone. Second quarter performance was in line with our expectations, with consolidated net sales of $1.26 billion and adjusted EBITDA of $228.5 million. Turning to our segment results, and beginning with Post Consumer Brands, net sales were $431 million, a decline of 2% compared to the prior year.

Total volumes declined 0.8%, resulting from decreases in lower margin, co-manufacturing and government-bid business. However, product mix improved, with strong sales volume increases for two of our four core brands, Malt-O-Meal bags and Pebbles. Volumes for our other core brands, Honey Bunches of Oats and Great Grains, experienced declines.

This primarily resulted from lapping the prior year Honey Bunches of Oats club promotion that did not repeat and the exit of certain discontinued Great Grains SKUs. As we move into the third quarter, we have now fully lapped the reduced co-manufacturing volumes and we will lap the discontinued Great Grains SKUs in our fourth quarter.

However, we will not lap the reduced government-bid business volumes until the end of the fiscal year. Post Consumer Brands' adjusted EBITDA was approximately $121 million for the quarter, and benefited from manufacturing cost savings, improved product mix, and reduced consumer advertising and promotion.

This was partially offset by a higher trade promotion rate. The trade promotion rate for the second quarter was in line with the first quarter rate. We continue to expect lower promotional spend in the second half of the year, based on the timing of our promotional activities.

Michael Foods Group net sales were $515 million, a decline of 12% on a pro forma basis. Egg volumes increased 2.4%, also on a pro forma basis. We continue to see delays in customers returning to value-added egg products, with the ongoing low market prices for shell eggs. This contributes to the imbalance Rob mentioned earlier.

Egg revenues decreased 11% as we continue to lap the impact of avian influenza pricing. We also continued to experience lower pricing to our market-based customers, in line with Urner Barry market prices.

As with the first quarter, cheese volumes declined significantly, resulting from the eggs at a certain low margin private label business in the fourth quarter of fiscal 2016. This quarter, we also experienced branded cheese distribution losses, and we saw general weakness in the cheese demand.

Michael Foods Group adjusted EBITDA was $79 million, and well below the comparable prior year period, as we continue to progress through the egg market recovery from AI.

Recall, we anticipated our second quarter year-over-year adjusted EBITDA performance gap in this segment would be greater than in the first quarter, and that turned out to be the case. We continue to expect the year-over-year performance gap to shrink during our third and fourth quarters when compared to the second quarter.

Moving to Active Nutrition, net sales were $177 million, an increase of 23% compared to the prior year. Growth in Premier Protein shakes and bars was partially offset by declines for PowerBar.

Dymatize branded net sales were up 2% from higher volumes, partially offset by increased trade spend resulting from lapping unusually low trade rates in the prior-year period. Active Nutrition adjusted EBITDA was $27.5 million and benefited from higher Premier Protein volumes and lower raw material cost.

This was partially offset by increased advertising and promotional spend across all three brands. Recall, the quarterly margins in this segment fluctuate significantly, depending on the timing of promotional activity and levels of consumer marketing spending.

We saw higher trade and marketing levels in the second quarter, and expect this to repeat in the fourth quarter. We continue to expect fiscal 2017 annual adjusted EBITDA margins in this segment to be in the mid to high teens. Turning to Private Brands, net sales were $132 million, an increase of 2% compared to the prior year.

Revenue benefited from growth in volumes of higher margin tree nut butters and organic peanut butter. Sales revenues were negatively impacted by volume declines for dried fruit and nut and lower net pricing for almond and walnut products related to pass through of declining input costs.

Private Brands' adjusted EBITDA was $16 million and benefited from the favorable nut butter product mix. This was partially offset by manufacturing inefficiencies in dried fruit and nut, and co-manufacturing costs in the granola business.

Before reviewing our guidance, I would like to comment on our operating cash flows and capital market transactions. Our cash flow from operations for the first six months of fiscal 2017 was significantly lower than the comparable prior year period. Current year cash flow was negatively impacted by three items.

First, we paid $103 million in legal settlements related to egg antitrust lawsuits. Second, earlier in the fiscal year, we paid above-target bonuses that resulted from strong performance last year. Finally, we experienced an increase in working capital, which was mostly driven by timing.

We expect the operating cash flow in the second half of fiscal 2017 to be considerably higher than the first half as a result of modestly improved operating performance and the absence of the aforementioned items. In fact, in April alone, we generated approximately $90 million of cash.

Moving to our capital market transactions, in mid-February, we opportunistically refinanced and extended the maturities for a portion of our fixed rate bonds by issuing $1 billion of 5.5% senior notes due in 2025 and $750 million of 5.75% senior notes due in 2027.

These proceeds were used in part to fund redemptions in March of all of our outstanding 6.75% senior notes due in 2021 and 7.375% senior notes due in 2022. For the aggregate principal that was redeemed, we achieved $12 million of annual reduction in our interest cost. In March, we amended and restated our credit agreement.

In doing so, we extended its term to March of 2022, increased the size of our revolver to $800 million (15:17), lowered the cost of borrowing under the facility and created greater flexibility within the covenants. Yesterday, we announced that we intend to raise approximately $2 billion in term loan debt.

We anticipate using these funds for both the acquisition of Weetabix and our tender offers for our 7.75% senior notes due in 2024 and 8% senior notes due in 2025.

Giving full credit for the second quarter and upcoming capital market transactions and the Weetabix acquisition, we expect pro forma net leverage as measured by our credit facility to be approximately 5.4 times and our quarterly net interest expense to be approximately $80 million.

At this net leverage level, we continue to have flexibility to pursue new M&A opportunities. Including with our outlook, we continue to expect fiscal 2017 adjusted EBITDA to range between $920 million and $950 million, excluding any contribution from Weetabix. With that, I would like to turn the call over to the operator for questions.

Operator?.

Your first question comes from the line of John Baumgartner of Wells Fargo..

Hi. Good morning. Thanks for the question..

Good morning, John..

Rob, I'd like to ask at the Michael business, what are your thoughts as to why demand has been so slow to respond there? I mean, I have to think that on a price basis, eggs really have to offer quite significant value relative to the proteins for the end-customers.

How do you really explain the demand softness?.

Well, the issue varies by channel. So in the ingredient channel, some of the demand destruction that occurred during AI as customers formulated away from egg has persisted. And that's taking longer to return and some of that maybe permanent, that of course is our lowest margin channel.

Within the balance of food service and retail, it's not so much that egg demand has weakened, it's during AI, when supply was just proportionally impactful on value-added eggs. Some of that demand has shifted to shelled eggs.

And with the relatively higher cost of grain-based eggs versus market-based eggs today, it is slower to return to grain-based eggs. So what we need in order to fully exit from the AI event is the normalization of pricing between the grain-based cost and the market cost, which is long-term an equilibrium that must be maintained.

So, once that's achieved, which we believe is a near to intermediate term event, we believe to see a reconversion back to value-added eggs on a grain basis as we've seen for so many years previously..

How are you seeing that business kind of track sequentially into Q3?.

In order to meet the guidance, it would be growth from Q2 to Q3, and that was consistent with our plan throughout the year. We had – always forecast Q2 to be the nadir..

And then, presumably, you should see on a year-on-year basis a benefit on the feed cost side as well, correct, between corn and bean meal?.

Yes. That reduces some of our cost on a grain basis and starts to shrink the delta between the grain-based cost and the market-based cost. In a normal environment, that would simply be a pass-through.

So, it might be helpful just to spend 30 seconds reminding everyone that, in a normal environment, we are somewhat indifferent to the cost of eggs because we sell 75% of our product on a grain-based formula and we procure 75% on a grain-based formula. Likewise, we do 25% on market both selling and procuring.

Where we are this year is because of the timing of recovery and supply. We are excessively supplied on a grain basis in a time where market prices are quite low. So, yes, the answer to your question is this year that will have a positive impact. In normal years, it's simply a pass-through..

Okay. And then just lastly as a follow-up, in terms of Weetabix. I mean, that deal is a bit different for you in terms of not having a platform to bolt it on (19:54) to really accentuate the synergies.

But, I mean, can you speak to any sort of operational improvements or just business process cost savings that would fall outside the scope of a traditional synergy bucket that you can kind of go after the first year to after this deal closes?.

Sure. Let me disagree with you a bit in that when you bring together Post Consumer Brands, Weetabix North America and Attune Foods, you have a pretty meaningful consolidation opportunity within North America. So, it fits nicely within our existing North American cereal platform.

In the UK, which is the second largest active nutrition market in the world, we expect that to be an attractive platform for expanding our Premier business into the UK, which is already happening. So we do believe there are some platform aspects of Weetabix that may not be self-evident.

Beyond that, we think that there are some opportunities to look at manufacturing processes specifically and maybe some distribution processes and share best practices between PCB and Weetabix that could be impactful to the margin structure of each business.

So, we look for cost reduction opportunities that would be, not necessarily typical synergies, but are cost reduction nonetheless..

Okay. Great. Thanks, Rob..

Sure. Thank you, John..

Your next question comes from the line of Andrew Lazar of Barclays..

Good morning, everybody..

Hey, Andrew..

Hi. Just a couple things, one quick one first. Unless I'm mistaken, I think you reported sales this quarter on kind of a pro forma basis, rather than maybe the way you had previously, which was sort of organic, and then sort of the impact of what net acquisitions and divestitures did.

Do I have this right? And I'm just curious, if so, what led to the change in how you reported it?.

We're actually reporting it the same way, but the terminology is different. And the reason is in response to an SEC comment. So pro forma, as currently in the press release, is what we used to call comparable basis..

Got it. So, comparable basis in previous releases had – you had made the adjustment in the year ago for what acquisitions had added? Okay..

Right. And we've continued to do that. The SEC took exception to the term comparable basis. They did not take exception to the actual math behind comparable basis. They just didn't like the terminology, so we changed it to pro forma..

Got it. Okay. Thanks for the clarification. With respect to EBITDA margins in Consumer Brands segment, up nearly, I guess, year-over-year, almost 400 basis points or so. And I guess, I assume there's a lot of, obviously, the MOM Brand synergy coming through and maybe not repeating some of the discretionary spend, I think, from last year.

I guess more importantly, at this stage, I guess, what you see as a sort of more sustainable margin level for that business going forward?.

I think we are at approximately the sustainable level, as we start to look into ways to try to grow the business. The tension between growth and margin will keep a lid on driving margin beyond this current point and maybe put some pressure downward..

Okay.

And last thing, just in Active Nutrition, I seem to remember – although, again, I could have this a little wrong, but you've talked in the past about getting that business up to a certain level of scale from an EBITDA generation perspective that would give you enough scale to think about, over time, strategic optionality with it, if you felt maybe that you either weren't getting the proper credit for that business and the growth opportunity and your current valuation, or other things.

And I seem to remember maybe it being kind of more like $100 million or so of EBITDA would give you that kind of scale. I could have that wrong, but if it's right, it looks like potentially, that's where you could be by the end of this fiscal year.

So I was hoping you could just comment a little bit on that, and let me know if I have that right or wrong..

You certainly have it right, that that is the way we think, in terms of viewing our portfolio as a dynamic one that we would look to try to create ownership where the ownership is most appropriately valuing the assets, whether that's a spin or whatever it may entail.

Whether that's a bright line $100 million EBITDA or something higher than that is less clear, and there are more facts and circumstances than simply the level of EBITDA. But I think, to the key point, that the growth in the business creates optionality that previously didn't exist is absolutely accurate..

Okay. Thanks very much..

Thank you..

Your next question comes from the line of Bill Chappell of SunTrust..

Thanks. Good morning..

Hey, Bill..

Rob, you were kind enough to say you thought there were considerable consolidation opportunities for Weetabix North America, yet I guess we're still sticking with $25 million of synergies on a $1.8 billion acquisition.

So, would you be willing to kind of expand on where you think there are further synergies? Is that number maybe a conservative number, just because it does seem, also with – even the announcements of bringing Attune and others under one roof, there would be more near-term synergy opportunities?.

No. We're not going to increase the synergy estimate today. I think that, as always, we tend to approach things from a conservative perspective and try to over-deliver where possible.

So, having just announced the deal three weeks ago, and are just now starting the integration planning, while we do believe there are opportunities that will fall out from this that are not anticipated, there are also likely some risks that will fall out that are not anticipated.

So, we want to approach this from a balanced perspective and be prudent in our estimates..

Okay.

But bringing Attune and all that under one roof, was that contemplated on the original transaction?.

It was. And we think that that affords more opportunity for better focus more than it does significant cost reduction because the manufacturing processes are considerably different..

Okay.

And switching to eggs, since you're talking today now that the year-over-year loss will be at the high end, does that mean, as we look at your full year EBITDA guidance, we should be focusing more on the low end or is it the full range still available to you?.

I would not assume that the difference between $50 million and $100 million necessarily ties to the low or high end. We had planned various scenarios, so I would answer the question by saying the entirety of the range remains within our reach or we would have brought the high end of the range down..

And I'm just asking that because, is there certain businesses – I mean, should we look at Active Nutrition is outperforming kind of your original expectations?.

For the year, I would characterize our – I mean, if you go back to the beginning of the year, I think our original estimate was 910 to 950 (27:29), and we said it was slightly skewed to the second half and that we increased the bottom. Year-to-date, we're at roughly $460 million of EBITDA.

So, I would characterize this as almost precisely on plan with a little bit of over performance elsewhere covering for a little bit of greater pressure on the Michael side.

But we have factored multiple scenarios into the guidance that allows us to meet the different levels in the guidance depending on a number of different variables that come into play..

Okay. And then, last one for me on Honey Bunches of Oats. You talked about some distribution losses.

Is that comes from the ancillary products off the Honey Bunches family or were you actually seeing some delistings of the core products?.

No. The former. We had overextended the brand into some noncore SKUs and what we're trying to do is really focus on the core SKUs and get better velocities on the core rather than have too many different phasings..

Got it. Thanks so much..

Thank you, Bill..

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

Hi. Good morning..

Chris..

Hi. I had just two questions for you.

First off and a bit of a follow-up, when you think about the upper end of the range for the Michael Foods egg EBITDA decline, does that require then an improved rate of pricing through the second half of the year? Is that incorporated in your guidance (29:00) main metrics we're looking for for that improvement?.

No. It implies a constant rate based on where we are now. So, we think we've got a reasonably cautious outlook from here..

Okay. That's great. And then, I wondered if you could characterize the EBITDA contribution from the egg business in relation to history.

Are we back to average levels, are we below average levels? Can you give any kind of color around that?.

We would be below average levels in dollars, but above average levels in margin..

Okay. Thank you. And then just one final one, if I could, which is in relation to the cereal business.

Are you seeing any inventory adjustments there, declines there at retail that are affecting your sales – retail inventory that is?.

Did you say in the cereal business?.

Yeah..

I did. I'm sorry. Yes..

No. We think our retail inventory is in relative equilibrium. The shipment difference between or the difference between shipment and consumption was more a function of measured channels and unmeasured channels, the items that Jeff mentioned around government bids and co-manufacturing..

Okay. Thank you..

Thank you..

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

Good morning and thanks for the questions..

Thanks, Cornell..

I just wanted to start off on the Michael Foods business, seems like within the guidance some of the current fundamentals in the egg market are pretty much expected to prevail over the course of the year.

So, in that context, I wanted to know kind of what drives maybe some of the sequential improvements that you have baked into your model for the back half of the year relative to what we saw on the second quarter?.

The imbalance that we had in the grain-based versus market-based supply-and-demand equilibrium was most pronounced in the first quarter..

Okay. And then on just kind of moving along through cereal. I think for the cereal volumes, you guys are down modest 0.8%. That's in sharp contrast maybe to what we've seen generally throughout U.S. food with a lot of weak volumes kind of coming through the sector in the first quarter.

So, I just wanted to know kind of how is Post able to (31:25)? I think cereal market share in Nielsen data was at least up 80 basis points over the quarter.

And so, where have you been sourcing share from in the category and maybe how sustainable are these results?.

Well, if we had a silver bullet, we would not talk about it here. But the – I think the reality is that MOM Brands is the one cereal business that does have some distribution opportunities whereas everybody else has a near ubiquitous presence. So, we're gaining some distribution as we talked about in the prepared comments..

Okay. And then, lastly on Active Nutrition, kind of going back to distribution, how much of that top-line growth is really just coming from distribution gains at Premier? Where are we in that process and is there any way that you can kind of size up the opportunities that you have for Premier and kind of the distribution within the U.S.

going forward?.

It's roughly half distribution and half incremental velocity. I think the category is still a relatively small developing category, so we see it to be a meaningful opportunity longer term..

Okay. Thanks a lot, and I'll pass it along..

Thank you..

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

Thanks so much. Good morning..

Hi, Tim..

Rob, you kind of started with comments on our key segment data, and I'm wondering if you think there is any inflection point here in the category more broadly or is this just a continuation of the steady glide path that we've seen for many years?.

I would say it's a modest increase in the glide path. We saw last year a bit better comp, and we're seeing a little bit worse comp.

I think if you look deeper and this information is available to everybody, so there's nothing terribly insightful here, is that pre-sweetened cereals are driven by household formation of households with children and the family size is smaller.

So, we are continuing to be stable in that category, but in smaller households and that the adult brands are declining as baby boomers leave the category for more protein-rich alternatives. So, the consumers who we need to focus on in order to completely stabilize the category are the ones who grow up on cereal and it's somewhat counterintuitive.

But the data is pretty clear and available to everyone..

Got it. And relative to Michael Foods Group, your discussion really sort of centered around the mix changed between value-added eggs and shell eggs. But the consistent backdrop to that business has been greater overall adoption of value-added eggs on menus in the QSR business.

Do you think that's not so much of a factor, say, in the next 12 to 18 months? Or are we maxed out right now with everybody is doing breakfast?.

No. I think quite the opposite. Once we have a more normalization between the relationship between grain-based cost and market cost, we will see a return to that long-term trend that you're referring to. Because from a menu perspective, it's just eggs.

From a product supply perspective, it's a value-added egg, which is significantly more cost efficient in normal environments than a shelled egg, and I'm mostly referring to the labor side of it.

So we expect, once we have more of a correction in the price, exiting the AI event, that the trend that was so strong for quite some time, five plus years, will return and that we should see a meaningful step change in our value added or our grain-based business after we get to normalization.

So the disappointing aspect of it this year is that prices have been stubbornly low and have caused the QSRs and some of the other food service customers to delay returns to grain-based value-added eggs after they were forced to move away from it during AI..

Got it. Okay. Thanks so much..

Thank you..

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

Hi. Good morning, everyone..

Ken..

Just to maybe continue on Michael Foods, but, I guess what I'm trying to figure out is, beyond 2017, how you guys set up for growth in terms of top-line and margins.

Do we reach a more steady state going into 2018 and beyond, and how do you think of that?.

Circling back on the question that Tim asked, we would expect to see a resumption of the long-term trend after a potentially more accelerated reconversion to grain-based value-added eggs. So, we think the original algorithm that attracted us to the company remains intact, albeit disrupted now for a multiyear period.

With respect to margin, as we said almost from the outset of the AI event, we expect to exit AI with a more profitable mix as our ingredient business emerges as a smaller percentage of our overall portfolio..

My second question is, you actually said in your prepared remarks that the Weetabix synergies will be longer term than that of the MOM acquisition. Was that – maybe, I don't know if I misinterpreted that it was longer term relative, or just that it was longer term because it's just after the facts of MOM (37:58).

I just wanted to make sure I understood the clarification of that..

The latter. The execution timeframe is very similar. It's just where we are in the process..

Okay. So, there's nothing to read into, okay.

And then my final question is, on the marketing and trade spending, did you say now, in 2017, it's going to be flat year-over-year relative to – was it supposed to be higher, or has that changed? Can you just discuss your marketing and trade spending going forward?.

So, the trade spending. What we commented on as the trade rate, which was higher in the first half for the year than the first half of the comparable period last year, does not reflect a shift. It's just a timing phenomenon where the calendar was more frontloaded this year. So, it'd essentially be the same.

With respect to some of the advertising spend, if you recall, last year, we stepped up the advertising expense considerably; we've brought it back down to a more normalized level this year..

Great. Thank you very much..

Thank you..

Your next question comes from the line of Brett Hundley of The Vertical Group..

Hey, thanks, guys. Good morning..

Good morning..

Question on cheese business dynamics within Michael.

Just curious if the sequence of events there, Q4, Q1 to Q2, if it concerns you at all? And can you give us an idea of maybe how to think about the drag on segment profitability going forward from what's happening in that business?.

Well, it certainly concerns us. It's a relatively smaller business within our portfolio. But nonetheless, it's something that we are digging into. We had some distribution losses that were disappointing with a key customer. That was a surprise that we probably should have anticipated, but did not.

The aggregate softness in the category, I think, is more of a phenomenon that is in the early stages and hopefully temporary. But if not, we're going to have to dig into it more.

The most recent periods covered an Easter overlap that we think is distorting the Nielsen data, but we're going to give that one a little bit more time to draw some conclusions on. There's nothing that jumps out that says that the demand for cheese has changed materially, so we expect it to be a temporary blip..

I appreciate that. And then just one last one for me, Rob. I just want to get your perspective on brand support spend as a whole.

So, when I think about, I guess, two main buckets of advertising investment spend and then your trade spend and how that's been set up this year, a lot of us on this side are thinking a lot about the evolving retail environment, the evolving competitive environment, especially given a slow start to the year in January and February.

You guys, your promo plan in cereal has kind of been weighted towards the front half of your fiscal year. You have a number of competitors talking about really bringing their own performance up in the back half of the calendar year.

And then you have this evolving retail set, of course, where we hear a lot of stories about different reactions that are occurring across the retail landscape. So, the point it was just brought up, you've kind of walked back that additional advertising investment spend from last year.

When you guys look at the landscape in front of you, for maybe the remaining part of the fiscal year or the calendar year here, can you just talk to us a little bit about your comfort with delivering on full-year expectations again with having your promo plan a little bit more front-end loaded and continuing to bring down your ad investment spend year-on-year? Hope that question makes sense..

It makes a lot of sense. I would start by saying that there are some competitive tensions in that question that is going to lead me to be less candid than I like to be. So, I'm not going to get into it too much other than to say that we feel very comfortable with the plan we have for the year.

We feel good about our position and the ability to continue to market to both the consumer and to be a strong partner with the trade. But in this forum, I don't think I want to add much more to that..

Okay. Thank you..

Thank you..

Ladies and gentlemen, we have reached the allotted time for questions and answers. I will now return the call to Rob Vitale for any additional or closing remarks..

One of these days, I'm going to come up with some good closing remarks other than just thank you, but for now, thank you. And we look forward to talking to you again in August. Thank you, all..

Thank you for participating in Post Holdings second quarter 2017 earnings conference call and webcast. You may now disconnect your lines and have a wonderful day..