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

John Joseph Baumgartner - Wells Fargo Securities LLC Christopher R. Growe - Stifel, Nicolaus & Co., Inc. Stephanie Benjamin - SunTrust Robinson Humphrey, Inc. Andrew Lazar - Barclays Capital, Inc. Cornell R. Burnette - Citigroup Global Markets, Inc. Vishal Bhailal Patel - BMO Capital Markets (United States) Timothy S.

Ramey - Pivotal Research Group LLC Brett Hundley - The Vertical Group Bryan C. Hunt - Wells Fargo Securities LLC.

Welcome to Post Holdings' fourth 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 800-585-8367 and the passcode is 1689909. 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 fourth 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 section 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..

Great. Thank you, Brad. And thank you for joining us. We are pleased to share our results for the fourth quarter and for fiscal 2017. We are really quite proud of our performance this year.

Despite challenging year-over-year comparisons, adjusted EBITDA, excluding the impact of acquiring Weetabix, grew approximately 2% for full year 2017 and 13% in the fourth quarter. We have previously articulated the long-term algorithm of 4% to 5% annual growth in adjusted EBITDA.

Growing from 2016's extraordinary results, combined with the attractive growth in the fourth quarter helped substantiate our expectation. The year closely followed our initial guidance, with a decline in Michael Foods Group more than offset by growth in the balance of the portfolio.

2017 was also an active year from a strategic perspective, evidenced by our acquisition of Weetabix and our agreement to acquire Bob Evans Farms. Yesterday, we provided 2018 guidance of $1.14 billion to $1.18 billion in adjusted EBITDA. Pro forma to now include Weetabix, this implies organic growth of approximately 4% to 7%.

This excludes any contribution from the Bob Evans transaction, which we expect to close during our fiscal second quarter. This morning, I will highlight key drivers of our 2018 expectations. Jeff will provide more detail on Q4 segment results and more detail around guidance for 2018.

Ready-to-eat cereal in North America and the UK remains the largest contributor to total adjusted EBITDA. In U.S. measured channels, the category continues to experience low single-digit declines and our expectations for 2018 are consistent with recent performance. We do believe the rate of decline is overstated, as non-measured channels are growing.

We estimate this reverses 1 percentage point of decline. As we have discussed, the adult sub-segment remains the weakest to North American cereal. Older consumers are seeking breakfast alternatives with more protein. Other segments of our business benefit from this trend. We have clear and reasonable expectations for Post Consumer Brands in 2018.

First, we will complete the final stage of the merger that created this segment. Bringing Post Foods and MOM Brands together has resulted in cost reduction well ahead of our initial expectations. Second, we must apply that same rigor to the Weetabix North America integration. It is well underway.

Finally and most critically, we must continue to deliver taste and value propositions that enable us to defend our share. We expect modest growth in EBITDA to result from flat volumes and ongoing cost reductions, which are partially offset by increases in advertising and commodity costs.

Michael Foods Group is our second largest segment and currently includes value-added eggs, potatoes, cheese and pasta to foodservice and retail customers. Our pending acquisition of Bob Evans Farms has implications for this segment's organizational structure, and I will discuss that shortly.

For now, I want to focus on value-added eggs, which generates the lion share of profits in this segment. This is a terrific category and we have a defensible position. Avian influenza disrupted what had been a steady growth and we expect to return to that growth trajectory as the supply shock recedes into the rearview mirror.

In foodservice, we continue to see long-term growth prospects driven by a customer value proposition based upon reducing labor, improving food safety and delivering product consistency. Retail remains slower to develop, but we believe affords a meaningful long-term opportunity.

Our 2018 expectation for Michael is better than its average EBITDA growth as it returns to its long-term trend line. We have a potential tailwind with recent egg price movements. However, I want to give three points of context. First, the benefit lags the price move because of inventory cycles and potentially impacts Q2 and beyond.

Second, prices have normalized but we have not assumed they are constant throughout the year. Finally, to the extent this price dynamic does continue, our ongoing effort to convert customers to a grain-based pricing alternative will dampen its near-term benefit.

By intentionally inhibiting 2018 potential, we seek to solidify that return to a sustainable and predictable growth trajectory. This is entirely consistent with the objectives we have long described. Our Active Nutrition portfolio continues to grow rapidly, with Premier Protein gaining ground in the ready-to-drink beverage segment.

We continue to innovate the brand around other product forms. The Bolder PowerBar innovation is currently hitting the market. Dymatize is stable but at a level not supporting our initial investment. In 2018, we expect the rate of growth in this segment to remain quite attractive.

While we expect the rate of sales growth to decline, we expect to add more sales dollars than added in 2017. Private Brands is now our smallest segment. We believe the emergence of discounters, Amazon acquiring Whole Foods, and competitive retailer reactions create an interesting opportunity for Private Brands.

We expect the solid performance in 2017 to be repeated again in 2018. Meanwhile, we are giving considerable thought as to the best approach to addressing this dynamic situation. Let me turn to strategic activities and balance sheet management. In July, we closed Weetabix acquisition. Weetabix provides us a three-tier opportunity for value creation.

Tier 1 simply matches attractive cost of capital against a reliable cash flow stream to produce a reasonable return. Mere continuity produces this result. Tier 2 enables us to use the Weetabix platform to deliver existing Post's products to Weetabix markets and Tier 3 enables us to use Weetabix as a platform for additional M&A.

We like this option-driven approach to creating value. That brings me to Bob Evans. In September, we reached an agreement to acquire Bob Evans, and we expect to close in the first quarter of calendar 2018. Like Weetabix, Bob Evans is accretive without growth but modestly so.

The value creation for Bob Evans involves delivering synergies and more strategically enables the creation for Michael and Bob Evans of a pure play foodservice and a pure play refrigerated retail platform.

Once established, we expect this tight focus to result in best execution against organic growth opportunities, best positioning for future M&A, and better transparency around portfolio growth. Finally, I would like to talk about capital structure.

In 2017, we executed three transactions that refinanced $2.1 billion, financed Weetabix, and positioned us to fund the Bob Evans transaction. The net result of these transactions was to increase annual interest expense on a pro forma basis for Bob Evans from $290 million to $370 million, with a blended rate of 4.9%.

We also repurchased 4 million Post shares for $318 million. Meanwhile, acquisitions announced in 2017 are expected to add, excluding synergies, nearly $260 million of acquired EBITDA.

When we complete the Bob Evans acquisition, our leverage will increase to approximately 6 times adjusted EBITDA, and we expect to reduce it to approximately 5.5 times by fiscal year end. We are quite comfortable with our leverage given our diverse portfolio, the attractive fixed cost structure, and long-term nature of our debt.

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. Adjusted EBITDA for the fourth quarter and fiscal year were $286 million and $989 million, respectively. Both were at the high end of our guidance range. Beginning our segment results discussion with Post Consumer Brands, net sales were $492 million.

Recall, this segment now includes the Attune Foods granola and the Weetabix North America businesses. On a pro forma basis, net sales declined 2.9% compared to the prior year and volumes declined 2.7%. Volumes and sales were negatively impacted by shifts in the timing of promotional activity when compared to the prior year.

This was partially offset by volume increases for Malt-O-Meal bags and sales from new licensed products. Post Consumer Brands adjusted EBITDA was approximately $125 million for the quarter, a 12% year-over-year increase, and benefited from continued integration cost savings and reduced trade and consumer advertising and promotion spending.

This was partially offset by lower volumes and unfavorable product mix. Turning to the Michael Foods Group, net sales were $537 million. Egg volumes continued to improve and increased 3.5% on a pro forma basis.

Egg revenue is relatively flat on a pro forma basis, with net egg pricing declining 3% as we continue to lap the impact of avian influenza pricing in the prior year.

Egg volume improvements were offset by a 23% volume decline in the cheese business resulting from branded cheese distribution losses in the second quarter of 2017 and the exit of certain low-margin private label business at the beginning of the fourth quarter of fiscal 2016.

Michael Foods Group adjusted EBITDA was approximately $99 million, a sequential and year-over-year improvement of $16 million and $1.5 million respectively. Moving to Active Nutrition, net sales were approximately $193 million, a 22% increase compared to the prior year, driven by growth in Premier Protein branded products.

Dymatize lapped a strong sales quarter in the prior year and was negatively impacted by ongoing weakness in the specialty channel, while PowerBar continued to lap distribution losses.

Active Nutrition adjusted EBITDA was approximately $29 million, a 100% year-over-year increase, and benefited from higher shake volumes, lower input costs, and reduced advertising and promotional spend. A planned reduction in spending on the PowerBar brand was partially offset by an increase in spending on the Premier Protein brand.

Recall that quarterly margins in this segment fluctuates significantly depending on the timing of promotional activity and levels of consumer marketing spending. We had higher trade and marketing levels in the fourth quarter, similar to the second quarter. Fiscal 2018 is expected to follow a similar pattern.

Turning to Private Brands, which now includes only the nut butter and dried fruit and nut businesses, net sales were $113 million, an increase of 7% compared to the prior year.

Volume growth of 2.6% was driven by traditional peanut butter and tree nut butters, which were partially offset by declines for certain lower-margin dried fruit and nut products.

Net pricing increased 4% and benefited from higher pricing for traditional peanut butter, partially offset by lower net pricing for almond products, both of which related to pass-through of input costs. Private Brands adjusted EBITDA was approximately $16 million and benefited from higher nut butter volumes and a favorable product mix.

Weetabix net sales were $112 million, an increase of 5% on a pro forma basis. Net sales benefited from promotional activities, which led to increased sales of four Weetabix branded products. Segment adjusted EBITDA was $37 million, in line with our expectations for the quarter.

Before reviewing our guidance, I'd like to comment on SG&A, cash flow, and capital markets transactions. Fourth quarter SG&A included $23 million of transaction costs, which primarily related to success fees paid in conjunction with the completion of the Weetabix acquisition. This was treated as an adjustment for non-GAAP measures.

Cash flow from operations for the fourth quarter was $178.5 million compared to $135 million in the prior year. As expected, fourth quarter operating cash flow improved considerably when compared to the first and second quarters of fiscal 2017.

Regarding capital markets transactions, during the fourth quarter we issued $750 million in principal value of our 5.75% senior notes, which were priced at 105.5% of par, for an effective yield of just under 5%.

Concluding with our outlook, we expect fiscal 2018 adjusted EBITDA, exclusive of Bob Evans, to range between $1.14 billion and $1.18 billion, with modest sequential quarterly growth throughout the year, but most pronounced from first to second quarter.

This primarily results from the RTE cereal businesses, where promotional timing, the execution of cost reductions, and seasonality drive higher performance in the back half of the fiscal year. Regarding our capital expenditures outlook for fiscal 2018, we plan to invest between $220 million and $230 million.

This includes approximately $50 million for the previously announced cage-free conversion and $30 million to $40 million for growth initiatives and productivity. Finally, we estimate cash taxes for fiscal 2018 will be approximately $140 million based on the midpoint of our guidance range.

This estimate excludes income from Bob Evans or any impact from potential tax reform. With that, I would like to turn the call back over to the operator for questions.

Operator?.

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

Good morning, thanks for the question..

Hey, John..

Rob, I wanted to dig a little deeper into the cereal business. You spoke to your assumptions a bit in the comments for 2018, but maybe build on that. Are you seeing new distribution for MOM Brands? Are you assuming distribution gains for Weetabix in the U.S.

this year? And then, as pertains to the competition, could you comment on what you're seeing in your expectations for the environment in terms of price and promotion this year?.

So, I would say, taking those a little bit out of order, we do not expect significant distribution gains in Weetabix this year.

We're looking at Weetabix predominantly as a year of integration and cost management, getting the margin structure of Weetabix where it needs to be, and that's a 12 to 24-month process, including some supply chain reconfiguration. There's modest gains in distribution in the bag business as we gain real estate within existing retailers.

I think with respect to competition, I would say that there is a more intense competitive environment as we enter 2018 than we saw in 2017. We have some additional competition in the bag segment and that tends to bring both some positives and negatives, when they are directly competitive with SKUs of ours.

We tend to see some velocity reduction, however, the entry of additional competitors into the segment also validates the perceived product quality of the packaging and generally has led to expansion of the bag segment, which we tend to be a net winner in.

So, the competitive environment changing has got some puts and takes and we think we have done enough scenario planning factored into our expectations for 2018..

Okay. And then just in terms of your approach to trade merchandising, when we look at your subsidized sales at least in the Nielsen data, the trend in nutrition has been one who were subsidized sales have really increased over the past few years. I guess, you built distribution there.

And then in cereal, we haven't seen much of a reduction there since the new analytical tools were put in place.

So, can you speak a bit more to the opportunities still ahead of you to increase incremental sales, I mean, due to some of the cannibalization? How does that evolve and how do you think it impacts the top line and margins in those two segments?.

So in nutrition, we use significant promotions as a means of gaining trial and stick and it tends to work fairly well and has resulted in the significant growth that we've seen in the segment. Within cereal, it's an ongoing approach to balancing.

We look at the aggregate of our trade spending and our advertising support as an overall aggregate bucket, which we make choices within. So I think the better way to look at it is some better efficacy around trade spend has allowed some reduction in advertising spend and we look at that as an ongoing balance.

I would say that the sophistication with which we approach trade spend has increased with a step function as we added both technology and talent and that we would expect that to continue in the future. But in order to look at it on a holistic basis, you need to look at both line items..

Great, thanks for your time..

Thank you, John..

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

Hi. Good morning..

Hey, Chris..

Hi. I just wanted to come back to the egg business and some of the recent momentum we've seen in egg prices has been very attractive and especially against the easy comps you faced in the first half of 2018.

So I understand you're not building in these higher egg prices for the year, but it would seem like there would be quite a benefit in the first half. And you should be gaining market share as well, especially with these higher spot prices. So I'd like to just understand how that factors into your guidance.

And then around the comment about the sequential progress in EBITDA through the year, it would seem that the first half, especially in this business, could be quite a bit stronger against the easy comps a year ago..

So within Michael, the comp in the first quarter still had some AI pricing so that comp specifically is not quite as favorable as you may think. The comps become easier in the second quarter and then resume a normalization pattern in the second half of last year, so it's a little bit more nuanced than first half, second half.

I think, as we stated in prepared remarks, that the egg pricing does present a potential tailwind that could impact the year.

But strategically, we're trying to balance what our business model dictates, which is an attempt to create an environment in which the supply and demand equation is in such balance that we are immunized from egg price movement.

And in order to get to that position, we may choose to give up some short-term gains around monetizing egg prices by trying to be aggressive in moving customers to that grain-based pricing alternative.

So, it's a very dynamic equation that includes both the volumes, which are feeling very positive, the egg pricing, which right now looks very favorable from a short-term perspective weighed against the success we have in driving that grain-based model's penetration.

So we've given guidance which factors in potential volatility around prices, but also factors in our longer-term objective to immunize ourselves from prices by moving towards that grain-based model and, again, recognizing that that does potentially create a tailwind for the latter half of the year, most pronounced as we get past the first quarter where there is some older, higher cost inventory on the opening balance sheet..

Okay. Thank you for that color there.

And then, just from a high level, if you have, as you go through the year and upside EBITDA or stronger performance across the business, are there areas in which you want to reinvest? I'm thinking back to a year or so ago when you were putting some money behind marketing, for example, across other parts of the business.

Are there areas you're looking to invest in as opposed to the degree which you can or afford that around your guidance?.

So, starting our plan for 2018, we have a pretty meaningful marketing load built into our expectations. So I would view that as more of a source of opportunity than an area to lean into. We've fully restored the advertising expectation at Post Consumer Brands to 2016 levels.

We've ramped up considerably in Active Nutrition to support the ongoing growth of that business, and we'd like to maintain that. But if anything, we're fully loaded with respect to our starting point..

Okay, thank you for your time..

Thank you..

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

Hi, good morning. This is actually Stephanie on for Bill. I just have a question if you guys have had any kind of change to your first-year accretion guidance on Weetabix just given the weakening dollar..

Do you want to talk to our constant currency approach?.

Yeah, so what is assumed in our guidance is the currency translation rate approximating where we currently stand, so in this range of about $1.31 to $1.32, which is where the pound to dollar exchange rate has been for the last month or so.

So to the extent that the dollar-pound exchange rate is higher or lower than that, it would influence our performance on a translated basis. We've discussed and are still developing our plan for how we plan to communicate that on a constant currency basis.

Many of our peers with significant international business use a constant currency methodology, but they have longstanding basis to compare against. And given that next year will be our first year of ownership, we're still developing how we'll communicate that, but we plan to do so..

Got you. No, that's helpful.

And then just lastly on commodity costs in general just with higher resin and durum wheat costs of recent, are you looking to implement any pricing or anything to offset the higher commodity costs?.

Specifically, durum we treat as a back-to-back price move, so that one tends to get passed through. In general, the other commodity costs across the portfolio are modest enough that we will seek to absorb them in other areas..

Okay, thanks so much for the help..

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

Good morning, everybody..

Hey. Good morning, Andrew..

Hi, first one quick one on Private Brands. I think in your prepared remarks you mentioned something along the lines of we'll determine what the best approach is for that business. And I'm sure it was in a different context, but I wasn't sure exactly what you meant by that..

The business is subscale within the aggregate Post portfolio right now, and it is in a category that certainly seems to have some dynamism to it. And all we were trying to say is that we think the way that we are approaching it right now needs to be modified.

And whether that modification means an expansion or something else is a topic of considerable discussion, but that we are well aware that being where we are in Private Brands as a subscale player probably doesn't make long-term success or long-term sense. So we are starting to explore those alternatives..

Got it. Okay, that's helpful. Thank you. And then regarding Michael, so it sounds like with some potential upside that might come through this year around short-term moves in egg pricing, you'll use that, as you said, to solidify getting customers more aggressively back on the grain-based model. So, correct me if I'm wrong.

The grain-based model obviously is where you were in a pretty big way prior to the AI shock.

Does that suggest that customers aren't yet maybe coming back to that model as readily or as quickly as you would have hoped, and so using some of the upside just gives them a little kick to get there, or that it's happening, but this just would get you there even more quickly? I'm trying to get a sense if there's something that's changed with respect to – because I think you've always said that the grain-based model was really good for your customers too and therefore....

It's actually surprisingly simple. So if you go back pre-acquisition and pre-AI, the grain-based model success, it produced a consistent lockstep increase in the EBITDA and free cash flow of Michael, and AI disrupted that trend line.

So the long-term objective that we've been talking about, and in this context, long term means since 2015, is to get back to that grain-based model that was disrupted by AI.

Essentially, it's as simple as this; that the sales process discussion, or more specifically the actual sale and pricing discussion to convert to a grain-based model typically means that there is a deviation from the market price that a customer is paying.

So when grain-based are higher than market, which has been the situation the last several years, it's a much more challenging sale because customers naturally tend to seek to wait for an entry point into the grain-based model when it has a short-term benefit.

We tend to have greater success in selling the grain-based model in environments in which that results in a short-term benefit to the customer because human nature and customer nature is to try to move that price down when it's opportunistically available.

So as the market is shaping up now and a gap has been produced between higher market prices and lower grain-based pricing, that sits very well for our opportunity to resume that pace of gaining grain-based customers and getting back to that long-term attractive growth trajectory.

So, we could – the intentional inhibition of the 2018 potential I meant was if we did nothing and try to not aggressively sell the grain-based model, we would just ride the market curve and make a little bit more money and have a short-term benefit.

But we are quite intentionally and strategically seeking to not pocket that benefit, move customers to what we think is the long-term best value proposition for them and the most stable source of earnings growth for us..

Got it. So, they might have gotten there anyway as market prices continue to rise. But this just kind of....

Correct..

...gets them right on the process sooner. Okay. That's very helpful. Thank you very much..

Thank you..

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

Hey, guys. Congratulations on the quarter. Just had a quick few ones. The first one, did I catch in the comment that when you talked about Michael Foods earlier in your prepared remarks, you said that this year the kind of EBITDA growth would be better than kind of what the long-term trajectory has been.

So, just can you remind me what's kind of a baseline long-term EBITDA growth figure for Michael Foods and are you saying that it's kind of better than that this year, given what you know now?.

Yes. We have talked in the past about Michael Foods being a long-term 3% to 5% growth in EBITDA essentially on our average portfolio growth rate. And, this year, we'll exceed that or should exceed that because of the underperformance from last year and a correction or reversion to mean from 2017 to 2018..

Okay.

And then also in your comments when you talked about kind of seeing the EBITDA next year kind of build sequentially and seeing kind of modest sequential improvements each quarter, were you also signaling, if I heard you correctly, that maybe kind of the delta between what you expect in the first quarter and the second fiscal quarter is perhaps kind of the biggest kind of sequential improvement that you'll see as the year progresses?.

Yes..

Okay. And then, lastly, looking at cereal, I know you talked a little bit about maybe in the quarter we're seeing the core business down on sales that there's somewhat of an issue there with the timing of promotions.

So, just on average, do you have kind of a ballpark figure for what that kind of took out of the quarter and is that something that we kind of recapture in the first fiscal quarter as we move forward?.

No, we expect it to recover more in the second and third fiscal quarters because in fiscal 2017 we had a fast start promotion plan, which we did not repeat this year. So we've seen some negative comps to the prior periods simply because of some promotional calendar timing that shifted backwards to correspond with some new product launches..

Okay, very good. Thanks a lot..

Thank you..

Your next question comes from the line of Kenneth Zaslow of BMO Capital..

Hi. This is Vishal on for Ken. I wanted to just ask a little bit of an offbeat question. Can you talk a little bit about cage-free eggs? It seems like pricing really hasn't come back here strongly as they have in table eggs.

Has the demand sort of built up the way that you thought it would? And what does the industry capacity sort of look like right now? Thanks..

So this is a channel-specific answer. The demand has been very consistent with our expectations around foodservice and it is slower to build in retail. The retail conversion is a longer process than the foodservice. The announced foodservice customers have been more aggressive in moving towards a full cage-free introduction into its supply chain.

We are moving in lockstep with our customers and trying to be supportive of their overall initiatives in this area. So, our capacity is very nicely matched against the demands by channel. In terms of aggregate category demand, including retail, I would speculate that there is some excess capacity in certain portions of the country.

But, for us, that is so tied to a channel that we're well in balance..

Okay, great. Thank you..

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

Thanks so much. Good morning, Jeff and Rob..

Hey, Tim..

First, I wanted to kind of circle back on Andrew's question a little bit.

The question I had was taking into account kind of the percentage change of the business of industrial eggs from kind of 2014 to 2018, will grain-based be a higher percentage of overall business in 2018, 2019 than it was in 2014 prior to AI?.

Probably not in 2018 and hopefully in 2019..

Okay. So, it's a build. It's a progression..

Yeah. Correct..

And then I'm a little confused on Post Consumer Brands margins just because of the addition of the North American Weetabix business there. That business has not – Post Consumer Brands has not had a lot of seasonality. And if there is seasonality, it's been to the – maybe the fourth quarter benefit or the winter month benefit.

So, how should we think about these extraordinarily wonderful margins you had in the 2Q-3Q, and then, obviously, less margin in the 4Q with the addition of the lower-margin U.S.

business or North America? Is that kind of a new run rate for the fourth quarter?.

So I think when we announced – I'm not sure I've got – I'm answering your question exactly, but I'll try with this.

When we announced the acquisition of Weetabix, we talked about how the bulk of the synergy realization was going to come out of the North American business because the North American business was essentially not quite a breakeven operation but close to it.

So, you had roughly $100 million, $120 million of revenue flowing through at negligible margins. So, no impact if synergy realization has really occurred in the quarter just completed. So, we picked up the revenue without corresponding margin and that would have had an overall margin degradation on Q4.

Prospectively, there is a bit of a greater seasonality factor to Weetabix than there is to PCB. And whilst the seasonality on revenue is relatively low at PCB, there does tend to be modest seasonality of earnings as you have different flows of inventory and promotional timing.

So I think if this is answering your question, there had been modest changes in the PCB seasonality at the EBITDA level as it shifts from first quarter to fourth quarter predominantly related to Weetabix and timing of promotional activities. And then Weetabix in the UK has a little bit more seasonality tied to the same timeframe..

Okay.

And then the overlay of the synergies will mostly come in North America, but we shouldn't expect even half of the synergies to occur in 2018, I wouldn't think, right?.

Correct, and the portion that does will be back-loaded..

Okay, thank you so much..

Thank you..

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

Hey. Good morning, guys..

Hey Brett..

I have two questions. My first is just very quick clarification. So I think guidance came a little bit – came across as a little bit confusing for some. Some of us on the sell side here already have BOBE in our numbers. On the BOBE call, somewhat recently, Rob, you talked about a potential pro forma EBITDA number of $1.2 billion.

And, of course, the guidance from last night for 2018 excludes BOBE.

And so, can you just give some real quick clarifying comments on maybe would $1.2 billion still be the number if we include BOBE? Would you want to go ahead and maybe give an expected EBITDA impact from BOBE and what that could mean for a pro forma guidance number for 2018?.

So the quick answer on the Bob Evans question is no, that we really don't want to do that because we're in a bit of an awkward stage right now, while they're in the process of going through their shareholder communication and approval process and we don't want to be speaking on behalf of them while they are communicating directly with their shareholders.

I would say that the optimism we have at the announcement of the transaction is at the same level or greater. We feel very good about this transaction.

And what we announced at the time of the transaction was expected EBITDA at the midpoint of their guidance and that the implications on 2018 are a function of their seasonality and the timing of the closing. So, it becomes hard to precisely incorporate Bob Evans' contribution into 2018, given the uncertainty around timing.

We're highly confident that it will occur sometime in the first quarter, but we want to try to break this out between a legacy contribution EBITDA and a partial year contribution from Bob when we have better clarity around the precise timing of the Bob contribution starting to flow into Post.

So recognizing that it is a bit complex or at least confusing, we tried to be real precise in terms of what the legacy business has done and leave our communication of the Bob Evans contribution to prior communications.

Is that helpful?.

Yes, it actually really is, and some of that communication can certainly come from us on the sell side here today, so thank you for those comments.

And then, just my second question, I wanted to toggle between your Michael eggs business and Active Nutrition, if I can, because a key area of strength in the bar market has been egg-derived protein, at least as we've seen it, and we saw one of your competitors pay a pretty big multiple for a bar manufacturer here recently that skews towards egg-derived protein.

And so, just given the different businesses that you have and what we would see as maybe potential for maybe cost and revenue synergies actually, do you guys have any plans to utilize your Michael egg business into that segment in any significant way, into that bar market, egg ingredient situation? Because I do think there could be some potential synergies even with PowerBar, which has maybe been struggling a little bit.

So, can you just address that?.

We are actively engaged in providing egg ingredients for the bar segment. The data is a little hard to track, but I would venture we're probably the largest in the country of providing egg protein ingredients for that segment, so it is a growth area for us.

If the question is more do we see the nexus between our Active Nutrition business and our supply or ingredient supply business affording us an opportunity to carve out our own position in that segment, we're a bit more cautious on that because we look at the product lifecycle of some of these products and want to really make sure we understand the slope of those cycles prior to investing or making an investment decision.

And some of those products tend to have more parabolic product lifecycle curves, and we tend to favor more gently sloping curves. So we are cautious on the end product and highly supportive of the ingredient..

That's great, thanks so much..

Your next question comes from the line of Bryan Hunt of Wells Fargo..

Thanks for your time this morning. I'm curious how you can weave in perhaps some comments around, one, the move to the grain-based model, as well as two, the ongoing capital commitment for cage-free.

One of your competitors has dialed back their cage-free expansion, saying the consumer side of the equation and the retail side of the equation is definitely slow and consumers don't seem willing to pay up for it, whereas it seems foodservice and ingredient manufacturers are, so I was wondering.

Can you, again, weave in how do you work in your cage-free expenses and your grain-based contracts as well as maybe what you're seeing on the retail side of the equation on cage-free?.

So let's divide those into two different topics because the grain-based and the cage-free are really fundamentally different, so let me start with the cage-free. As I mentioned earlier, we continue to see good growth in foodservice in cage-free, and the nature of the contracts are long term and matched against our cage-free supply.

So we feel very comfortable about our cage-free commitments in the context of foodservice. And I think if you think through the rationale of that, in the foodservice applications, eggs as a percentage of the total applications tend to be much smaller, whereas at retail it's 100%.

So the impact of the incremental cost of cage-free gets absorbed in a much more complex supply chain at foodservice than it does in a supply chain which results in delivering shelled eggs at retail. So it's a profound cost implication at retail and a modest cost implication at foodservice.

And as such, we think that that is the right space to participate in more aggressively and monitor it more judiciously in retail. And I think that's consistent with what you are observing from some of our other competitors. Now, ask your question again about the grain-based portion of that because I'm not sure I....

No, you covered it with your comments. I was really trying to understand better about how cage-free gets absorbed into contracting and ensuring that you're getting the capital returns necessary to cover that incremental $50 million.

And if I think about the long-term demand for cage-free, how many more facilities do you need to meet demand over the next, call it, three to five years?.

That's a good question. We are more following than leading that. So we're letting our customers dictate that. And where the return can be met, we will support. So I wouldn't necessarily want to make a prediction on where it lands. It will certainly grow.

But the actual number of facilities, I wouldn't want to foster a guess at this point because it's entirely market-driven..

All right. And my last question is, a lot of your CPG competitors have talked about transportation costs and various packaging cost inflation as we look out into next year.

Can you give us a qualitative comment on what you're seeing in terms of inflation on transportation and packaging and your ability to pass it along, given how competitive the environment is?.

So we're taking the approach that as we get commodity cost increases and increases in transportation cost with some of the driver shortages that it's incumbent upon us to find cost reduction internally and assume that we have no ability to price that.

I think that that – whether that emerges as too cautious an assumption or not remains to be seen, but that's our starting point. We have, in our comments, about both cereal and Active Nutrition, we do it in commodity increases.

There's no one commodity increase that is worth highlighting, but it's a series of small commodity increases, a bunch of – across a large basket of commodities that's adding up to a number that in aggregate approach to probably $25 million..

Very good.

And transportation is buried in that $25 million as well?.

It would be in the noise..

Okay, thank you for your time and best of luck..

Thank you..

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

Thank you, again. I want to stress we're very excited about 2018. We think we're well-positioned. It's obviously a challenging environment for all the reasons we've talked about, but we feel good about our ability to continue to deliver on our growth expectations, our free cash flow generation. And, as always, thank you for your continuing support.

We look forward to speaking with you in....

February..

...February. So, have a good weekend..

Thank you for participating in the Post Holdings' fourth quarter 2017 earnings conference call and webcast. You may now disconnect..