Welcome to Post Holdings First Quarter 2018 Earnings Conference Call and Webcast. Hosting the call today from Post are Rob Vitale, President and Chief Executive Officer and Jeff Saddux, Chief Financial Officer. Today's call is being recorded and will be available for replay beginning at 12 pm Eastern Time. The dial in number is 80058 58367 and the passcode is 2,992,278. 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 introductions. Sir, you may begin.
Thank you, and good morning, everyone, and thank you for joining us today for Post's Q1 earnings call. With me today are Rob Vitale, our President and CEO and Jeff Taddox, our CFO. Rob and Jeff will begin with the 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 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'll turn the call over to Rob. Thanks, Brad. Thank you for joining us to discuss our Q1 results and our outlook for the business. I'm going to proceed a little bit differently this morning and reverse our normal order by starting with our guidance. Because we are adding Bob Evans, I want to ground you in the outlook as we move through each business.
Last evening, we provided updated outlook for fiscal 2018 of $1,220,000,000 to 1.25 includes Bob Evans and incorporates a modest increase in the low end of our prior legacy guidance. Our volume and pricing assumptions are largely consistent with our prior guidance with the exception of some softness in the UK. Across the business, we are absorbing freight inflation in excess of our prior estimates that we are bringing into our guidance, all netting to a modest uptick in the low end and no change to the high side. We closed Bob Evans on January 12, which leaves approximately 8.5 months of ownership during fiscal 2018. Our guidance reflects an approximate 10% increase in Bob Evans adjusted EBITDA versus the similar timeframe last year, which is consistent with the growth trajectory of the business.
Note that the Bob Evans business has significant seasonality with 33% to 35% of its EBITDA historically generated in post 1st fiscal quarter. Therefore, this guidance excludes the peak quarter plus 2 weeks. Last, with respect to synergy realization, we are on track with Weetabix and have increased our expectation for Bob Evans. However, recall synergies for both transactions have modest year 1 realization, peak in year 2 and have a 3rd year tail. With that as context, let me comment on the Q1 performance of
the business.
Starting with Post Consumer Brands. North American cereal results were soft as a result of lapping a Quick Start trade promotion last year. Additionally, the greater competitive intensity we highlighted last quarter put pressure on Honey Bunches of Oats and multi meal bag cereal. We expect the balance of the year to be more favorable from a promotional calendar perspective. However, recall that this year, we expect more impact from commodity inflation, and we are making incremental brand investments.
We also expect the competitive intensity in cereal to remain high. This is all reflected in both our initial 2018 guidance as well as our updated guidance. The integration of Weetabix North America into Post consumer brands is proceeding smoothly, but the synergy realization is modest until late this year and into 2019. In our UK Weetabix business, our 1st fiscal quarter is a seasonal low. In assessing performance, a cumulative 6 months of our ownership is more relevant.
Nonetheless, it was a weak quarter. Weetabix consumption is in line with the market. However, the price realization was unfavorable as we overpromoted. Promotions have grown too frequently and diminish their value in driving incremental sales. We have chosen to pull back some promotion and incur some near term volume loss in order to reestablish the consumer proposition of our promotions.
Ultimately, just like in the U. S, we need less frequency and more depth in order to avoid trading dollars between base and incremental. Meanwhile, we have an ongoing continuous improvement program aimed largely at reducing manufacturing waste. Our targets were not achieved this quarter. We have added strong leadership in both continuous improvement and supply chain, and we expect to see measurable progress against these objectives in the second half of the fiscal year.
As expected, volumes and margins for Michael Foods have improved, and we appear to be back on the steady growth trajectory that preceded avian influenza. We are excited about bringing the Bob Evans Foodservice business onto the Michael platform. We now have leadership positions in value added eggs and refrigerated potatoes. The conversion from fresh to refrigerated potatoes at foodservice is the same value proposition that Michael has so successfully sold in eggs, and we expect that conversion rate to accelerate. Active Nutrition had another solid growth quarter with net sales increasing 21% year over year.
This brings me to Private Brands and our announcement in January. We have combined our Private Brands businesses, which include nut butter, fruit and nut, pasta and granola into one business. We are exploring a range of alternative structures, including an initial public offering, a partnership with private equity firm, a sale or a strategic combination. There are significant consolidation opportunities within private brands, and we believe the best structure for pursuing these opportunities is outside our full ownership. We will update you accordingly on further developments in this venture.
As I mentioned, we closed the Bob Evans acquisition in January. Our enthusiasm remains quite high. Our integration work has led us to increase our synergy estimates to $35,000,000 to $40,000,000 We also increased our estimate of one time integration costs for fiscal 2018 to approximately $30,000,000 from our prior estimate of $25,000,000 These one time costs also include Weetabix, but the increase is related to the incremental synergy at Bob Evans. During the pendency of the transaction, Bob Evans achieved its revenue targets with double digit growth from last year. However, it had unexpected COGS variances relating to greater than planned volume causing manufacturing bottlenecks.
You may have seen that we announced our move towards an integrated supply chain last week. We believe this move will eliminate the cost overages Bob suffered and will provide the potential for synergies above the revised target. We will update our target as we refine the estimates. I want to close with a quick comment on share repurchases. During the quarter, we purchased approximately 700,000 shares at an average price of $78.1 for a total of $56,000,000 Our remaining authorization to repurchase shares is $176,000,000 We expect to continue to have a balanced approach to share repurchases and leverage reduction.
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 Q1 was $281,600,000 in line with our expectations. Before detailing our business unit results, as a reminder, our segments are presented consistent with our Q4 2017 presentation and are not yet aligned with the organizational changes we announced a few weeks ago. Beginning with Post Consumer Brands, net sales were $456,000,000 On a pro form a basis, net sales declined 4% compared to the prior year and volumes declined 2.4%. Volumes and sales were negatively impacted by shifts in the timing of promotional activity when compared to the prior year.
Furthermore, volume growth from licensed products, multi meal bags and private label and government bid business was offset by declines of other branded products. Post consumer brands adjusted EBITDA was $109,000,000 Continued integration cost savings and reduced trade spending was offset by lower volumes, unfavorable product mix and higher freight expenses. Weetabix UK net sales were 99,700,000
dollars a
pro form a decline of 1% compared to the prior year. The pound sterling to dollar foreign exchange translation rate was favorable compared to the prior year. However, this favorability was more than offset by an unfavorable product mix favoring private label sales versus branded sales. Segment adjusted EBITDA was $25,600,000 Turning to Michael Foods Group, net sales were 577,000,000 dollars Egg volumes improved again this quarter, increasing nearly 4%. Egg revenues were up 9% as net pricing increased 5%.
Potato volumes and revenues both grew 12% with continued strength in the foodservice channel. Michael Foods Group adjusted EBITDA was $113,000,000 a sequential year a sequential and year over year improvement of $14,000,000 $21,000,000 respectively. Adjusted EBITDA benefited from higher ag and potato volumes and improved net pricing, which was partially offset by higher freight expenses. Moving to Active Nutrition, net sales were 186,000,000 dollars a 21% increase compared to the prior year and once again driven by growth in premier protein branded products. Dymatized sales performance also improved this quarter as strong online and international sales growth offset ongoing weakness in the specialty channel.
Parrbar sales were soft as we continue to lap distribution losses. Higher Shake volumes fueled growth in Active Nutrition adjusted EBITDA to $35,000,000 This was partially offset by protein input cost inflation and higher freight expenses. Turning to private brands, net sales were $114,000,000 an increase of 5% compared to the prior year. Volume growth in tree nut butter and organic peanut butter was offset by declines for certain lower margin dried fruit and nut products. Net pricing increased nearly 7%, primarily related to mix and pass through of input costs.
Private Brands adjusted EBITDA was $13,500,000 driven by favorable product mix with the higher tree nut butter and organic peanut butter volumes. Before we open up the call for Q and A, I would like to make a few comments on taxes, cash flow and capital markets transactions. As a result of recently enacted U. S. Tax reform, we recognized a net one time benefit of 200 and $63,600,000 in the Q1.
This resulted in an estimated $271,000,000 benefit from the remeasurement of our deferred tax assets and liabilities and an estimated $7,000,000 expense related to the one time transition tax on un repatriated foreign earnings. Looking ahead, we expect U. S. Tax reform to result in a reduction to fiscal 2018 cash taxes of between $30,000,000 $35,000,000 Our U. S.
Federal corporate income tax rate will be a blended rate of approximately 24.5% for fiscal 2018 and then 21% for fiscal 2019 and forward. In 2019, we also expect a temporary loss of a modest amount of interest deductibility and the elimination of certain permanent deductions. While we are not ready to quantify cash tax estimates for future years, we expect the ongoing benefit of tax reform to be significant. And as you would expect, we are actively reviewing opportunities to ensure that we are structured as tax efficiently as possible. Cash flow from operations for the Q1 was $204,000,000 and benefited from a change in the timing of interest payments.
The vast majority of our interest is now payable in our 2nd and 4th fiscal quarters. Regarding capital markets transactions, during the Q1, we issued $1,000,000,000 in principal value of 5.625 percent senior notes. The proceeds were used to redeem our 6% senior notes and pay a portion of the consideration for the acquisition of Bob Evans. With this transaction, our debt maturity ladder has been extended to 2028 and our first maturities are not until 2024. The weighted average cost of our fixed rate debt, including interest rate swap hedges, is 5.3% and comprises 84% of our total debt.
The remainder of our debt fluctuates with LIBOR. This mix insulates our free cash flow from rate changes in the intermediate term and the long term nature of our amortization ladder affords us ample time to deleverage in a manner that will reduce our cost that will reduce the cost of our capital structure. Giving full credit to the Bob Evans acquisition, pro form a net leverage at the end of the Q1, as measured by our credit facility, was approximately 6 times. We expect net leverage to reduce to approximately 5.5 times by the end of the fiscal year. With that, I'd like to turn the call back over to the operator for questions.
Operator?
Your first question comes from the line of Bill Chappell of SunTrust.
Thanks. Good morning.
Hey, Bill.
Hey, I guess first question on Weetabix softness. Can you you said we, but I assume most of the promotions and everything was put in place before you acquired the business. There's barely a 6 to 9 month lag on that. Is that the right way to look at it? And I guess trying to understand how much of the softness was a surprise versus how much is just you haven't had a chance to really affect the business?
It's more of the latter. So just to give you a little context, the biscuit segment itself continues to modestly grow. And as you know, we're the leader in branded when we participate in private label. But there's been a more pronounced shift in channel mix, more aggressive private label that has put some pressure on average pricing. And I think we've, to some degree, unconsciously allowed the promoted percentage of volumes to creep up.
And coming in, we determined that one of the things we need to address is that promotions creep in order to maintain the efficiency of the promotion versus just trading incremental dollars. But as you, I think, rightly point out, there is a calendar on promotions planning that takes some time to work through. And even now, we're still operating under prior planning. So it will take a couple of periods through really the balance of fiscal 2018 now to make the necessary corrections on the promotion calendar and it will involve some near term volume loss aimed at what we think is better promotional efficiencies heading into 2019.
Okay. And then on Private Brands and the decision there, is there any and maybe you've given some update on timing, is this fiscal year, is it could it go longer? And then also just maybe the thoughts behind, I think you had previously talked about the private brand segment, but pulling out the Dakota Growers business, which is I thought more of a foodservice business seems like they're kind of different businesses. So I'm trying to understand cobbling together decision behind that and then also timing when we would hear more about this?
Sure. The timing would be towards the end of the fiscal year is our target for having something done. So we would likely announce something earlier than that. With respect let me give you again some context on the rationale. We think that there is a real opportunity to be a consolidator in private brands because of all the secular trends that are well established.
We think category selection is critical, but the opportunity is meaningful. I think the other reality we face is that in order to pursue that opportunity, we need to be set up to do frequent smaller transactions, whereas Post is now more oriented towards fewer larger transactions. So we think there's a disconnect between our engagement and the capital allocation and the opportunity that exists. So we want to try to structure a company that allows direct capital access, a highly engaged team, and we got a great leader in Jim Dwyer, who is excited about executing this opportunity. The specifics of the question about Dakota are really aimed at, 1, Dakota is about half private label and half foodservice.
So it could really go either way. The inclusion in the Michael Foods Group has really had some benefits as we've driven the foodservice volumes. However, what we wanted to do by including it in private brands is really create additional optionality because it gives us options with capital markets that otherwise wouldn't be existing because of the scale needed to enter that market. So it's more about some of the financial alternatives we're trying to create and the fact that Dakota can be a swing participant.
Got it. Thanks for the color.
Thank you.
Your next question comes from the line of John Baumgartner of Wells Fargo.
Hi, good morning. Thanks for the question. Sure. Hi, John. I wanted to ask about the EBITDA margins at Michael.
You're much stronger than we had expected. Can you walk through the moving parts there? I guess given that haven't yet even had the full benefit of the egg price recovery filtering through. How do you think about the business sequentially for fiscal 2018? Well, the 1st fiscal quarter tends to be the high mark.
So on a penny per pound basis, and again, we tend to not focus as much on percentage margin as we do on penny per pound because of the grain based pricing mechanism. But on a penny per pound basis, it will likely be the high watermark. If you look at, Michael, seasonality, it's not hugely seasonal, but there's about 27%, 28% of the average EBITDA contributed in the Q1. So that has some absorption benefits as it flows through fixed costs. So between a reasonably attractive market, real success in cost control, real success in driving incremental volume on a grain basis, we had an attractive margin quarter.
I think one of the things that could drive it further offset by some fixed cost absorption reduction as volumes come down just from a seasonal perspective is that we will start towards the end of the year to see some of the synergy flow through on both the Michael and the Bob side, very modest in fiscal 2018, much more significant in fiscal 2019. And in terms of migrating some of the customers to longer term contracts in the Michael and the egg business, any initial indications of how that's going? Yes, it's going well. And it's anecdotal at this point, but we've had 2 very large customers who have made the transition. And it's largely gone at the cadence that we have expected.
We've been talking about Michael with these expectations now for the better part of 2 years. And I think finally, we've got the ability to look backwards and say that the pattern we anticipated occurring 2 years ago has now fully cycled and that the grain based profile is reemerging and with pretty good momentum.
Okay. And just on Bobby, pretty nice bump
up in the synergy target so soon in the process. Can you walk through the drivers of that and what's kind of changed there on the haul side? The biggest increment comes from, generally speaking, supply chain. But one of the things that we were unable to do pre closing for competitive reasons was to do any real procurement analysis. So the procurement opportunity was bigger than we expected.
And as we have driven towards an integrated supply chain, that unlocks both near end opportunities as well as larger potential opportunities. And we have not tried to quantify the larger potential opportunities because they involve capital allocation decisions that we have not yet made. We had an integrator work with us and did a very nice job of helping push us on identifying some synergies. And I think when you look at our early assumptions, which were frankly conservative, and you look at the decision to go with an integrated supply chain, the combination of those two resulted in a lift in the estimate. And to be fully transparent, if not for the fact that we have to spend a little bit more money this year to get those synergies, we may not have pulled them forward quite so quickly, but we're going to need to spend some money now in order to get them towards the end of the year and into 2019.
Okay. And then just last to wrap up. Over the past few years, you've worked through some promo inefficiencies between mom and post in the cereal business. Now it sounds like you're addressing that at Weetabix. For Bobby, the sausage business received about what 60% of the trade promo dollars there.
And the lift on that promo is the lift has become weaker in the measured channels the last couple of years. How are you thinking about achieving promo improvement on BOTI? And is that already part of your synergy guide? Thank you. Yes.
So I would consider on Bob Evans, the trade strategy to be fundamentally different than in the balance of our packaged goods business in that with such a volatile underlying commodity, that's a means of being an adjustment valve for swings in the underlying commodity versus the attempt within the balance of our portfolio to drive incrementality. So I think it's a fundamentally different way of thinking about trade and one that I would not expect to change materially. Okay. Thanks for
your time.
Thank you, John.
Your next question comes from the line of Chris Growe of Stifel.
Hi, good morning.
Hi, Chris.
Hi. I thought if I could just ask a follow-up question on Weetavix. And just to understand, if you were to look at organic sales, I know you gave pro form a sales in the release, but I'm just trying to take out currency. It may help better kind of illuminate what happened in that business. Was it down in the quarter then, kind of the underlying ex currency benefit?
Yes. So the volumes were down 2 or 3 percentage points. I don't have it at my fingertips. But the currency impact was largely in the very latter part of the quarter. So I think while we're all thinking there's a big currency benefit, our guidance was predicated upon a $132,000,000 $133,000,000 conversion rate.
And for the Q4, that was largely intact. There was a lift from the prior year quarter of about $0.04 But the impact of the recent run up in currency has been largely a late December phenomenon and really gained momentum into January. So and I should add, our guidance continues to be predicated upon a $132,000,000 $133,000,000 conversion rate. So inherently, there's some cushion there. So I think we can overstate the impact of currency in the quarter we just ended.
Okay. Got you. And then, and just maybe to run that out, is there a seasonality factor that it all played into this quarter for Weetavix?
There's a modest seasonality factor, but I think there's also a impact of having last year been a year end and this year not being a year end, so that there was more pressure last year from the prior owner to pull forward into last December that we didn't repeat. So there's a little bit of a qualitative difference between our December and their December last year.
Okay. That makes sense. And then on the egg business, I'm curious, you mentioned you may have a couple of conversions that have occurred there. How much of your volume broadly is sold at spot versus on a grain based contract?
In general, we sell I mean, historically, we sell 25% of it on a spot basis. This year, we're selling less than that on a spot basis. We're selling more like 10% on a spot.
Okay. And that includes those who have already converted then, is that correct?
Correct.
Okay. And then just one final question on the cereal category. I guess I'm curious if you've seen pressure, particularly on the mom on the bags from General Mills coming into the category. And then just a broad question like can you gain market share you think in cereal this year? Was it more about comps in Q1 and things get better from here?
It sounds like, but I wanted to just see what you thought about that.
So as I mentioned in my prepared remarks, our promotional calendar was backloaded this year in contrast to last year. So we have an optimistic outlook that some of the share losses from the Q1 would be regained in the balance of the year. But certainly, the competitor is effective as General Mills entering the bag category matters to us and has an impact. I think long term, the impact is kind of mixed. It certainly validates the bag.
I think I've commented on in the past that it validates the bag as a packaging format that historically has been viewed as more of a value with less obvious quality. But when you see some of these box brands enter the bag category, we think there will be some positive carryover into the aggregate bag section. We frankly think that a more vigorous innovation pipeline, some more vigorous advertising and some more vigorous behavior from the category leaders potentially had some short term implications for us. But long term is helpful in creating excitement in the category and we're by no means above riding coattails.
Sure. Okay. Thanks a lot.
Your next question comes from the line of Andrew Lazar of Barclays.
Good morning, everybody.
Hi, Andrew.
Hi. Couple of quick things. 1, Active Nutrition, again performed very well on the top line against a tough comp. I think last quarter you said you potentially expected the rate of sales growth to decelerate, but to have higher sales dollars on the year. But the sales growth rate obviously continued to clip along at a pretty nice pace.
Is that something that was specific you think to the fiscal Q1 or is the pace just still at a pretty high rate and you'd expect that to continue to go through the year?
Well, we continue to be pleasantly surprised by the rate of growth. We anticipated the dollar growth, as you just indicated, but we just don't feel comfortable to extend that rate of growth into perpetuity, and in this case, undefining perpetuity fairly shortly. And we are looking more at what the dollar implication is. But again, every quarter, we get pleasantly surprised by how well the brand is doing. So I'm kind of dancing around saying we're very optimistic for the brand.
Whether we can sustain this hyperbolic growth rate for more than a year or 2, it's hard to say given the product life cycle in this category. But we feel very optimistic that the gains will stick and that the an attractive rate of growth will continue without trying to put too fine a point on what attractive means.
Got it. Okay. Thanks for that. And then on Weetavix in UK, if I'm understanding you right, it sounds like potentially we can expect over the next couple of quarters, the volume to weaken some, but potentially margins be a bit above sequentially where we saw them in the Q1, just as you shift off a little bit volume for more effective promotions. Is that a fair assessment?
Well, that's a fair assessment, but I would add to that assessment that part of that margin story will be getting our CI program more in line with our plan. So we had a weak delivery of our CI expectation in the first quarter. So it's a combination of better pricing, but equally significant is just driving that CI cost reduction that we have identified and think will flow through.
Got it. Okay. And then just last on cereal. Obviously, you're getting some benefit on cash flow from tax reform, perhaps some of the major players, branded leaders in cereal will have a large benefit as well in cash and on the P and L. So I guess as you're the way you're sort of budgeting and thinking through how you're thinking this through the year in consumer brands, Do you feel like it takes into account what potentially some of these players could well do in the interim with some additional flexibility from tax reform.
Again, we don't know how much will be reinvested by the branded players against consumer promotion and branded innovation versus some near term promotional or pricing activity? I'm trying to get a sense of how, I guess, prudent and conservative you're being on that piece of the business.
Yes. Well, as you can anticipate, we do multiple scenario analysis. So we've got various planning based on different predicates. I think we have we've tended to be conservative on guidance and we think we are continuing to be. I think the proof will be in the pudding in terms of how aggressive competitors respond, but we think we've incorporated most realistic scenarios.
Okay. Thank you.
Your next question comes from the line of Jason English of Goldman Sachs.
Hey, good morning folks.
Good morning,
Andrew. Thank you for squeezing me in. I guess I'll pick up a bit where Andrew left off in terms of understand the dynamics in the U. S. Cereal space.
Have you begun to see any shelf resets shrinking space for the category overall? And if so, how are you faring in those planned resets?
I think if you look over a multiyear period, yes, in any one period, the shrink is pretty small. But over the last 5, 6 years, it's probably about a 10% decline. We have fared pretty well. Our net real estate has expanded in that timeframe predominantly from Bags.
How about more recently? I'm less focused on sort of the past and more focused on the now and the implications on the forward. Anything more dramatic you're seeing
this year? Not as it affects us. And I don't know that I can tell you yet as it affects category as a whole, but we have not in the short term seen anything shrinking our footprint.
And back to more specifically Andrew's question in terms of promotional aggression, we've clearly seen mills with a heavy, heavy investment posture in the category. You're kind of signaling just based on cadence that your posture is going to become more aggressive as the year progresses. And I'm not sure what you're seeing from Kellogg, but it seems reasonable to assume that they ramp as well. How do you expect the category to behave? I imagine there's going to be some deflationary pressure.
And what if you can give us any more context around sort of the specifics of what your planning assumptions are as we think about that business for the rest of the year?
Yes. I don't want to get into details around competitive reactions and planning assumptions we have an array of, variables that we have an array of variables that we assume move from both, not just the 2 you named, but the other individual assumptions are around that other than to say that I think your general thesis of some price deflation, as you've seen this quarter, is consistent with our expectation for the balance of the
year. Understood. Thank you. And then two quick questions on Michael's interrelated. That 10% figure on spot for eggs, is that your expectation for the year or is that where you were running for the quarter?
That's for more quarter. The year could shrink a little bit more. It's probably not terribly far off for the year either.
Okay. That's an encouraging data point because it suggests that there's clearly a little bit of concern that given the spread between grain and spot egg prices right now that you may actually be back to an over earning period. And that this may be a high watermark and once you convert customers back into contracts that the EBITDA will have to slide lower until you wait to sort of volume to grow into that. Is it fair to say that with only 10% of spot that we shouldn't be overly concerned about that right now?
Yes, I don't think as I mentioned, we have it is a high watermark the year. We don't think there's a fundamental over earnings situation as we had in 2016. If you extrapolate our earnings in fiscal in our 1st fiscal quarter times 4, you get a pretty high number, and it is comparable to 2016. But that's not the trajectory of the business because of seasonality. So we do not feel like we are in Your
Your next question comes from the line of Cornell Burnett of Citi.
Great. Thanks a lot guys.
First question I had was just if you can kind of marry some of your comments in terms of perhaps kind of seeing some type of price deflation in the cereal category with the fact that kind of freight costs are coming in higher than your expectations and are probably hitting everyone else within the industry. So just wanted to know if kind of what's the thoughts on people seeing higher costs perhaps keeping some of the competitors a bit more honest as the year progresses in Cereal?
Well, so if your question is, will some higher input costs drive more inflation versus anticipated deflation? We would certainly be encouraged to see that. But I don't we're not going to plan around that. We're continuing to look at our non commodity costs and be aggressive in trying to take as much out as we can and maintain our market structure. But given our relative position in the category, we take a more weighted approach on that.
And then just generally, can you give comments generally across a number of your categories within at least the retail space on just how you're seeing the kind of pricing environment play out this year and perhaps how does it compare to years past?
Well, it's a very aggressive environment. I mean, you've seen the Nielsen reports and we've got not this is a broader than cereal because private label has not been as strong as cereal, but we've got some encroachment on private label. We've got some competitive intensity. So it's a difficult pricing environment.
And then the last one is I get where you're coming from and everything that you said on Michaels is pretty clear. I believe perhaps on the previous earnings call, Luisa mentioned that kind of fiscal 2Q would be a big quarter in terms of the year over year comparisons in total EBITDA and a lot of that was driven by Michaels, which I think kind of last year, fiscal second quarter is when it was hit the worst. Is this still the expectation that kind of 2Q is one of, if not the biggest kind of quarter in terms of year over year delta in Michaels Foods growth EBITDA growth?
If you look at the cadence of this quarter, there's been some slight shift from the second quarter to the latter half of the year. We still expect, as we talked about last quarter, there to be sequential growth throughout the year. So I would say the growth is continues from Q1 to Q2 at a more modest rate than we had expected last quarter, but then we have a greater rate going from Q2 to Q3. So there's been a little bit of a timing shift.
Okay, thanks. And then just
the last one on Surio. I know in past you talked about making some more higher consumer marketing investments this year. So just wanted to know what's kind of the what's in the base in terms of kind of the year over year delta in consumer marketing spending? And kind of has that changed as perhaps maybe your view on the category has shifted a little bit over the past quarter?
We had about
a $25,000,000 increase year over year just in cereal and then across the portfolio was closer to $35,000,000 We have made some very modest reductions in that outside of cereal. Cereal remains intact and we evaluate that on a constant basis.
Okay. Thanks a lot. I'll pass it on.
Thank you.
Your next question comes from the line of Tim Ramey of Pivotal Research Group.
Thanks so much, Jeff and Rob. Good morning, Tim. A couple of quick ones here. On Michael, the Catria conversion, should we be thinking about that as also a capacity
No, that's more of a conversion. I wouldn't think about that because what we did was we took the farm down and converted it. There is a modest increase in the productivity of the farm that we're replacing versus the farm that preexisted. But the it's more about capabilities and capacity.
Okay. Would you argue that the Q1 volume performance in the ag business was a high watermark as well?
Not on a percentage basis compared to prior periods, just intra year.
Okay. And then on Bob Evans, the I had $107,000,000 number in my head as the base. I don't know if that's actually what you're thinking of as the base for EBITDA there. Is there an update on that number?
Yes. So it roughly flows through on that basis through the balance of the year. But the but if you looked on a historical basis because of some cost overruns related to very specifically the Lima facility, they would not have gotten that. But on a prospective basis, they're in line with that.
Okay. And I was intrigued by the probiotic initiative at Kellogg in adult or TEEs. You guys have some expertise with the supplement business, although maybe not probiotics specifically. Did that cause any thinking caps to go on relative to innovation in RTE?
It certainly does. I think that we've logged the efforts. I think they talk about the microbiome and the impact on how to address gut health more generally. And I think a lot of the work they're doing in that area is encouraging and things that we spend time on as
well. Good. Okay. Thanks so much. Thank you.
Your next question comes from the line of Ken Zaslow of Bank of Montreal.
Hey, good morning, everyone.
Hi, Ken.
Let me just start off. So even with the intensity in the cereal category, the logistic costs, all that, you guys obviously felt more comfortable with the outlook by at least raising the bottom end of the range. What was that predicated on?
General performance of the business, the degree to which we I think you know from our past behavior that we try to handicap more broadly in the beginning of the year and as we go through the year, relieve hedges. So as the quarter passed and some of the assumptions came in, and generally in line, there's obviously some puts and takes. We had some comfort to take out some of the hedges.
Okay. And then as you integrate these businesses, it seems like that both of the businesses seems like there was some, lack of better word, management miscues, not by you guys, but by the previous owners of both businesses. And then you guys can come in and kind of rectify some of these somewhat shortfalls. Is that included in how you think of the synergies? Or is that potentially an incremental opportunity of just kind of, hey, let's run these businesses a little differently than the previous owners?
So if I understand the question, I would tell you the way we think about synergies is not we try to be intellectually consistent that synergies are on top of our underwriting case. So that to the extent we need to remediate something, that's not a synergy as much as a correction to the baseline. So to the extent there were bottlenecks in manufacturing that weren't obvious early in the year and became obvious at the peak season, those are fixable growing pains. But the incremental synergy is not based on growing or expanding off of a reduced base. It's off of the original base.
With Weetabix, I think it's less about a change in synergy as it is just a change in our pricing strategy.
But would that not change the earnings power of both these businesses relative to your expectations? Is that not how to think about it?
Well, in the case of Bob Evans, it will certainly do so. In the case of Weetabix, I think it will get it back in line with history. And then the question is, can the will the synergies, which are flowing through and will some of the improvements that we think are obtainable on the CI program drive incremental performance over the baseline? We believe that will occur, but it's not going to occur until 2019.
Okay. And then where are the opportunities for distribution gains in Bob Evans? You don't talk about that, that much, but it seemed like their previous strategy was to get distribution. You guys have a more extensive network. Where does that lead?
And I just have one quick question after that. Thanks.
Yes. Broadly, the answer is in the western part of the country where the brand tends to be less penetrated.
And what's the timing of that?
It's ongoing. They've been doing a nice job of gaining it pre acquisition and it's their ACV growth is has been fairly consistent the last handful of years and we expect that to continue to accelerate.
And then last question, what prompted you guys to buy back stock? You don't do that often? Just give us a little heads up on that and where is this going to?
Well, we thought and think that the price was attractive and chose to act on that, not more complicated than that.
Okay. Thank you very much.
Thank you.
Your next question comes from the line of Brett Hundley of Vertical Group.
Hey, good morning guys. Hey, Brett.
I wanted to
ask you about your updated, BOBE synergy target. You gave us some good direction on just some modest benefits this year and then more meaningful into fiscal 2019. I mean, at this point in a vacuum, should we just be thinking about the lion's share of that synergy target still being potential for that to be available in fiscal 2019?
Yes.
Okay. And then I wanted to ask you about your NPE business and maybe separate out 2 comments if I could. So number 1, with the view that maybe the specialty ag market has built out a little too much, I was just curious how that might impact NPE, if at all? And then related, do you guys still think that you can deliver on your synergy target there as well? I think the bulk of that synergy was supposed to come this year, if I'm not mistaken.
Yes, and it has. So that business generated about $4,000,000 in the quarter. And we had when we bought it, it was generating about $9,000,000 a year. So we're well ahead on our synergy targets for MP.
Okay.
Okay. And do you feel like any changes in the specialty market have affected you? It doesn't sound like it.
No. I mean we've been very successful with NP and with our specialty acquisition in Willamette. So those have been nice accretive acquisitions for us.
Okay. That's good to hear. And then, just my last question, Rob, is just I probably know the answer to this, but when I think about new tax reform or just potential policy change in general, but mainly related to tax reform, and some different changes there. And I think multiple years out, does that shift the company's stance on its asset strategy at all to maybe more of a seller versus being a buyer before? Maybe asked differently, I mean, does it change your views on leverage at all?
I'd just be curious to get a comment from you.
Yes. So when asked this question historically, our answer has been the changes in tax law have tactical, but not strategic implications on where we take our business. The reality is that having accumulated this group of businesses over the last 5 or 6 years now is a natural time to start thinking about what is the optimal structure in a variety of ways, irrespective of tax reform. So tax reform just adds a layer of intrigue to some of the corporate organization work we're doing. And one of the evidence of that is our decision on private brands.
So I think the tax reform first of all, I think we are we would much rather operate under a tax regime at 21% to 35%, full stop. There are some mitigants to that, but I think that we have the planning ability and the creativity and conviction to work through that in a manner that allows us to win from tax reform.
Thank you.
Your next question comes from the line of Ryan Hunt of Wells Fargo.
Thank you for your time. A couple of my questions have been asked, but I've got 2 left. One, I was wondering if
you could just,
given the change in guidance, what your outlook is for kind of composite inflation on packaging ingredients and transportation? So at our fingertips, we don't have the percentages, but the numbers are so we're looking at, in aggregate, about $15,000,000 of freight. The ingredient inflation year over year was about $15,000,000 in cereal and another ten, so $20,500,000 So between the 2 and those are the 2 big buckets we're facing right now, we were looking at nearly $40,000,000 of cost absorption. Okay. And then my second question is, when you look at the evolution of click and collect and delivery, it's bringing a new level of price transparency and maybe different levels of packaging to the industry overall.
Can you talk about what that means for product innovation, price pressures from your competitors as well as maybe change in marketing tactics on a go forward basis? Well, I think in asking the question, you kind of hit on the big ones. We have to think in an omnichannel basis and think about everything from the package form to the package size to the price point deliverability. So I think what it requires is a going back to a whiteboard level and reconstructing the product form to fit the consumer who wants to move to that kind of shopping behavior. Now in cereal, at this point, it is a very modest portion of the consumer.
Where it's more important to us, at least in the short term, is in our nutrition business, where we are pretty well positioned by virtue of the price point and the product form. We ship fairly high price point, works very well. And in fact, online has been a very substantial growth vehicle for us in the last really 2 quarters, but particularly the Q4. So I think it requires addressing all the PQ rates and it also requires a different nuance from business based on consumer behavior, temperature profile, price point, all of that. Thank you for your time and I'll hand it off.
Thanks.
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.
Again, thank you all for joining us. We feel good about the way the year is shaping up despite some challenges that we're going to face in any portfolio of this size. And we look forward to talking to you again in May. So you all have a good spring.
Thank you for participating in the Post Holdings Q1 2018 earnings conference call and webcast. You may now disconnect your lines and have a wonderful day.