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spk00: Good day, and welcome to the Post Holdings Quarter 3 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 1 on your telephone, and you will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1 1 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Daniel O'Rourke, Investor Relations. Please go ahead.
spk05: Daniel O' Good morning, and thank you for joining us today for POST's third quarter fiscal 2023 earnings call. I'm joined this morning by Rob Vitale, our president and CEO, and Matt Maynor, our CFO and treasurer. Rob and Matt will begin with prepared remarks, and afterwards we'll answer your questions. The press release that supports these remarks is posted on both the investors and the SEC filing sections of our website and is also available on the SEC's website. As a reminder, this call is being recorded and an audio replay will be available on our website at postholdings.com. 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 the 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. And finally, this call will discuss certain non-GAAP measures. For a reconciliation of these non-GAAP measures to the nearest GAAP measure, please see our press release issued yesterday and posted on our website. With that, I will turn the call over to Rob.
spk08: Thank you, Daniel, and thank you all for joining us this morning. We had a really terrific quarter, and we expect a strong finish to fiscal 23. This morning, I'm going to be a bit more prescriptive than usual as it relates to how we think about our business trajectory one year out. We realize that between adding the pet business and our outsized food service performance, we are making for a challenging model. So let's start with our pet acquisitions. You can infer from PCB's reported margins that pet food margin realization is exceeding expectations. In fact, contribution has well exceeded our underwriting case. There are three reasons. First, changes in factory leadership and behaviors within our factories have enabled us to improve service levels and rebuild customer inventories. Second, our G&A assumptions are proving to be conservative. And last, we have not yet begun to invest in brand rehabilitation. While we are not going to give specific PED guidance, it is fair to say our expectations for its contribution have increased in the short term and meaningfully more so once we move past full integration and synergy realization. Recall our three-tiered approach to evaluating this acquisition. We said if we can increase margins, it will prove to be a good investment. Our margin opportunity is greater than expected and already starting to hit the P&L. The second tier was brand rehabilitation. In 2024, we will start to reinvest some of the margin upside and seek to revitalize these brands. That was investment success tier two. And finally, we are building this over the long term as a platform for inorganic growth. Related to inorganic growth, I am very proud of this team's integration efforts, going back all the way to Mom Brands, Treehouse, Private Label, Peter Pan, and now PET. They have developed a real proficiency at delivering sustainable synergies. The other contributor to outsized results this quarter was food service. The business continues its terrific performance. Ignoring the outsized performance, Baseline is performing extremely well. Volumes grew 3% and mix continues to shift towards higher value-added products. In tandem, the volume growth and favorable mix produce a sustainably higher level of EBITDA than pre-COVID. We estimate this to be approximately $90 million per quarter prior to the impact of ready-to-drink protein shake manufacturing, which will come online in the first quarter of fiscal 24. On top of a strong baseline, we delivered outsized performance. Matt will provide some detail on its drivers and the trajectory to normalization. Last night, we raised our adjusted EBITDA guidance to $1.18 to $1.2 billion. Back to my comment about helping you model by being more prescriptive, While our FY24 planning is in the preliminary stages, we expect to show modest EBITDA growth next year with our current guidance as the baseline. Further, we expect to be well positioned for FY25 as we realize synergies from the pet acquisition, continue to improve supply chains, and make incremental investments in marketing. The step up in marketing is not limited to pet. We are stepping up marketing spend across categories including U.S. and U.K. cereal and the Bob Evans brand. Last, I want to be as clear as possible that in anticipating growth next year, we are including seven more months of PET results and normalizing food service. Those are the significant offsets. Hopefully, the outlook for 23 and these preliminary comments around 24 give you the ability to appropriately factor recent M&A and current year performance into your models. Turning to ready-to-eat cereal, there have been questions lately about volume resiliency in the face of two years of stacked pricing. In fact, category pounds were down 3.9%. We attribute this to lapping Omicron, a shift to away-from-home breakfast consumption, and most significantly, the March reduction in SNAP benefits. Omicron and SNAP are non-repeating, and as a result, we tend to think of the category as mean reverting to a pre-COVID 0% to 2% decline. We were also seeing a notable shift to value price products. Our shipment volumes this quarter declined 5.7%, but half of the volume decline was a result of Peter Pan shipments lapping the temporary market withdrawal of the Jif brand. On a consumption basis, we grew sequential dollar share in cereal to 19.9%, and Peter Pan has grown half a share point on a two-year basis. Refrigerator retail had a mixed quarter. Supply chains have markedly improved over last year and have enabled product continuity, and margin expansion. On the negative side, we continue to see pressure from private label impacting volumes, and we are responding with our first television advertising in two years. We fully expect to see this brand resume its growth as we drive incremental households and expand distribution, both supported by re-engaged marketing. We to VIX is in a tough macro environment with UK consumers facing food, energy, and housing inflation well ahead of the US. The business is being well managed, and we are investing in the brand for the long term. In fact, against the backdrop of strong company-wide quarter, we are increasing marketing, and we'd have extended 2024 in stronger shape. In terms of capital allocation, we continue to weigh M&A, deleveraging, and share buybacks against each other. We have been aggressive purchasers lately. Since the announcement of our pet acquisition, we have open market repurchased approximately 60% of the amount of shares that we issued to JM Smucker, all while keeping our leverage ratio on a downward trajectory. In closing, we remain quite confident in our recent portfolio moves, and we continue to see momentum building in our business. With that, I will turn the call over to Matt.
spk01: Thanks, Rob, and good morning, everyone. Third quarter consolidated net sales were $1.9 billion, and adjusted EBITDA was $338 million. net sales increased 22% driven by the newly acquired pet food business. Excluding this acquisition, net sales increased 4% driven by pricing actions in each segment. Food service saw increased volumes as consumers continued to show a preference for eating out during breakfast hours. Volumes in our retail businesses decreased as pricing elasticities ticked up and shifted volume to our private label offerings, although not enough to offset declines in our branded products. Our supply chain performance and customer order fill rates continue to improve. However, we still have pockets of opportunity in both. Inflation moderated across the business in the quarter, especially in freight costs. Turning to our segments and starting with post-consumer brands, excluding the benefit of the pet food acquisition, net sales increased 4% and volumes decreased 6%. Average net pricing, excluding pet food, increased 10% driven by pricing actions. we saw a strong volume growth in private label cereal, which was offset by declines in peanut butter and branded cereal. Segmented adjusted EBITDA increased 28% versus prior year, as we benefited from the contribution of the newly acquired pet food business. Moving over to Weetabix, net sales increased 7% year over year. The British pound was nearly comparable quarter over quarter, causing just a nominal foreign currency translation headwind of approximately 50 basis points. The increase in net sales was attributable to significant list price increases and was partially offset by unfavorable mix towards private label biscuit. Volumes decreased 5% as growth in U-fit, extruded products, and private label biscuit was not enough to offset declines in branded products, which were driven by inflation-related elasticities. Segmented adjusted EBITDA decreased 26% versus prior years. Lower volumes and higher input and warehousing costs outpaced our pricing actions. We continue to expect the challenging macro environment in the UK to keep our margins compressed into 2024. Food service net sales and volume grew 8% and 3% respectively. Revenue growth continued to outpace volume growth as revenue reflects the effect of our timing and our commodity pass-through pricing model in our temporary AI price premium. The benefits of our pricing dynamics were magnified by the combination of our abnormally low inventory level at the end of the second quarter and a temporary collapse in market egg prices in May and June. This market collapse resulted from the post-Easter demand pullback, coupled with the continued recovery of national layer population following avian influenza. It would likely take another AI event to have a similar price dynamic the opposite direction. And as a reminder, such events historically give rise to incremental pricing. Our AI pricing tapered off at the end of Q3 and is winding down, which is a nominal tail in Q4. In addition, market egg prices quickly recovered by early July. So as we sit here today, the business on a go-forward basis is running in line with normalized run rate that Rob discussed. Refrigerated retail net sales and volumes decreased 6% and 11% respectively. The decline in net sales was driven by lower volumes and was partially offset by increased average net pricing in the portfolio. Side dish volumes decreased 10%, reflecting price elasticities and a customer shift to private label. Segment-adjusted EBITDA increased 25%, primarily benefiting from pricing actions to offset significant cost inflation, favorable sell costs, and improved manufacturing performance across our network. Reinstating advertising and promotion spending versus the prior year was an offset to these benefits. Turning to cash flow, in the third quarter we generated $282 million from continuing operations, which is up significantly sequentially and versus prior year, driven by improved profitability and a decrease in net working capital. We ended the quarter at net leverage of 4.8 times, which is down from the 5.1 pro forma for the April closing of our PATH transactions. Moving over to capital allocation, capital expenditures were approximately $70 million in Q3, driven by continued progress on the new protein shake co-manufacturing facility, which is slightly delayed, though, into Q1 of next year. In addition, we repurchased $1.9 million of our shares at an average price of approximately $87 per share and retired $50 million of our debt at an average discount of 13%. In the month of July, we spent an additional $60 million to repurchase 700,000 shares, reducing our common shares outstanding to approximately $61 million. So to summarize, since the closing of the pet transaction, we have been able to buy back 4% of our shares outstanding and still reduce leverage by three-tenths of a turn. With that, I will turn the call back over to the operator. Thanks for joining us today.
spk00: Thank you. At this time, we will conduct the question and answer session. As a reminder, to ask a question, you will need to press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. One moment while we compile the Q&A roster. Our first question comes from Andrew Lazar with Barclays. Your line is open.
spk03: Good morning, Rob and Matt. How are you doing?
spk05: Good morning. How are you?
spk03: Great, thanks. Maybe to start, Rob, I was hoping to get maybe your perspective on just some of the key dynamics at play in the industry right now. On the consumer side, a number of companies have mentioned consumers are stretching their budgets. On the other hand, it appears they've yet to see, other companies anyway, yet to see much in the way of trade down to private label or switching out of categories. You know, on the customer side, we've heard about some inventory destocking at retail, supply chains sort of get back to normal. We've heard that branded competitors are getting more promotional, but there's sort of mixed sentiment regarding the level of return of promotions. Some say promotions are up year over year, but still below 19 levels. Others are saying promotions have largely returned to 19 levels. I'm just trying to get a sense of maybe what you're seeing in this regard and sort of how you're expecting the environment maybe to play out over the next, you know, 6 to 12 months.
spk08: You always get me in trouble with these questions, Andrew, but I'm going to fall into that trap anyway.
spk03: I appreciate it.
spk08: You know, so here's how we think about the state of the consumer right now. You have an increasingly bifurcated consumer where we have still, you know, call it half a trillion dollars of excess deposits compared to pre-COVID. And at the same time, you have pretty significant increases in credit card debt. So, if you call that a one-third, two-thirds relationship between the top and the bottom, as that rate of excess deposit amortizes, you're going to see a shift down in consumer spending, all the while having unemployment seemingly stay at a fairly attractive level, attractive from a macro perspective, not necessarily an inflation comment. But that leads to a 12- to 18-month horizon of probably a weakening consumer inflation unemployment is not going to get better deposits are not going to get higher and spending particularly if you include the resumption of student loan payments is going to get more challenging so we think the net consumer position is likely to be weaker not stronger and that that bodes well for shifts to value-oriented products which we're already starting to see and we expect to continue that then suggest that certainly you're going to see some more promotional activity and a bit more pressure on pricing offset by the normal things we've managed for the last decade plus.
spk03: Got it. Thanks for that. And then I think initially with the pet food acquisition, you were looking for a contribution of annual sales of about $1.5 billion and annual EBITDA of about $60 million. I guess you're at a point where it's early still, obviously, in the integration, but where you're at a point where you're ready to either sort of update that, or how do you see those numbers playing out now, given it seems like, while early, things are starting to break in a pretty favorable way pretty quickly?
spk08: Well, we've got the business combined with grocery, so we've got pet cereal and peanut butter under the post-consumer brand segment. So, you know, what we're going to be able to share with you, of course, with another quarter as they plan for 2024, and then you're going to start to see the changes in the segment. Obviously, the lion's share of the changes in the segment are driven by the pet acquisition. We're not going to give specific updated guidance on pet because it is part of a larger segment, but it, I think, will be relatively easy to track the progression over the next couple of quarters. Could you restate the numbers that you started with? Because I think the way you said that may have been just the 2023 effect and not the actual annual. I may have misheard you, but what numbers did you throw up?
spk03: Yeah, I think it was $1.5 billion in sales and then the EBITDA of $60 million.
spk08: No, no. EBITDA was $100 million.
spk03: Yes. That was just the piece for a partial year, yes, but $100 million on a full annualized basis.
spk08: Correct. Correct.
spk03: Thanks for that. I guess the last thing would just be, as some companies in the industry are starting to lap pricing, at least so far, it's early. The volume picture is maybe coming back a little bit more slowly than I think some would have maybe anticipated. Just looking at the mechanics of how you lap pricing and whatnot. I guess in your consumer business, are you at a point where you can see, you know, a trend developing yet where volumes are either sort of coming back mechanically as you would have expected as you lap the pricing, or are things maybe a little bit slower in some of those consumer areas like what we've seen from some others? Thanks so much.
spk08: I think our pricing, well, our volume dynamic is coming back very much consistent with our expectations. I think the, you know, I called out SNAP in my prepared remarks. I think that you can see where that caused a bit of a blip in volume consumption. So we are not seeing any real surprises based on our own expectation. Again, the only surprise in the quarter has been strength of PET margins as we start this journey with PET.
spk03: Great. Great. Good to see. Thanks so much.
spk08: Thank you, Andrew.
spk00: One moment for our next question. Our next question comes from David Palmer with Evercore ISI. Your line is open.
spk02: Thanks. Good morning. It sounds like PET is giving you more confidence to guide on fiscal 24 as you are today. Is it really all PET that's giving you more confidence? I'm specifically digging into if there's something in food service that could be sustaining above that base case of that $90 million per quarter plus the $10 million or so you might get from co-packing. So any thoughts there? Thank you.
spk08: PET is certainly a contributing component of our comfort level in giving you some sense of 24. And let me be completely transparent on that. Had we not just had the the twin events of adding PET and having quite an outsized performance year to date in food service, we wouldn't be talking about 24 just yet. That's not our normal cadence. So what we are trying to do is try to be respectful of the challenges you all face with the complexity that we sometimes create and give you a little bit more of our thinking as it relates to a period of time a bit further out than we would normally do so. But in terms of the components, we do feel good about PET, but we feel very good about most of our business. We think that there's going to be a strengthening position in our refrigerated business as we engage with advertising. We've invested heavily in Weedabix at the expense of Weedabix's current year performance, so we are positioned nicely going into 24. It would be nice to see some macro strengthening there, but what we can control, we are well controlling. Our food service business, even outside the pricing dynamics of AI, is in very attractive shape. We've long talked about the investment we made in precooked capacity, and we made a heavy investment in precooked capacity right ahead of COVID, which for a couple years looked questionable. Now it is paying off in spades as we see a higher mix towards value-added products. And recall that the mix in value-added products from highest to low is a four to five times increase in the contribution to fixed overhead. So the business is performing well. In each business, yet, there's room for improvement. We have some manufacturing underperformance in Michael Foods. We have the challenges that we've already articulated in Weedabix and in Bob Evans. And we can always do cost improvement within our network within PCB. So despite the strength of the year, we feel very confident that we can continue to build upon it and improve our trajectory.
spk02: That's all very helpful. Just a quick one. I think probably investors are most nervous about volume assumptions by any food company these days. And I'm just wondering what sort of volume assumptions, particularly with consumer brands and refrigerated retail, are you thinking about for fiscal 24? And thanks.
spk08: Well, we gave you the category assumption that we're looking at of a 0% to 2% decline. Again, we're not through our planning process for 24, so that's a pretty high-level category call. We're not ready to give you where we're thinking about potatoes and other categories yet because we haven't gotten into the details of that assumption, but I would expect that to be more positive And that's more of a controllable on our side than a category comment, because that's the area where we haven't marketed. But I think you're probably most interested in a large category like ready-to-eat cereal, and we think it's down zero to two.
spk02: Thank you. Thank you.
spk00: One moment for our next question. Our next question comes from Michael Lavery with Piper Sandler. Your line is open.
spk09: Thank you. Good morning. Hey, Michael. I just wanted to come back to food service. You mentioned the mixed benefit, and you touched on some of the things that have really driven the lift in the quarter, but if that mixed shift is more sustained, how do much how much different is that than the 90 million base case run rate uh you know could that continue and continue to add a lift is your assumption that it doesn't can you just help us maybe think about the the mixed piece and and what to expect going forward well i think the best thing i can do is refer you to our investor deck in which we attempt to normalize that go back to the 90 million dollar uh per quarter baseline
spk08: add in a potential $20 million for ready-to-drink shakes, adjusted by the fact that it doesn't all come on board day one of the new fiscal year. And then we call out a 3% to 4% growth rate in that segment. And that's a five-year model that we've published, and it's on our website and readily available. So I think that's the best way for you to think about the impact of
spk09: both volume growth and uh mix to higher value-added product and so some of that mix improvement is is is baked in already i guess is really what i'm trying to get at that is that the right way to think about it it is because the volume growth is well below that but the volume growth is leveraged by the impact of mix gotcha um thanks for that and on the share repurchases Are you able to give any color on how much or whether or not Smucker was involved in that and just if their position has changed from where it was when the deal would have closed?
spk08: We are not.
spk09: Okay. Thanks so much.
spk08: Thank you.
spk00: One moment for our next question. Our next question comes from Bill Chappell with Truist Securities. Your line is open.
spk10: Thanks. Good morning.
spk08: Hey Bill.
spk10: Hey Rob, just going back to ready to eat cereal. I'm just trying to see how you think this, the movie plays out over the next couple of years. I mean, I understand you're seeing volume growth to zero to 2%, but I guess the worry is that, that all the players will now struggle to, to grab share volume, that pricing gets more, um, you know, competitive promotional levels get back to 2019 or even earlier levels. And you've held up very well there, but I'm just trying to figure out, you know, does that torch the whole market? You know, do you feel like this time is different? You know, just trying to kind of understand from a pricing standpoint more than a volume standpoint how you see the market playing out in the next 12 to 18 months.
spk08: Yeah, I mean, it's a good and perhaps central question to how you think about this category going forward. And the reality is we don't know. We tend to be disciplined in the way we behave. We look at different market scenarios and try to make sure that we're behaving and responding in the manner that is most productive for us. But we don't spend a lot of time trying to anticipate what those market scenarios may be. You've got, you know, a change in the competitive landscape coming with, you know, not necessarily a new competitor, but a competitor organized in a new fashion. That's going to introduce some uncertainty. Don't know. You know, the category is 100 and whatever it is, 130 years old. We've been through many different waves. over time seems to work its way out, but could there be periods of greater promotional activity? Certainly. You hear me say mean reversion a lot lately. I tend to think all of these things have a pattern towards mean reversion, and I would lump this in the same bucket.
spk10: Got it. No, and as always, I appreciate your tender. In terms of the plans, though, to I think you had said step-up marketing, not just on pet, but across the board and on the brands. I mean, how does that help? When I'm talking, again, about ready exterior, is that necessary in terms of, you know, there have been a lot of brands that have popped into the category, there's got to be more noise out there, and you need to do that? Or is it just kind of across the board we need to support our brands with a higher level of support?
spk08: No, it was frankly more a luxury in that from a company-wide perspective, we are well in excess of some of our internal estimates and felt that we tend to lean into opportunities to make longer-term investments when we have a situation like this, and sometimes in the opposite, we'll pull the other direction. So given the strength of the business, And some of the challenges WeDevix faces and some of the challenges Bob Evans has faced with lack of advertising, we wanted to lean in a bit more aggressively than we otherwise might have. So necessity or luxury I think sometimes is a bit blurry, but it felt like more of a luxury given the performance of the portfolio.
spk10: Great. Thanks so much, Luke Eller.
spk08: Thank you.
spk00: One moment for our next question. Our next question comes from Robert Dickerson with Jefferies. Your line is open.
spk07: Great. Thanks so much. Hey, how's it going? I just want to touch on Weedabix profitability. Clearly, you know, a little compressed in the quarter. I think you said the remarks probably stay a bit constrained as you kind of head into next year. So maybe you just comment on kind of what are the, core drivers of that compression, and then how do you view the return to prior profitability margins within the region? Thanks.
spk08: The single biggest contribution towards the dilution in the margin is a shift towards private label. We are the dominant provider of private label, but it's not margin parity. We're keeping volume within the biscuit category, but losing some profit. I think in order to restore that profit, we need to do what we are doing, which is lean heavily into marketing. Instead of pulling anything back in a time of a bit of a challenge, we are going the opposite way, which makes the appearance of the margin challenge worse. But what we are trying to do is set the brand up well for, you know, what we anticipate will be an eventual normalization of the macro environment in the UK. And when the consumer is ready to reengage, we are there having supported it, uh, it being the brand all along. So, you know, I think we weather the storm, we keep our investment level where it needs to be, and we prepare for normalization.
spk07: Okay, perfect. Thank you. Um, and then I guess just secondly, um, I'm trying to touch on the points we haven't discussed yet. Refrigerator retail, you know, you break out the categories and the release. A few of those categories seem to be a bit more volume pressured, let's say, relative to other parts of your business. And at least from my perspective, we've seen some, you know, kind of volume pressure a bit more outsized in other areas of frozen, let's say, versus kind of center of the store. Is there, you know, Anything you think is driving that pressure just outside of just the kind of standard issue shift to private label? Do you think consumers might be steering a bit more away from kind of higher price point frozen items? I'm just trying to gauge why the volume there is maybe more pressure than elsewhere.
spk08: Well, I think if you – let's focus mostly on our side dish business, which is the core of the franchise. Along with everyone else, we took considerable price the last two years. At the same time, this is the segment that had the most challenging supply chain two years ago, and it is the segment that has had the most improvement in supply chain over these last two years. We were in a position the last 18 months or so. the 18 months prior to the last six, I should say, in which we had poorly performing supply chains, price escalation, lack of advertising support because advertising made no sense given our inability to support incremental product within our supply chain. So that's not a great position for growing a brand. We've now fixed the supply chain. We've now fixed the lack of marketing support, or we are in the process of doing so. And pricing is normalizing as some of our competitors have now priced. So I feel optimistic that the problems in that area were a combination of self-inflicted and macro supply chain problems that are behind us. It will take a little bit of time to prove that out as we enter 2024 and see the impact of the marketing, the impact of the improved supply chain and the better parity pricing. But those are the reasons to be optimistic about the segment. I think it's less about a major consumer shift than it is about the trajectory over where we've been the last two years.
spk07: All right. Super. Makes sense. And I guess just lastly and quickly, you know, fully realize you just completed the pet acquisition. But I feel like I always have to ask, you know, just kind of general at the general appetite for, you know, other opportunistic transactions kind of, you know, given overall market environment?
spk08: Well, we're very interested. We are looking at things now. You probably heard Matt say our leverage ratio is 4.8, so we're in a very attractive position to, you know, look at external opportunities, buyback shares, or, you know, if nothing else, just continue to generate cash and deliver, I think the environment we're in favors us because if you look at, I think I've shared this before, we tend to compete with private equity and private equity is in a less favorable position than a year ago with SOFR being 5.5% and the spreads being 5% on top of that. senior debt, so we have a cost of capital advantage that I think could play into our favor, and I think demonstrably has done so with PET. I think part of the reason we were able to be as successful as we were in PET was the paucity of competition for an asset like that. So we will always be active, at least in looking, and hopefully selective in acting.
spk07: Perfect. Thank you. Pass it on.
spk00: One moment for our next question. Our next question comes from Jason English with Goldman Sachs. Your line is open. Hey, good morning, folks.
spk11: Thanks for talking. Hey, Jason. Hey, there. So, obviously, juice was some over-earning in the food service business. And I want to come back to that. You guys said that you're now back to more of a normalized earnings level. The last time we went through this volatility, we overshot on the upside, followed by a bit of an undershoot on the downside. I think that crisis remained depressed for a while as we replaced the flock with much more productive younger chicks. Why is that not the case here? What is the risk of undershooting on the back end of this? And why are the conditions different that wouldn't cause that to happen? Thank you.
spk08: Yeah, the last time we went through this, the issue was more about the balance between grain-based and supply-based, and we were closer to balance this time. So we don't see the same risk persisting for an extended period of time. We will always have some risk, but we think the risk is a very manageable amount of risk as we look into 24. The other meaningful difference between 2015 and 2023-24 is the shift in our business to
spk11: uh much higher priced and higher value-added segments of our product mix got it okay um and back to refrigerated retail looking side dishes at this point now the one the growth engine of the business is not so growthy today um i think this is the second quarter in a row of a private label pressure i imagine there's two more quarters to go at least as you cycle this but i guess that's my question is it just two more quarters it's like just a change at one major retailer who's pushed in, or is there something on the supply chain side where there's a new supplier out there supplying this and we've got one retailer on board and there's likely to be another to follow and another to follow. Could this have duration, this encroachment on private label, or is it a one and done, ride our four quarters, cycle it through and back on the other side, back to growth?
spk08: Now, in order for it to take legs and expand meaningfully, you, as in the category, would need additional capacity. So, I mean, there's always the potential for it if someone's going to add capacity, but that would be a fairly significant gamble, particularly at a time where we are becoming more effective in our own supply chains and more aggressive in our advertising. I think that to answer the first part of your question, the advertising is effectively starting now-ish. It's been a couple weeks, so there certainly will be a lag. I would not be surprised to see... some further weakness this quarter and start to improve in the first part of next year. Hopefully, we'll see some changes in the rates, but it's not going to turn on a dime.
spk11: Okay. Last question for me, and I'll pass it on. On your consumer brand side, I believe in the key to disclose that inflation is still a headwind. I think it was like $15 million or so this quarter. I could be mistaken. I'm away from my computer right now. The spot cost, everything we look on a cost curve would suggest that that should turn deflationary as we kind of wrap this year and go into next. Is that consistent with what you're seeing, or is there any reason to think that the inflationary pressure from an ingredient and commodity perspective could be more prolonged?
spk08: And, Jason, you're a little bit hard to hear. I didn't hear what business you were asking about. Could you somewhat repeat the question?
spk11: Yeah, yeah, I'll take it from the top. I'll try to speak a little louder. I apologize. I'm outside an air pod, which can be annoying. In your consumer brand segment, inflation is still eating away at profitability. But our own cost curve, I think everyone's looking and saying, gosh, it's just a matter of time before this turns deflationary from a cost perspective. Is that realistic or are there offsets we don't appreciate? And what's the cadence as you look forward?
spk08: Yeah. So our entire basket of commodities is certainly not deflationary and is modestly inflationary. I think I would characterize what we're seeing as a disinflation trend rather than a deflation trend, and that's what we are anticipating.
spk11: Okay. Thank you. I'll pass on.
spk08: Thank you.
spk00: One moment for our next question. Our next question comes from Matt Smith with Stifel. Your line is open.
spk06: Hi, good morning. Matt. I wanted to follow up on the commentary about the egg business. The improved product mix and balanced sourcing help insulate risk on the back end of this AI cycle as conventional egg prices reset. But I wanted to ask if you're seeing any trade down from your customers back to less value-added products to take advantage of that wider price gap to conventional shell eggs in this environment.
spk08: Zero.
spk06: Okay. That was quick.
spk08: Once you make that switch, it's very difficult to go back because of the implications on your labor model.
spk06: Okay, thank you for that. And maybe if I could follow up on the commentary about refrigerated side dishes and the private label outperformance. We've seen post-benefit from a tiered value structure in several of your categories, whether it's cereal comes to mind here. Do you see any advantage to pursuing a similar type of strategy in refrigerated retailers, the strength of the brand of Bob Evans and the relatively low penetration of private label differentiating factors there?
spk08: I think there's a number of differentiating factors. Let me start with the answer of yes. I think there is always an interesting opportunity to be had with having multiple tiers within the price points of the category. But the difference between cereal and the refrigerated side dish category is one of maturity. The cereal business is quite mature and tended towards excess capacity, which opened up opportunities around multiple price points. Whereas historically, the side dish category has been earlier in its product lifecycle, much more on a growth curve, and has tended towards lack of capacity, which crowded out different price points. So I think the balance you have to strike is where you are on the product lifecycle, where you are on the capacity curve, and how you want to play in the different price points within those two dynamics.
spk06: Thank you for that. I appreciate the time this morning. I'll pass it on.
spk00: Thank you. We've reached the end of our Q&A session. Thank you for joining us. You may now disconnect.
spk10: Thank you all.
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