Post Holdings, Inc. (POST) Q1 2021 Earnings Call Transcript

Welcome to Post Holdings First Quarter 2021 Earnings Conference Call and Webcast. Hosting the call today from Post are Rob Vitale, President and Chief Executive Officer; and Jeff Zadoks, Chief Financial Officer. Today's call is being recorded and will be available for a replay beginning at 12:00 PM Eastern Time. The dial-in number is 800-585-8367 and the passcode is 153-9554. At this time, all participants have been placed in a listen-only mode. It is now my pleasure to turn the floor over to Jennifer Meyer, Investor Relations of Post Holdings, for introductions. You may begin.

Good morning, and thank you for joining us today for Post's first quarter fiscal 2021 earnings call. With me today are Rob Vitale, our President and CEO; and Jeff Zadoks, our CFO. Rob and Jeff will begin with prepared remarks and afterwards, we'll have a brief question-and-answer session. The press release that supports these remarks is posted on our website in both the Investor Relations and the SEC filing 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.

Good morning. Thanks, Jennifer, and thank you all for joining us. The year started with the quarter very much in line with our expectations, and the first half is shaping up in the same manner. Our expectation remains that EBITDA will dip in Q2 and will accelerate in the second half versus the first half. As I briefly review the business, I will share some additional color regarding our expectations. Our U.S. cereal business had a solid quarter; however, it was hampered by supply constraints. During November and December of COVID absenteeism, our Battle Creek facility required us to temporarily suspend production for one building. This resulted in the highly publicized Grape-Nuts shortage. Production was also suppressed on Honeycomb and peanut butter products. We are back to full production, but it will be through early spring to restore inventory levels. We estimate the first quarter impact was lost revenue and adjusted EBITDA of approximately $10 million and $6 million, respectively. Longer term, COVID has revealed areas in which we can improve supply chain effectiveness and efficiency. The demand surges and the supply pressures are testing our demand planning and production plan. These learnings are constructive and we expect to emerge from COVID with improved processes. While most pronounced at Post Consumer Brands, supply chains across the company are learning and improving from the experience. For some time, we have sought more fundamental cereal category innovation. While quite early, I am cautiously optimistic about two of our efforts. Premier protein cereal has launched with great success at limited distribution. This launch combines our heritage strength in cereal with our competence in protein, and we believe delivers great tasting cereal with high protein. Second, we have launched snacking products which leverage our iconic brands into more rapidly growing dayparts. Weetabix continues to perform exceptionally well. COVID has helped the category and Weetabix has gained share in the category. Similar to the U.S., we have an intriguing innovation pipeline that we will soon introduce. Our core refrigerated platform, the Bob Evans side dish business, continues its rapid growth by increasing consumption dollars 21% over last year. Volume grew a healthy 11%. Meanwhile, our retail branded egg business also turned in a solid quarter with volumes increasing 13%. The weak spot remains our cheese business. In addition to commodity price volatility, production delays from a co-packer resulted in lost sales volume. BellRing will be holding a separate call. The business continues to rapidly grow its core ready-to-drink franchise. Transportation costs accelerated faster than expected and pressured gross margins. We expect to mitigate the margin pressure in Q3. Further, we are excited to share that Dymatize too is growing nicely. You will have seen BellRing reaffirmed its guidance for the full year. In 8th Avenue, we continue to be encouraged by recent trends. Like several of our categories, peanut butter is supply constraint. We also expect 8th Avenue to be more active and looking to add to its portfolio. That leaves foodservice which has borne the brunt of the COVID burden. We had an encouraging quarter in that there is a near perfect correlation between our increased demand and the loosening of COVID restrictions. As expected, late in the quarter, restrictions tightened in many key markets across the country that pressured demand early in Q2 with an expectation that it reverses entering Q3. Because of the reduced demand, non-contracted pricing is generally weak. Therefore, the EBITDA decline remains more than linear to the volume decline. Category capacity has not expanded. In fact, it has modestly declined. Therefore, we expect this will reverse with demand recovery. Finally, the quarter saw the beginning of what has turned into a rather substantial run-up in commodity costs. Our pass-through pricing model captures this increase, but there is a lag between the cost change and the pricing change. In terms of recovery, we remain highly confident across the channels with the possible exception of business travel. We expect business travel to lag recovery and other segments. So to summarize, we have a growing confidence in demand recovery and its implication on profitability, but we remain cautious in trying to estimate the timing of the full recovery. With respect to capital allocation, we have been quite active. This quarter and continuing into the second quarter, we were aggressive in repurchasing shares. We also announced two tuck-in acquisitions that we expect to be highly accretive. Both have since closed. As I mentioned last quarter, there seems to be more opportunities available than since the pandemic started, and we have an interesting pipeline. I want to close with some comments on our outlook. We gave first half outlook in November and continue to expect to deliver on it. The implied sequential decline from the first and second quarter was planned. We continue to expect the second half to materially outperform the first half. The two key drivers of this cadence are: first, Bellring’s normal quarterly promoted pricing fluctuations and the timing of its marketing spend, resulting in Q2 being a slow point with the second half materially more profitable. And second, our planning assumes foodservice would dip in the second quarter as a result of tighter COVID restrictions during the winter months. We expect even the limited rollout of the vaccine along with more favorable weather will drive material improvement to each of quarters three and four. The more effective and rapid the vaccine rollout becomes, the more material we expect the improvement to be. Again, this is entirely consistent with our planning assumptions. The increase in grain prices exceeded our short-term expectations, but we plan with sufficient conservatism to allow for this type of short-term volatility. In closing, we expect to meet our targets for the first half and with the additional clarity we hope to have when we announce the second quarter, we intend to then provide specific second half guidance. With that, I will turn the call over to Jeff.

Thanks, Rob, and good morning, everyone. Consolidated net sales were $1.5 billion and adjusted EBITDA was $284.4 million for the first quarter. Although the COVID effect was less pronounced when compared to prior quarters, each of our businesses continues to be impacted by COVID dynamics. Starting with Post Consumer Brands, net sales grew 1% while volumes were flat. Favorable mix drove an improvement in average net pricing. Legacy Post branded cereals had a great quarter with sales up 9% in the aggregate. Partially offsetting these results were declines in private label and government business as we intentionally exited certain low margin businesses, as well as softness in licensed brands and Malt-O-Meal bag cereal. Adjusted EBITDA increased 3.6% compared to prior year, reflecting the net pricing benefit and SG&A reductions. Offsets to this growth were manufacturing inefficiencies, inflation in raw materials and freight, and increased COVID-related compensation screening and PPE expenses. And as Rob discussed, Post Consumer Brands results were achieved despite COVID-related shutdowns and employee leaves at our Battle Creek facility. Weetabix net sales increased by 11.8% over prior year. This reflects 8.3% and 0.7% improvement in volume and average net pricing, respectively. Volume growth benefited from increased at-home consumption, particularly for cereal biscuits. We also saw solid growth in extruded product sales, private label, and exports. The export growth was partially driven by shipments that accelerated ahead of Brexit. A stronger British pound to U.S. dollar exchange rate resulted in an approximate 280 basis point tailwind to the net sales and adjusted EBITDA growth rates. Overall, Weetabix segment adjusted EBITDA increased 16.9%. Our foodservice business continued to be significantly impacted by COVID, with net sales and volumes declining 16% and 20%, respectively. Our acquisition of Henningsen Foods was a slight benefit to these results. Additionally, volumes benefited approximately 370 basis points from our participation in government-backed food initiatives, such as the USDA Farmers to Families Food Box Program. Our participation in these programs largely came to an end in November. The overall foodservice declines continued to reflect lower away-from-home demand in reaction to COVID. Our volumes continue to be highly correlated with the degree of restrictions imposed on consumer mobility and gathering. As the first quarter progressed and COVID counts and restrictions increased, we experienced a corresponding decline in demand, which continued into January. We continue to anticipate a full recovery will likely take through fiscal 2021. Adjusted EBITDA declined 46.3% to $40.4 million, primarily resulting from lost profit from reduced volumes, as well as unfavorable pricing and mix. In addition, our egg business began to face headwinds from the timing of commodity input costs versus the timing of repricing grain-based sales contracts. Until grain prices plateau, we will face these headwinds, particularly in our second fiscal quarter. Refrigerated retail net sales and volumes increased 5.3% and 1.1%, respectively. Side dish volumes grew 13%, reflecting strong growth for both Bob Evans and Simply Potatoes. Partially offsetting this growth were declines in egg, cheese, and sausage volumes. Overall, net pricing improved reflecting favorable mix, targeted side dish price increases and higher branded cheese pricing. Growth in sales and volumes led to an 18.3% year-over-year improvement in refrigerated retail segment adjusted EBITDA. Higher side dish manufacturing costs, freight inflation, and higher sales input costs were offsets to this growth. BellRing net sales increased 15.7% and adjusted EBITDA increased 3.6%. Premier protein sales increased 17.4%, driven by distribution gains for both existing and new products and incremental promotional activity. Dymatize net sales increased 16.2%, driven by distribution gains. You can hear further detail about BellRing’s results on their conference call later this morning. Turning to cash flow. We had a strong quarter generating $114.5 million from operations, including $23 million from BellRing. We had favorable working capital trends and benefited from the timing of interest payments, which are lower in our first and third quarters. Our net leverage at the end of the first quarter as measured by our credit facility was approximately 5.7x. During the quarter, we repurchased 1.7 million of our shares at an average price of $93.43 per share. Between January 1 and February 3, we acquired approximately 800,000 additional shares at $97.48 per share. On February 2, we received a new Board authorization for up to $400 million in share repurchases. This replaces our prior remaining open authorization. With that, I'd like to turn the call back to the operator for questions.

Thank you. The floor is now open for questions. Our first question comes from Andrew Lazar of Barclays.

Good morning, everybody.

Good morning, Andrew.

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

Yes, I think there are some challenges and opportunities. We have had some learnings that will improve our supply chain. We have continued to invest capital to drive productivity. And we continue to see, as I mentioned, some modest decline in overall category capacity. However, on the other side, on the demand side, this gets a bit more ambiguous. The most likely scenario would be that the customers that gain share as a result of the pandemic are the larger chains that tend to have better volume pricing. So there may be some offsets on pricing that are matched by improvements on cost. Where that exactly balances out yet, it's a bit early to predict. But there are certainly some opportunities and challenges.

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

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

Okay. Thanks very much.

Thank you.

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

Good morning. Thanks for the questions.

Hi, John.

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

Well, I think if you reflect on the way Post is organized, we think about it as a bit of a hub with the operating companies being the spokes. In order for there to be good collaboration across the organization, a certain amount of trust and relationships have to develop. And that takes time. So, if you look at the period from 2013 to 2017 or so when we were pulling this together, there was a steady flow of new faces and new businesses. Step one was getting to know those businesses, making sure we understand the strengths and weaknesses over time, as opposed to just rushing through diligence. The next more nuanced phase is trying to find those peer-to-peer opportunities to collaborate, which you've just described. I think it's a really significant opportunity for the business to work together to leverage our strengths and mitigate our weaknesses across the business. I'm very optimistic about how some of these brands are crossing the portfolio, specifically the ones you mentioned with Fruity and Cocoa Pebbles now being the fastest-growing protein powder in the country. And the comment I made about premier protein cereal, which again, while it's early, I'm very optimistic about.

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

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

Okay. Thanks, everyone.

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

Thanks. Good morning.

Good morning, Bill.

Rob, I'd like to ask about your prepared remarks. Can you explain what highly accretive means regarding the recent acquisitions? Are there any additional insights or synergies you've discovered? Additionally, could you provide more detail about your active pipeline of deal activity? Although I'm not asking for specifics on future purchases, are you focusing more on foodservice or retail? I'm trying to gauge if your strategy has shifted over the past year with the fluctuations in valuations.

Yes. I would characterize highly accretive as opportunities in which we're buying well below the Post multiple, as a result of purchase price and synergy realization and some tax benefits. So significant discounts to where Post is trading. In terms of the current pipeline, there’s not much that I really can say. But I can tell you that both the quantitative and qualitative perspective is that it is increasing. I think there was a period of time during the pandemic when either inbound or outbound M&A was perceived reasonably so as a distraction from our core objective of just making sure that we were delivering on our base commitment. So M&A was not particularly forefront. I think that sense is passing. So this year, the quantum of opportunities is increasing. In terms of qualitative, the opportunities we’re looking at are closer to some component of our business where we can drive operating synergies and justify the investment.

Got it. I'll leave it at that. Thanks so much.

Thank you.

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

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

Yes. We have historically identified four main channels impacted by COVID: full-service restaurants, quick-service restaurants, education, and travel and lodging. We expect the first two to recover reasonably quickly and effectively, especially with the rollout of vaccines and the easing of mobility restrictions. Education is more of a binary situation; kids are either returning to school or not. Lastly, the travel and lodging sector faces more significant long-term structural challenges. We anticipate that once restrictions are lifted, there will be rapid improvements in key channels.

Makes sense. And with regard to egg prices, I remember there was an egg price spike that happened in the spring. So you'll be lapping a spike. And you were mentioning in your prepared remarks that you will be dealing with a bit of a pinch in terms of timing on pass-through. Can you talk about how that will play out and perhaps any magnitude in terms of how you're thinking about margins from an egg pricing standpoint? Thanks.

I'm not going to specifically comment on margins in foodservice right now because they're quite volatile. With demand moving around as much as it is, it's difficult to bucket the real range of margins. What I will share is we feel very confident in our range of estimates in aggregate. However, we could see continued meaningful volatility in Q2, and hope for a much more steady state progression in Q3 and Q4 as we get a return to normalcy. Jeff, anything you want to add to that?

I want to provide some color around the pricing model. Our pricing mechanism is a quarter-based system, based on a 90-day look back. Prices that went into effect on January 1st are based on our look back from September, October, and November. As there are both up and down fluctuations in grain prices, it can impact our margins. Additionally, it's common for egg prices to rise in the spring due to Easter. Traditionally, we expect that spike during this season; however, the pandemic complicates things.

Great. Thank you.

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

Hi. Good morning, folks.

Hi, Jason.

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

No. We continue to see a fairly significant labor shortage that we're continuing to manage. It's a combination of location and some COVID impact, along with a lack of interest in entry-level positions. We are still working on solutions around this. Pre-COVID, we had some installation issues that have been resolved. While these challenges are transitory, they will take some time to work through as we navigate the current employment landscape.

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

No. I think it's fair to say they're two separate businesses that share largely a transportation and warehousing network. We are moving manufacturing functions closer aligned with each business. They have shared some manufacturing, but what we're trying to do is make the manufacturing responsive to the individual business objectives, while leveraging the logistics network.

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

Specific elements of value are not something that we discuss publicly, but our actions probably speak volumes regarding our opinions. We are always exploring different ideas as we seek M&A opportunities. While there are ideas that look good on paper, operational execution can be tricky. This is a constant work in progress and I wouldn’t exclude any of those opportunities from the realm of possibility.

Thanks a lot. I’ll pass it on.

Thank you.

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

Hi. Good morning. Just had a question for you first on kind of a follow-up on the cost inflation. I think you addressed cost inflation for the egg business and the structure of that business. I'm just curious about cost inflation for your retail businesses. Perhaps you could discuss hedging generally and kind of when you sort of start seeing those costs. And then do you think you can price to that cost inflation or do you expect generally to see that pricing come through in those retail businesses?

So inflation is apparent across our portfolio. Within our grain complex, we've got good coverage for the most part through the balance of this year. The implications of inflation are more oriented towards how we think about pricing trade and cost reduction in fiscal '22. We expect to protect against that inflation. Exactly how we do it at this point is too early to answer. Within the cold businesses, we continue to be aggressive in making sure we protect margins from inflation in the same way as I just discussed with the cereal business. The one segment that's trade sensitive is our sausage business, which we use trade tools to manage short-term swings in sales. With our dairy franchise, we've seen significant inflation as well, and we’ll utilize the same tools to ensure margins in the long term.

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

Yes. I've emphasized previously that we make a distinction between leverage and liquidity. We are very liquid, and while we're somewhat leveraged, the solution to being a tad high on leverage historically is not to change our capital allocation, but to recover effectively. The reason for the rising leverage is due to the weakness in foodservice year-over-year. Once we cycle through that and start to show EBITDA growth year-over-year, that will organically come down. We're confident in this outcome, and it does not cause significant concern for us right now, but it's something we aggressively manage and monitor.

Okay. Thank you for that.

Thank you.

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

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

In my prepared comments, I went through the areas that we attribute the sequential decline to. Those are: One, BellRing has a natural cadence. The first quarter tends to be strong while the second quarter lags. The second factor is related to COVID restrictions impacting foodservice. We expected the highest incident rate pre-vaccine. The third is the fluctuation in commodity prices. We had enough conservatism to absorb these impacts. We feel very good about the balance of the half. Overall, we are confident in the acceleration into the remainder of the year.

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

Sure. There are two sources of economic opportunity. One is we wanted to have a plant-based offering for both our foodservice and retail business. I think both businesses need that offering. It was a buyer-build decision. It would have taken us years to achieve where Hungry Planet is if we attempted to do it internally. We previously mentioned a distribution arrangement with Just Egg. We’re trying to ensure we have an appropriate both defensive and offensive posture regarding the movement toward plant-based proteins. The second opportunity we see is through a modest equity investment in Hungry Planet. We have a meaningful ownership position with options to increase that position if it proves valuable.

Okay, great. Thank you very much.

Thank you.

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

Great. Thanks so much.

Hi, Rob.

A few questions for you, Rob. Kind of more broadly, just in terms of the prior acquisitions you've done as of late and then kind of go-forward pipeline thought process. Obviously, you still have a protein tilt to the business. You have Hungry Planet, as we just mentioned. There’s Peter Pan. I saw there's a small kind of venture investment and then Almark obviously to egg. If we step back and think about where Post was even just a few years ago and where we are today, that protein theme is still existent and seems to be getting bigger. As you think about going forward, is that really part of the positioning and strategy? And there's the plant-based side, but you have alternatives, right. You have protein snacks, so that you might want to get more in the snacks and just trying to think about the broader go-forward strategy as new positioning with the retailers? Thanks.

In each case you highlighted, we were trying to either add capability or something close to the portfolio that could be tucked in at a very attractive price. I wouldn't characterize it as we sought to be more protein-oriented or focused on a specific nutrient. If we have an interesting opportunity in cereal or cheese or any other segment that shores up our weaknesses or expands our strengths at a reasonable value, we would pursue it. We’re more opportunistic than focused on a nutrient or segment. Regarding the small acquisition you mentioned, we aimed to be more entrepreneurial. We decided to make a small investment in an entrepreneurial company to understand what that means. I wouldn’t read too much into it other than we’re willing to learn and explore.

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

It’s a tough question. As we comp the COVID surge, it will be interesting to see how everyone across the food landscape reacts, whether pressure mounts to try to accelerate volume through pricing or just recognizing the tough comp from last year. I’m less concerned about our back half performance versus that of the prior year than in relation to our performance in the first half. We think the totality of this two-year period will yield positive long-term growth rates for categories. We are confident that this will inform innovation and capacity management going forward.

Okay, great. Thanks a lot.

Thank you.

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

Hi. Good morning, everyone.

Hi, Ken.

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

Going into this, we would have expected private label to perform better than it has broadly, not just in cereal. I speculate there is a supply-side equation where as supply chains got tested, private label was unable to maintain surge output due to the SKU count they have to manage. There’s a supply phenomenon that looks like a demand phenomenon. While there’s a persuasive counter-argument that consumers are reverting to brands they know, I continue to believe there’s a meaningful supply-side dynamic at play that will pass. Once we get past this choppy period, private label will continue to have a positive outlook. We're still interested in developing our private label business, but we're making choices to avoid marginal private label businesses while we're demand constrained.

Okay. Then my next question, and I'll leave it here, is the cereal category seems to be almost aberrational across the packaged food group. The cereal category continues to promote spending, despite probably the absence of needing to do it. They will face increased commodity pressure. How does that play out in a competitive set to be able to offset the pricing and input cost inflation in an environment where the competitive set seems to have intensified? One could argue that it’s a bit irrational. Can you talk about the category dynamics? I feel like it's aberrational relative to the other categories across basically packaged food.

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

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

Thank you, all.