Post Holdings Inc. (POST, Financial) has origins dating back to 1895 with the first batch of Postum, a cereal beverage, processed in a barn in Battle Creek, Michigan. This led to the introduction of Grape-Nuts being introduced in 1897. In 1929, the company changed its name to General Foods and acquired over a dozen companies and had 60 products over the years. In 1985, the company was acquired by Phillip Morris (PM) which later merged General Foods with Kraft Foods. Kraft sold Post to Ralcorp Holdings Inc. (RAH) in 2008 for $2.8 billion including debt of $950 million. Its brands found on breakfast tables throughout the country are Grape Nuts, Honey Bunches of Oats, Fruity Pebbles, Sugar Crisp, Raisin Bran and Honey Combs.
In January, Ralcorp spun out Post Holdings as an independent publicly traded company which manufactures, markets and distributes branded ready-to-eat cereals in the U.S. and Canada. It is the third-largest seller of ready-to-eat cereals in the U.S. with a 10.4% share of retail sales (based on retail dollar sales for the 52-week period ended Sept. 29, 2012 (source: Nielsen). The company recently acquired Attune Foods, a natural and organic cereal and snack maker with sales of $15 million in 2011.
John Paulson and Mario Gabelli hold a total of 5.5% (3% and 2.53%) of the company.
The two best-selling brands by market share are Honey Bunches of Oats with 4.9% of the ready to eat cereal market and Post Total Pebbles at 2.1%.
The top 10 customers represent 56% of sales with the largest customer account being Walmart (WMT), which accounted for 21% of sales in Fiscal years 2009 to 2011 This is inline with competitor Kelloggs’s 20%. Importantly, historical performance is not overly reliant on one product brand or overly impacted by volatility in costs.
The primary components of Post’s costs of goods sold include wheat, oats, sugar, fruit and almonds, packaging (linerboard cartons, corrugated boxes, plastic containers and carton board) and freight and distribution costs.
Each product is manufactured through a flexible production platform consisting of four owned primary facilities and sold through a variety of channels such as grocery stores, mass merchandisers, club stores and drug stores. Many of the brands are house hold names including, Honey Bunches of Oats®, Pebbles™, Post Selects®, Great Grains®, Spoon Size® Shredded Wheat, Post® Raisin Bran, Grape-Nuts® and Honeycomb®. The newest line is a low-cost RTE called Good Mornings with several varieties in large value boxes.
Facilities
The products are manufactured in the U.S. and Canada primarily in owned manufacturing facilities:
1) Battle Creek, Mi., comprises approximately 1.9 million square feet on 68 acres.
2) Jonesboro, Ark. location, which was built in 1993, comprises approximately 320,000 square feet on 80 acres.
3) Modesto, Calif. location, which was built in 1976, comprises approximately 282,000 square feet on 80 acres.
4) Our Jonesboro, Arkansas location, which was built in 1993, comprises approximately 320,000 square feet on 80 acres.
5) Niagara Falls, Ontario location, which was built in the early 1900s, comprises approximately 190,000 square feet on 6.6 acres.
Competitors:
The company’s primary competitors are General Mills (GIS, Financial) and The Kellogg Company (K, Financial). These companies along with Post account for 77.7% of the ready to eat cereal market in the U.S. Post is the only pure publicly traded breakfast maker of the three as General Mills and Kellogg have products outside of breakfast.
Food Industry Peer Comparisons
Financial ratios are about average of its peers with most ratios in the third quintile.
Management
The management of Post Holdings consists of leadership capabilities and in-depth knowledge of the company’s history and all aspects of its business. The extensive management experience and knowledge and understanding of the business and operations combine to provide valuable guidance and input on the many strategic and operational issue The following management effectiveness metrics indicate that Post returns are in the upper quintile of its peers.
William P. Stiritz - Chairman of the Board of Directors and Chief Executive Officer
William P. Stiritz is a private equity investor and had served as the chairman of the board of directors of Ralcorp Holdings Inc. since 1994. Stiritz will retire from Ralcorp’s board of directors upon the consummation the Post separation. Since prior to 2005, Stiritz has been a partner at Westgate Group LLC, a consumer-oriented private equity firm which has been inactive since December 2006 other than remaining escrow obligations. Stiritz was chairman emeritus of the board of directors of Energizer Holdings Inc. from January 2007 to May 2008 and chairman of the board of directors of Energizer Holdings from 2000 to 2007. Stiritz served as a Director of Vail Resorts Inc. from 1997 to 2009. In addition, he has served as Director Emeritus of Reliance Bancshares Inc. since August 2009. Stiritz has extensive managerial expertise, including as chairman at a number of public and private companies, experience in financial operations, as well as diverse industry experience and expertise with large multinational corporations.
Ready to Eat Cereal Market – Overview
The ready to eat cereal market includes about 30 companies with combined annual revenue of about $10 billion. Major companies include The Kellogg Company, General Mills and Quaker Oats. The industry is highly concentrated, as General Mills, Kellogg and Post's combined market share was 77.7% in the 2011 ready to eat cereal market.
Demand is driven by demographics and health considerations, particularly the attitudes of busy families and working professionals toward the first meal of the day. The profitability of individual companies depends on managing raw material costs, operating efficiently and maximizing retail shelf space. Large companies have advantages in purchasing, distribution and marketing. Small operations can compete effectively by manufacturing cereals that emphasize organic or healthful ingredients. The industry is highly concentrated: The top three companies account for 77.7% of market share.
Cereal production requires substantial capital investment, which leads to a high capital intensity. However, the level of capital intensity varies considerably with the size of the manufacturer.
Financial Highlights
Post Holdings Inc.
Source Material:
SEC Form 424b3
Historical Analysis
9 Months Ended June 2012 versus 9 Months Ended June 2011
Revenue (net sales) decreased $18 million or 3% to $712 million at June 30, 2012 versus the prior year’s nine month period. The decrease was largely volume based with a 6% decline but offset by higher average net selling price. Declines were in line with the entire RTE market. All Post brands showed declines in volume with the exception of Great Grains which had a 9% volume increase due to a national advertising campaign.
Gross profit decreased by 8.5% or $30 million to $319 million nine months to nine months, and as a percentage of sales, declined to 44.8%.
Gross profit margin declines were driven by $19.2 million of higher raw material costs (primarily grains, nuts and sugar) and $15.2 million of unfavorable manufacturing costs primarily driven by unfavorable fixed cost absorption from lower production volumes.
SG&A as a percentage of net sales increased to 28.5% versus the prior year’s nine month period of 24.7%. $10.4 million of costs were incurred from the separation of Post from Ralcorp and to begin transitioning Post to stand-alone processes and procedures during the nine months ended June 30, 2012.
Excluding the effect of these costs, SG&A as a percentage of net sales increased from 24.7% in 2011 to 27.0% in 2012. This increase was driven by $8 million of increased advertising and promotion costs in connection with Great Grains re-launch and provide advertising support to the entire brand portfolio which is in line with its strategy to stabilize our market share in the RTE cereal category. It incurred an incremental $4.3 million of compensation expense in the current year primarily due to incremental corporate costs and an increase in stock-based compensation.
Operating profit as a percentage of net sales declined to 14.9% from 17.2%. This was primarily driven by lower sales and margin compression in the current year and due to increases in SG&A as previously described. These factors were partially offset by the $32.1 million impairment charge recorded in the prior year period.
Historical Analysis
Fiscal Year 2011 Versus Fiscal Year 2010
Revenue (net sales) decreased $28.5 million or 3% in fiscal 2011 which was a function of a 9% decline in overall volumes yet partially offset by higher average net selling prices which was driven primarily by an 18% reduction in trade spending. Volumes were down across most of the Post brand portfolio driven by lower trade spending compared to the trade spending levels a year ago and competitive promotional activity. The stand out of the portfolio was Great Grains with a 12% volume increase, benefiting from a national advertising campaign to support the brand.
Gross profit margins improved slightly at 46.6% in 2011 compared to 2010. Gross profit margins were negatively impacted by $7.1 million of mark-to-market losses on commodity derivatives that did not qualify for hedge accounting (economic hedges) in fiscal 2011 and $1.3 million of transition and integration costs in fiscal 2010. If the hedge qualified then the $7.1 million charge would have effected other income loss versus gross profit margins.
Excluding the effect of these items, gross profit margins were 47.4% in fiscal 2011, up from 44.6% for fiscal 2010. Gross profit margins benefitted significantly from the aforementioned 18% reduction in trade spending, thereby increasing average net selling prices. This benefit was partially offset by unfavorable manufacturing costs due to unfavorable fixed cost absorption from lower production volumes and higher raw material costs (primarily sugar, nuts, wheat, corn and packaging costs).
SG&A as a percentage of net sales were negatively impacted by $6.4 million of transition and integration costs in 2010 and by $2.8 million of Post separation costs in 2011.
Excluding the effect of these items, SG&A as a percentage of net sales increased from 21.3% in 2010 to 24.4% in 2011, driven primarily by higher advertising costs. The $28.7 million increase in advertising costs was primarily for three brands, the Great Grains brand re-launch, Pebbles and Honey Bunches of Oats.
Operating profit margin was negatively impacted primarily by the $566.5 million (as restated) impairment charge related to our goodwill and other intangible assets which included trademarks and their relation to the spinoff. Excluding the effect of impairment charges of $566.5 million (as restated) in 2011 and $19.4 million in 2010, operating profit margin was 20.4% in 2011 compared to 21.1% in 2010, primarily driven by factors previously discussed above.
Cash Flow:
9 Months Ended June 30, 2012 Compared to 9 Months Ended June 30, 2011
Cash provided by operating activities for the nine months ended June 30, 2012 was $95 million, a decrease of $22.8 million, primarily driven by lower gross profit and increased selling, general and administrative costs.
Fiscal Year 2011 Compared to Fiscal Year 2010
Cash provided by operating activities for fiscal 2011 was $144 million, an increase of $8.2 million. The increase is due to favorable changes in working capital, payment of $13.6 million to Kraft in fiscal 2010 related to the transition services agreement a $2 million distribution to Post Canada from RAH Limited Partnership, partially offset by lower net earnings (excluding the impact of the non-cash impairment of goodwill and other intangible assets and deferred income taxes). Changes in working capital were primarily driven by a prior year decrease in levels of accrued obligations related to trade spending, the payment to Kraft in 2010 as noted above and a larger reduction in inventory in 2010 compared to the current year.
Risks:
Commodity Costs: The company's main commodities are wheat, corn, rice, sugar, nuts, oats, corrugated packaging and diesel. Post originally utilized Ralcorp's hedging program. With the split, Post newly established its own hedge program. Historically, Ralcorp's hedges were not considered economic in natural, and gains and losses were classified as cost of goods sold. In the newly established Post hedging program the gains and losses will be in other comprehensive income. Management has a long history of the food processing business and is capable of establishing a sound hedging program.
Conclusion:
The brands have been neglected during last year due to the spinoff. As a result, you can expect to see strong year-over-year market share gains for each product. The ready to eat cereal market is very competitive, and management is strong and experienced with a history of growing the brand portfolio. The chairman, William Stiritz, is a private equity investor and had served as the chairman of the board of directors of Ralcorp Holdings Inc. since 1994. Ralcorp stock at the time was approximately $12 and Stiritz just sold out to Con Agra for $90 in 2012. Will Post be a repeat? "He's probably among the best moneymakers of the past 30 years," says John McMillin, a food industry analyst at Prudential Securities from 1985 to 2007. "He's right up there with [former Nabisco and Gillette (PG) Chief Executive] Jim Kilts and Colgate's (CL) Reuben Mark. He's a Warren Buffett-like character, but stays out of the limelight." This stand-alone ready to eat cereal maker may be a good fit for a Nestle (NSRGY) in the future.
In January, Ralcorp spun out Post Holdings as an independent publicly traded company which manufactures, markets and distributes branded ready-to-eat cereals in the U.S. and Canada. It is the third-largest seller of ready-to-eat cereals in the U.S. with a 10.4% share of retail sales (based on retail dollar sales for the 52-week period ended Sept. 29, 2012 (source: Nielsen). The company recently acquired Attune Foods, a natural and organic cereal and snack maker with sales of $15 million in 2011.
John Paulson and Mario Gabelli hold a total of 5.5% (3% and 2.53%) of the company.
The two best-selling brands by market share are Honey Bunches of Oats with 4.9% of the ready to eat cereal market and Post Total Pebbles at 2.1%.
The top 10 customers represent 56% of sales with the largest customer account being Walmart (WMT), which accounted for 21% of sales in Fiscal years 2009 to 2011 This is inline with competitor Kelloggs’s 20%. Importantly, historical performance is not overly reliant on one product brand or overly impacted by volatility in costs.
The primary components of Post’s costs of goods sold include wheat, oats, sugar, fruit and almonds, packaging (linerboard cartons, corrugated boxes, plastic containers and carton board) and freight and distribution costs.
Each product is manufactured through a flexible production platform consisting of four owned primary facilities and sold through a variety of channels such as grocery stores, mass merchandisers, club stores and drug stores. Many of the brands are house hold names including, Honey Bunches of Oats®, Pebbles™, Post Selects®, Great Grains®, Spoon Size® Shredded Wheat, Post® Raisin Bran, Grape-Nuts® and Honeycomb®. The newest line is a low-cost RTE called Good Mornings with several varieties in large value boxes.
Facilities
The products are manufactured in the U.S. and Canada primarily in owned manufacturing facilities:
1) Battle Creek, Mi., comprises approximately 1.9 million square feet on 68 acres.
2) Jonesboro, Ark. location, which was built in 1993, comprises approximately 320,000 square feet on 80 acres.
3) Modesto, Calif. location, which was built in 1976, comprises approximately 282,000 square feet on 80 acres.
4) Our Jonesboro, Arkansas location, which was built in 1993, comprises approximately 320,000 square feet on 80 acres.
5) Niagara Falls, Ontario location, which was built in the early 1900s, comprises approximately 190,000 square feet on 6.6 acres.
Competitors:
The company’s primary competitors are General Mills (GIS, Financial) and The Kellogg Company (K, Financial). These companies along with Post account for 77.7% of the ready to eat cereal market in the U.S. Post is the only pure publicly traded breakfast maker of the three as General Mills and Kellogg have products outside of breakfast.
Food Industry Peer Comparisons
| Financial Strength (MRQ) | Quintile | |
| Quick Ratio | 1.04x | 3rd |
| Current Ratio | 1.66x | 3rd |
| Debt/Equity | 0.77x | 2nd |
| Debt/Assets | 0.35x | 3rd |
Financial ratios are about average of its peers with most ratios in the third quintile.
Management
The management of Post Holdings consists of leadership capabilities and in-depth knowledge of the company’s history and all aspects of its business. The extensive management experience and knowledge and understanding of the business and operations combine to provide valuable guidance and input on the many strategic and operational issue The following management effectiveness metrics indicate that Post returns are in the upper quintile of its peers.
| Management Effectiveness (TTM) | Quintile | |
| Return on Assets | 1.83% | 1st |
| Return on Equity | 3.74% | 1st |
| Return on Inves. Capital | 1.92% | 2nd |
William P. Stiritz - Chairman of the Board of Directors and Chief Executive Officer
William P. Stiritz is a private equity investor and had served as the chairman of the board of directors of Ralcorp Holdings Inc. since 1994. Stiritz will retire from Ralcorp’s board of directors upon the consummation the Post separation. Since prior to 2005, Stiritz has been a partner at Westgate Group LLC, a consumer-oriented private equity firm which has been inactive since December 2006 other than remaining escrow obligations. Stiritz was chairman emeritus of the board of directors of Energizer Holdings Inc. from January 2007 to May 2008 and chairman of the board of directors of Energizer Holdings from 2000 to 2007. Stiritz served as a Director of Vail Resorts Inc. from 1997 to 2009. In addition, he has served as Director Emeritus of Reliance Bancshares Inc. since August 2009. Stiritz has extensive managerial expertise, including as chairman at a number of public and private companies, experience in financial operations, as well as diverse industry experience and expertise with large multinational corporations.
Ready to Eat Cereal Market – Overview
The ready to eat cereal market includes about 30 companies with combined annual revenue of about $10 billion. Major companies include The Kellogg Company, General Mills and Quaker Oats. The industry is highly concentrated, as General Mills, Kellogg and Post's combined market share was 77.7% in the 2011 ready to eat cereal market.
Demand is driven by demographics and health considerations, particularly the attitudes of busy families and working professionals toward the first meal of the day. The profitability of individual companies depends on managing raw material costs, operating efficiently and maximizing retail shelf space. Large companies have advantages in purchasing, distribution and marketing. Small operations can compete effectively by manufacturing cereals that emphasize organic or healthful ingredients. The industry is highly concentrated: The top three companies account for 77.7% of market share.
Cereal production requires substantial capital investment, which leads to a high capital intensity. However, the level of capital intensity varies considerably with the size of the manufacturer.
Financial Highlights
Post Holdings Inc.
Source Material:
SEC Form 424b3
| Key Financial Metrics | Nine Months June 30, | Year End Sept. 30, | ||||
| 2012 | 2011 | 2011 | 2010 | 2009 | ||
| (US$ In Millions) | ||||||
| Net Sales | $ 712 | $ 730 | $ 968 | $ 997 | $ 1,072 | |
| Gross Profit | $ 319 | $ 349 | $ 452 | $ 443 | $ 501 | |
| EBITDA (Unadjusted) | $ 117 | $ 130 | $ (367) | $ 206 | $ 228 | |
| Total Debt | $ 948 | x | $ 785 | $ 717 | $ 717 | |
| Total Liabilities | $ 105 | x | $ 105 | $ 91 | $ 78 | |
| Total Assets | $ 2,764 | x | $ 2,732 | $ 3,348 | $ 3,368 | |
| Total Net Worth | $ 1,284 | x | $ 1,437 | $ 2,061 | $ 2,023 | |
| EBITDA/Interest Expense | 2.65x | 3.35x | -7.12x | 3.99x | 3.91x | |
| Total Debt /EBITDA | 8.10x | x | -2.14x | 3.48x | 3.14x | |
| Operating Cash Flow | $ 95 | $ 118 | $ 144 | $ 136 | $ 221 |
Historical Analysis
9 Months Ended June 2012 versus 9 Months Ended June 2011
Revenue (net sales) decreased $18 million or 3% to $712 million at June 30, 2012 versus the prior year’s nine month period. The decrease was largely volume based with a 6% decline but offset by higher average net selling price. Declines were in line with the entire RTE market. All Post brands showed declines in volume with the exception of Great Grains which had a 9% volume increase due to a national advertising campaign.
Gross profit decreased by 8.5% or $30 million to $319 million nine months to nine months, and as a percentage of sales, declined to 44.8%.
Gross profit margin declines were driven by $19.2 million of higher raw material costs (primarily grains, nuts and sugar) and $15.2 million of unfavorable manufacturing costs primarily driven by unfavorable fixed cost absorption from lower production volumes.
SG&A as a percentage of net sales increased to 28.5% versus the prior year’s nine month period of 24.7%. $10.4 million of costs were incurred from the separation of Post from Ralcorp and to begin transitioning Post to stand-alone processes and procedures during the nine months ended June 30, 2012.
Excluding the effect of these costs, SG&A as a percentage of net sales increased from 24.7% in 2011 to 27.0% in 2012. This increase was driven by $8 million of increased advertising and promotion costs in connection with Great Grains re-launch and provide advertising support to the entire brand portfolio which is in line with its strategy to stabilize our market share in the RTE cereal category. It incurred an incremental $4.3 million of compensation expense in the current year primarily due to incremental corporate costs and an increase in stock-based compensation.
Operating profit as a percentage of net sales declined to 14.9% from 17.2%. This was primarily driven by lower sales and margin compression in the current year and due to increases in SG&A as previously described. These factors were partially offset by the $32.1 million impairment charge recorded in the prior year period.
Historical Analysis
Fiscal Year 2011 Versus Fiscal Year 2010
Revenue (net sales) decreased $28.5 million or 3% in fiscal 2011 which was a function of a 9% decline in overall volumes yet partially offset by higher average net selling prices which was driven primarily by an 18% reduction in trade spending. Volumes were down across most of the Post brand portfolio driven by lower trade spending compared to the trade spending levels a year ago and competitive promotional activity. The stand out of the portfolio was Great Grains with a 12% volume increase, benefiting from a national advertising campaign to support the brand.
Gross profit margins improved slightly at 46.6% in 2011 compared to 2010. Gross profit margins were negatively impacted by $7.1 million of mark-to-market losses on commodity derivatives that did not qualify for hedge accounting (economic hedges) in fiscal 2011 and $1.3 million of transition and integration costs in fiscal 2010. If the hedge qualified then the $7.1 million charge would have effected other income loss versus gross profit margins.
Excluding the effect of these items, gross profit margins were 47.4% in fiscal 2011, up from 44.6% for fiscal 2010. Gross profit margins benefitted significantly from the aforementioned 18% reduction in trade spending, thereby increasing average net selling prices. This benefit was partially offset by unfavorable manufacturing costs due to unfavorable fixed cost absorption from lower production volumes and higher raw material costs (primarily sugar, nuts, wheat, corn and packaging costs).
SG&A as a percentage of net sales were negatively impacted by $6.4 million of transition and integration costs in 2010 and by $2.8 million of Post separation costs in 2011.
Excluding the effect of these items, SG&A as a percentage of net sales increased from 21.3% in 2010 to 24.4% in 2011, driven primarily by higher advertising costs. The $28.7 million increase in advertising costs was primarily for three brands, the Great Grains brand re-launch, Pebbles and Honey Bunches of Oats.
Operating profit margin was negatively impacted primarily by the $566.5 million (as restated) impairment charge related to our goodwill and other intangible assets which included trademarks and their relation to the spinoff. Excluding the effect of impairment charges of $566.5 million (as restated) in 2011 and $19.4 million in 2010, operating profit margin was 20.4% in 2011 compared to 21.1% in 2010, primarily driven by factors previously discussed above.
Cash Flow:
9 Months Ended June 30, 2012 Compared to 9 Months Ended June 30, 2011
Cash provided by operating activities for the nine months ended June 30, 2012 was $95 million, a decrease of $22.8 million, primarily driven by lower gross profit and increased selling, general and administrative costs.
Fiscal Year 2011 Compared to Fiscal Year 2010
Cash provided by operating activities for fiscal 2011 was $144 million, an increase of $8.2 million. The increase is due to favorable changes in working capital, payment of $13.6 million to Kraft in fiscal 2010 related to the transition services agreement a $2 million distribution to Post Canada from RAH Limited Partnership, partially offset by lower net earnings (excluding the impact of the non-cash impairment of goodwill and other intangible assets and deferred income taxes). Changes in working capital were primarily driven by a prior year decrease in levels of accrued obligations related to trade spending, the payment to Kraft in 2010 as noted above and a larger reduction in inventory in 2010 compared to the current year.
Risks:
Commodity Costs: The company's main commodities are wheat, corn, rice, sugar, nuts, oats, corrugated packaging and diesel. Post originally utilized Ralcorp's hedging program. With the split, Post newly established its own hedge program. Historically, Ralcorp's hedges were not considered economic in natural, and gains and losses were classified as cost of goods sold. In the newly established Post hedging program the gains and losses will be in other comprehensive income. Management has a long history of the food processing business and is capable of establishing a sound hedging program.
Conclusion:
The brands have been neglected during last year due to the spinoff. As a result, you can expect to see strong year-over-year market share gains for each product. The ready to eat cereal market is very competitive, and management is strong and experienced with a history of growing the brand portfolio. The chairman, William Stiritz, is a private equity investor and had served as the chairman of the board of directors of Ralcorp Holdings Inc. since 1994. Ralcorp stock at the time was approximately $12 and Stiritz just sold out to Con Agra for $90 in 2012. Will Post be a repeat? "He's probably among the best moneymakers of the past 30 years," says John McMillin, a food industry analyst at Prudential Securities from 1985 to 2007. "He's right up there with [former Nabisco and Gillette (PG) Chief Executive] Jim Kilts and Colgate's (CL) Reuben Mark. He's a Warren Buffett-like character, but stays out of the limelight." This stand-alone ready to eat cereal maker may be a good fit for a Nestle (NSRGY) in the future.
