Post Holdings is a company that has undergone significant change in the last two years, with a spate of acquisitions transforming its business.
The US group was once focused squarely on breakfast cereal but, through a run of deal-making, has added products from pasta and eggs to protein shakes to its portfolio.
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“We have transformed Post from 100% ready-to-eat cereal company to a diversified food company,” Post CEO Rob Vitale told analysts after the company reported its annual results. “Today 75% of Post revenue comes from growing categories.”
However, Post’s numbers for the year to the end of September, plus its guidance for the first quarter of its new fiscal period, prompted questions from analysts.
And there were further questions about Post’s M&A strategy, with one analyst suggesting there had been “a lack of strategic cohesion” to some of the company’s recent deals.
For the 12 months to 30 September, Post posted an annual net loss of US$358.6m – compared with a profit of $9.8m a year earlier – as impairment charges offset a jump in sales, boosted by its recent transactions.
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By GlobalDataThe company booked non-cash goodwill and intangible asset impairment charges of $295.6m in the fourth quarter. Some $264.3m of those charges were on the Grape Nuts owner’s ready-to-eat cereal business, with Post pointing to an “acceleration” in the decline of the category.
A further $31.3m in charges were recorded on Post’s active nutrition division amid “supply chain disruptions” at its recently-acquired sports nutrition unit Dymatize and additional “remediation expenses”.
After running through the results, Post’s management faced a series of questions on the prospects of its cereal business. The owner of brands including Grape Nuts and Honey Bunches of Oats had said it expected its ready-to-eat cereal net sales to fall $15-20m in the first quarter of its new financial year, compared to 2013/14.
Looking to the year ahead, Vitale said he expects the US ready-to-eat breakfast cereal category to decline 4%, continuing the slide seen in recent quarters.
Nevertheless, he predicted Post would gain market share and insisted work on costs would mean the group’s cereal arm could maintain its annual EBITDA.
Dymatize appears to be proving a challenge. Post, which paid $380m for the business in February, admitted the unit would “under-perform” in its new financial year.
However, Vitale said Post was investing in the Dymatize manufacturing and supply chain network and expressed confidence about the long-term prospects for the business.
“In my opinion the impairment as no bearing on the long-term prospects of Dymatize. I think that we have asset that we had some diligence issues; we have some operational issues that are being fixed. I think that we will find that becomes a very attractive asset for us,” he said. Investors will be watching Post’s active nutrition – the division that houses Dymatize – closely. A division built through two acquisitions worth a combined $560m, it made an operating loss of $1.8m in 2013/14.
On the conference call with analysts, Vitale suggested the company was ready to make more acquisitions. “While in the near term, we have plenty to digest; we continue to believe M&A is central to value creation at Post,” he said.
It was Goldman Sachs analyst Jason English that suggested some of Post’s recent M&A activity lacked cohesion and he asked Vitale where investors should expect to see the company do deals.
The Post CEO defended the group’s deal-making. “I would take exception to the lack of strategic cohesion in that. We were setting out to create a portfolio that essentially pursued the consumer in terms of venues and price points and forms and which it was migrating away from the traditional bag-in-a-box cereal and the center store. So I think while this kind of transformation is at some times cumbersome and bulky after it’s done I think you will see more cohesion around what is the ultimate strategy, which is to chase the consumer,” Vitale said.
Since the run of deals, Post has carried out an internal reorganisation, setting up what Vitale called are three “platforms”. The company’s consumer brands arm contains the Post Foods cereal arm and its active nutrition business. Michael Foods Group comprises the Michael Foods business Post acquired this summer and Dakota Growers Pasta Co., which it snapped up at the start of 2014. A third division is private label, which consists of Post’s own-label nut butter and granola businesses.
“We have three scale size attractive platforms that we firmly believe will embed growth within our overall portfolio,” Vitale said. “We do tend to be opportunistic if something comes along that makes a lot of sense and is attractive from an economic basis recognizing all the realities of our capital structure equity price and everything else. It doesn’t mean we wouldn’t explore and try to be creative in pursuing it. But, our first mission is to make sure the portfolio operational integrity is intact. Then overlay opportunities on it. And the last piece of opportunity is reaction.”
He added: “Our near-term focus is on strengthening the platforms operationally so that future M&A can leverage more mature systems and generate marginally greater returns to capital.”
In the short term, Post has flagged some challenges in the first quarter of its new financial year. However, this time next year, it expects to report an improved performance over the 12 months just past.
In the year to the end of September, Post generated adjusted EBITDA of $344.5m; for the new year, it expects to post $540-580m.
The challenges in cereal – plus costs in its Michael Foods business – will put pressure on earnings in the first quarter.
However, CFO Jeff Zadoks, pointing to Michael Foods’ weak perofrmance last year and expected improvement from Dymatize, said: “In the balance of 2015, we expect to meaningfully outperform the prior year on a comparable basis.”
In the two days since Post announced its results, the company’s shares are up over 10%. Today, at 14:10 ET, Post’s stock had risen 5.84% to $40.79.
At least for now, the market seems to have accepted Post’s forecast it will have a challenging first quarter but then see enjoy growth in the rest of the year.
