POST - Post Holdings

[mevsemt]

I'm using 51 shares b/c the TEU's convert to equity in June 2017 (depending on the price of the common, the TEU conversion will add between 4.9 and 6.0 MM shares).  Also, for this stock to be interesting, we'd have to be looking at a share price in the 50's or 60's 2-4 years out, and if that's the case then at least some of the convertible preferred stock will convert to common (the 3.75% Series B has an effective conversion price of 47.19, and the 2.5% Series C has a price of 54.12).

 

As for how I got PF EBITDA for POST (w/o MFI, AB, or PowerBar), I just looked at YTD results w/o MFI and FY guidance w/o MFI to back into management's guidance for Q4 adjusted EBITDA.  I then determined Q3 adjusted EBITDA (again w/o MFI).  Since this is a fairly stable, non-seasonal business, I think it's basically OK to just assume the first half of the year looks like the last half, so I just doubled Q3+Q4 adjusted EBITDA to get FY EBITDA.  I think you have all the info you need in the Q3 earnings report, although it definitely gets confusing with all the noise from acquisitions. 

[TeddyLampert]

I'm using 51 shares b/c the TEU's convert to equity in June 2017 (depending on the price of the common, the TEU conversion will add between 4.9 and 6.0 MM shares).  Also, for this stock to be interesting, we'd have to be looking at a share price in the 50's or 60's 2-4 years out, and if that's the case then at least some of the convertible preferred stock will convert to common (the 3.75% Series B has an effective conversion price of 47.19, and the 2.5% Series C has a price of 54.12).

 

As for how I got PF EBITDA for POST (w/o MFI, AB, or PowerBar), I just looked at YTD results w/o MFI and FY guidance w/o MFI to back into management's guidance for Q4 adjusted EBITDA.  I then determined Q3 adjusted EBITDA (again w/o MFI).  Since this is a fairly stable, non-seasonal business, I think it's basically OK to just assume the first half of the year looks like the last half, so I just doubled Q3+Q4 adjusted EBITDA to get FY EBITDA.  I think you have all the info you need in the Q3 earnings report, although it definitely gets confusing with all the noise from acquisitions. 

 

Thanks Mesvemt for the explanation. Were you using management's revised guidance when you figured out Q4 adj EBITDA?

 

With the stock now at 9x EBITDA, it seems challenging to pull off the strategy of using stock trading at a higher multiple to acquire companies at lower multiples. The last few acquisitions have been at around 9x EBITDA.

 

Now that the Post story is "broken" (cf. recent analyst research reports questioning management's credibility), what do you think management's game plan is? Anyone recall what's next in the Outsider playbook? There's a ton of leverage currently, so it's hard to imagine cash can be used for buybacks instead of retiring debt.

 

I agree the stock is [going to] look interesting, but I don't think I'd want to pull the trigger just yet.

 

Anyone with any thoughts?

 

 

[loganc]

I'm using 51 shares b/c the TEU's convert to equity in June 2017 (depending on the price of the common, the TEU conversion will add between 4.9 and 6.0 MM shares).  Also, for this stock to be interesting, we'd have to be looking at a share price in the 50's or 60's 2-4 years out, and if that's the case then at least some of the convertible preferred stock will convert to common (the 3.75% Series B has an effective conversion price of 47.19, and the 2.5% Series C has a price of 54.12).

 

As for how I got PF EBITDA for POST (w/o MFI, AB, or PowerBar), I just looked at YTD results w/o MFI and FY guidance w/o MFI to back into management's guidance for Q4 adjusted EBITDA.  I then determined Q3 adjusted EBITDA (again w/o MFI).  Since this is a fairly stable, non-seasonal business, I think it's basically OK to just assume the first half of the year looks like the last half, so I just doubled Q3+Q4 adjusted EBITDA to get FY EBITDA.  I think you have all the info you need in the Q3 earnings report, although it definitely gets confusing with all the noise from acquisitions. 

 

Thanks Mesvemt for the explanation. Were you using management's revised guidance when you figured out Q4 adj EBITDA?

 

With the stock now at 9x EBITDA, it seems challenging to pull off the strategy of using stock trading at a higher multiple to acquire companies at lower multiples. The last few acquisitions have been at around 9x EBITDA.

 

Now that the Post story is "broken" (cf. recent analyst research reports questioning management's credibility), what do you think management's game plan is? Anyone recall what's next in the Outsider playbook? There's a ton of leverage currently, so it's hard to imagine cash can be used for buybacks instead of retiring debt.

 

I agree the stock is [going to] look interesting, but I don't think I'd want to pull the trigger just yet.

 

Anyone with any thoughts?

 

My thought is that there is way more potential upside than 60 in 4 years with what I consider to be reasonable assumptions and no additional acquisitions.  I think the conservative way to look at it would be to model paying down debt over the next 5 years. 

 

I don't know about the "outsider" playbook but I can't imagine that it would involve paying down debt in this environment.  Even the bears would admit that Stiritz has raised capital in very favorable terms.  I am not sure why he would want to go out and negate that.

 

 

 

[mevsemt]

TeddyLampert - yes, I was using mgmt's revised guidance to figure out Q4 adjusted EBITDA.

 

I also generally agree with loganc's comments - the conservative way to look at this is just to assume all cash from operations is used to retire debt.  If you then assume modest EBITDA growth from a base of 600 MM in 2015, it's pretty easy to get to a pps around $60 at YE 2017 (and that's assuming 61 MM shares outstanding).  BTW, I'd also note that Q3/Q4 results are pretty bad, so using these to determine an annualized "base" EBITDA could turn out conservative.  If you just look at the legacy operations, plus the adjusted EBITDA announced with each acquisition, you get an annualized EBITDA around 645 MM (btw I'm not saying they'll get back to those levels, although I suppose it's possible). 

 

Anyway, for the next year or two, it's my guess that's Stiritz will focus on paying down debt.  After that I think he'll try to maintain debt/EBITDA somewhere between 4.5x and 5.5x.  Assuming EBITDA is growing, that means every year he'll take on incremental debt to maintain the leverage ratio.  This incremental debt, along with free cash flow, will be used to boost returns to equity holders (either through acquisitions or buybacks).  Assuming I'm right, and depending on the sustainability of this "perpetual-LBO," the returns for shareholders could end up being pretty good...

[TeddyLampert]

TeddyLampert - yes, I was using mgmt's revised guidance to figure out Q4 adjusted EBITDA.

 

I also generally agree with loganc's comments - the conservative way to look at this is just to assume all cash from operations is used to retire debt.  If you then assume modest EBITDA growth from a base of 600 MM in 2015, it's pretty easy to get to a pps around $60 at YE 2017 (and that's assuming 61 MM shares outstanding).  BTW, I'd also note that Q3/Q4 results are pretty bad, so using these to determine an annualized "base" EBITDA could turn out conservative.  If you just look at the legacy operations, plus the adjusted EBITDA announced with each acquisition, you get an annualized EBITDA around 645 MM (btw I'm not saying they'll get back to those levels, although I suppose it's possible). 

 

Anyway, for the next year or two, it's my guess that's Stiritz will focus on paying down debt.  After that I think he'll try to maintain debt/EBITDA somewhere between 4.5x and 5.5x.  Assuming EBITDA is growing, that means every year he'll take on incremental debt to maintain the leverage ratio.  This incremental debt, along with free cash flow, will be used to boost returns to equity holders (either through acquisitions or buybacks).  Assuming I'm right, and depending on the sustainability of this "perpetual-LBO," the returns for shareholders could end up being pretty good...

 

Thanks again for the reply! That was thoughtful and insightful.

[Picasso]

Big management shift.

 

Bill Stiritz becomes Executive Chariman

Terence Block retires.

Robert Vitale becomes President & CEO.

 

Hmm.....

[Palantir]

Wow, one of those guys gave me my first job. :)

[CorpRaider]

That's pretty neat Palantir. 

 

The comments about the flexible management are interesting and Teledyne/outsideresque, eh?  Any of you guys have any insight on the folks over at ENR?  They're stiritz guys but I wonder how much of his philosophy they picked up;  I guess I need to just knuckle under and read their reports, but there aren't a ton of them since he's left.  I suppose the fact that they are busting up their ops versus building a glorious corporate empire with many corporate jets may be an indication.

[Picasso]

That's pretty neat Palantir. 

 

The comments about the flexible management are interesting and Teledyne/outsideresque, eh?  Any of you guys have any insight on the folks over at ENR?  They're stiritz guys but I wonder how much of his philosophy they picked up;  I guess I need to just knuckle under and read their reports, but there aren't a ton of them since he's left.  I suppose the fact that they are busting up their ops versus building a glorious corporate empire with many corporate jets may be an indication.

 

I spent a day on their reports early this year.  Well, I went into a few of the Stiritz stocks, like CHD.  From what I could make out of ENR, they had second rate consumer products but the stock trades for around what a PG does (I think there was a 10-15% discount on ENR when I compared earnings).

 

I could never pull the trigger on ENR since they seemed to lack any kind of pricing power in an environment where PG was getting much more aggressive.  They announced the split shortly after and I missed the 20% rally.

 

But I still think the value in ENR does not really justify the stock price when I can own a better business at an also fair price.

[CorpRaider]

Yeah, thanks for the response, as usual that seems like solid thinking to me.  I don't want to buy it up here either, but if it trades down to pre-announcement...(of course, if candy and nuts)  They just bought the tampons and other PC businesses not too long ago, right?  Maybe with P&G exiting some brands they can get something on the cheap or sell out the batteries to spectrum or someone.  Kind of a better space than the food staples for some rational capital allocators to work, ya' know?

[Picasso]

I suppose it depends on what you want to return on the investment in ENR.  I believe Stiritz was told how crappy the businesses at ENR were and decided to do a spin-off instead of a sale, but the stock returns still ended up being pretty solid.  I could be wrong on this and cannot remember the source...  It fell in my "too hard" bucket earlier this year and still does today.

 

I think the best capital allocation I have seen in consumer products is CHD.  You get several stellar brands and good capital allocation through dividends, buybacks, and acquisitions.  They are #1 in almost every category they operate in too.  Unfortunately the stock is never that cheap.

[Palantir]

That's pretty neat Palantir. 

 

The comments about the flexible management are interesting and Teledyne/outsideresque, eh?  Any of you guys have any insight on the folks over at ENR?  They're stiritz guys but I wonder how much of his philosophy they picked up;  I guess I need to just knuckle under and read their reports, but there aren't a ton of them since he's left.  I suppose the fact that they are busting up their ops versus building a glorious corporate empire with many corporate jets may be an indication.

 

Yep, and I don't think it is too surprising that this change happened, I always got the impression that RV was being groomed for the top post by BS, whom he has worked with for a long time. I should start following this company now that it is down so much.

[ccplz]

How does one go about evaluating whether or not the acquisitions (Michael foods etc.) were worth the price paid?

 

If one is investing based on the belief that management are superior capital allocators then it makes sense for us to look at how their previous investments have been doing. Thus far it hasn't been impressive - taking FCF from the legacy cereal business and investing it in lower margin nutrition products like protein (albeit higher growth) doesn't seem like a winning formula to me.

 

[Scudbucket]

Anyone going to the annual meeting?  January 29th, 2015 near St. Louis.  I'll be there.  Let me know if you'd like to meet up.

[VersaillesinNY]

Post Holdings' great management team is starting the year with a $1.15 billion acquisition.

Mom Brands is a great fit for their cereal business.

 

http://www.bizjournals.com/stlouis/morning_call/2015/01/post-holdings-to-acquire-mom-brands-in-1-15.html?page=all

 

  I have admired MOM Brands for nearly 50 years. I am delighted that Post and MOM Brands will finally be together. It is one of the best strategic and financial fits of any transaction in which I have been involved.

Bill Stiritz, Post's Executive Chairman

[nielfiel]

Does the amount of the leverage the business will have after close concern anyone at all?  I think we are looking at 6x-6.5x post closing at about $4.5b

 

Additionally I think slide 11 is a little misleading regarding pro forma FCF to common shareholders.  First they are showing immediate run rate synergies of $50m.  You can see in note 3 that this will be achieved by the third year.  Secondly they are not including costs to achieve the run rate savings of $50m which they believe will be $70m-$80m, also found in note 3.  Thirdly, they expect this transaction to close in their fiscal 4th quarter, so adding the ~$170m EBITDA to the 2015E EBITDA is incorrect.  I realize management is trying to provide a picture of what the earnings power of the combined organizations will be however there are many items buried the notes that make the $4.67 FCF profile misleading.

post-to-acquire-mom-brands-slides-12615-final.pdf

[CorpRaider]

On recent quarterly call they guided to ~$600MM in EBITDA for 2015, with ~$50MM coming from the recently acquired MOM Brands.  Also, called out some material avian flu exposure via the eggs business..  Sounded like it is a very fluid situation, I think they said 10% of the flock from which they have contracted for the egg supply has been impacted so far.  I own zero but am hoping to maybe pick up a little if it gets knocked around due to bird flu.

[Scudbucket]

They provided an update today:

http://www.postholdings.com/newsroom/post-holdings-provides-avian-influenza-update

 

Estimate is at 20% now.  They'll provide more context soon.

[Scudbucket]

ST. LOUIS, May 14, 2015 (GLOBE NEWSWIRE) -- Post Holdings, Inc. (NYSE:POST), a consumer packaged goods holding company, today provided an additional update on the recent avian influenza ("AI") outbreak affecting Post's egg business:

 

Post management has determined that the ongoing AI outbreak constitutes a force majeure event with respect to its Michael Foods egg business, the effect of which renders Michael Foods unable to fully perform under its existing supply agreements with customers.

Michael Foods is taking various measures including discontinuation of certain product lines and appropriate pricing actions to offset reduced egg supply and increased operating costs.

Post management further announced that a second Company owned chicken flock in Nebraska has tested positive for AI. This brings the total affected supply to approximately 25% of the Company's volume commitments as determined prior to the recognition of force majeure.

The financial impact of the above is being estimated at this time.

 

Questions:

- How would you guys go about evaluating the impact of this?

- What are the consequences of the consequences and so on of this?  For example, is this a one-time hit or long-term thing?  From a customer perspective, will they want to diversify away from Michael?  What is the likelihood of that and then what are the consequences of that?  Lower margins?  Any help would be appreciated.  Thanks.

[CorpRaider]

Hi Scud,

 

I appreciate your contributions to the thread.  I'm sure I lack the expertise to intelligently address many of your questions, but I will try and respond.  As you know, $50MM was the hit to ebitda anticipated by mgmt. based on the 10% loss of egg supply.  It seems to me the ebitda impact probably scales at some accelerated rate given some of the fixed costs of the business, so we're probably looking at more than an additional $75MM (probably obvious).  Although, based on some of the Q&A on the call I don't think even management has a good bead on how this will play out.  For example, one analyst asked if they thought that, perhaps counter intuitively, the restrictions on export of U.S. poulty products due to the avian flu, might mitigate the impact on u.s. egg supplies due to lost flocks.  My recollection was that management thought that was an interesting point and the response is that they just didn't know.  There was also a question about the contractual obligation to supply eggs no matter the source or cost and the ability to mitigate that impact via force majeure clauses in the contracts.  I think Vitale indicated that may be an option in some contracts, but didn't offer further information.  I guess now we know that it was and that the clauses have been triggered.  It may allow them the option to perform or fail to perform depending upon where overall egg prices go in the market.  I suppose we will have to wait for further revised guidance once mgmt. feels things are clearer.

 

With respect to longer term impact, I personally don't see how the avian outbreak is likely to impact a particular supplier, given the industry wide impacts already seen (unless maybe there are foreign suppliers who have demonstrated immunity to the impacts of avian).  I recently read an article somewhere about a restaurant stockpiling eggs in anticipation of further supply losses and price spikes.  Seems like it is going to hit the industry as a whole.  Vitale said it takes about a year to get replacement flocks up and running at full levels, so this might be a lingering issue.  I guess if the ebitda hit gets a fair amount larger and lingers for a couple of years, it could become pretty problematic for POST, given the leverage levels.  Probably a good thing they just took down MOM as an addition to the RTE cereals cash flow machine.

 

 

[folivera13]

I agree with your comments CorpRaider- however the original EBITDA from AI was $20mm.  I can imagine it being over $50mm by now but I'm not an expert here.

[CorpRaider]

Oops.  Thanks for the correction, I crossed my wires with the $50MM contribution to EBITDA from MOM baked into guidance.

[CorpRaider]

Wow.  There are a couple of articles this morning indicating that they are involved in the bidding for Hostess Brands.  Value estimates for Hostess are in the neighborhood of $2 bil.  I would have thought they had quite enough on their plate, but I guess we will see.

[CorpRaider]

Crushed....guiding to $635 - $650 adjusted EBITDA...shares +17%...I own zero. 

 

http://finance.yahoo.com/news/post-holdings-reports-results-third-214500798.html

[Scudbucket]

Anyone hear anything more about Ralcorp?  What are the chances Stiritz uses equity to finance a deal?