Post Foods seeks new path to profitability

by Editorial Staff
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ST. LOUIS — Four years after becoming part of Ralcorp Holdings Inc., Post Holdings, Inc. has become an independent company, intent on finding a path to growth that proved elusive to managers at Ralcorp.
In its first day of trading Feb. 6 on the New York Stock Exchange, Post shares closed at a price of $26.89. With 34.5 million shares outstanding (of which 6.9 million, or 20%, are still owned by Ralcorp), the share price gave Post a market capitalization of $928 million.

The value represents a sharp discount to the $1.7 billion price tag of the 2008 acquisition of Post from Kraft Foods ($2.6 billion, including debt). In the following four years, Ralcorp invested an additional $76 million in Post in capital expenditures.

Meanwhile, under Ralcorp’s stewardship, Post’s cereal business did not thrive. The company’s annual sales of $1.1 billion pre-Ralcorp shrunk to $997 million in 2010. EBITDA fell to $275 million from $291 million.
In a filing with the Securities and Exchange Commission ahead of the spin-off, Post said the company lost a full point of market share in ready-to-eat cereal since 2008, falling to 11.2% from 12.2%.

“While generating substantial cash flow, we believe that Post has not performed as well as Ralcorp had expected,” Post said in the Form 10 filing submitted to the S.E.C. Jan. 25.

The filing included a detailed review of what Post management believes went wrong under Ralcorp’s stewardship.

“Our management believes it has identified the root causes of the decline and has developed a plan to reverse it,” Post said. “First, under Kraft’s ownership, sales management was part of Kraft’s in-house sales force, which we believe was generally considered one of the best in the consumer packaged goods industry. Upon the separation from Kraft, Post adopted a primarily broker sales strat-egy. We believe this resulted in a less focused sales effort as well as a loss in terms of general retail presence and its resulting scale benefits.

“Second, in addition to other centralized systems and processes from which Post benefitted, Kraft utilized a powerful proprietary tool for managing trade spending. Once this became unavailable to Post, we believe trade spending became erratic and lacked measurement discipline. As a result, the return on investment on trade programs fell sharply. Post shifted focus to Post’s diamond brands (Honey Bunches of Oats, Pebbles and Great Grains) to the detriment of the remaining brands.

“Finally, since mid-2008, Post has increased average pricing at more than twice the rate reported by (Nielsen Co.) for the ready-to-eat cereal category (16% vs. 7%) while at the same time reducing total advertising and consumer spending support by 5%. We believe this resulted in an unfavorable shift in consumer value perception and contributed to the decline in market share.”

Reversing the company’s market share erosion is possible with greater focus, incentivized management and the freedom to pursue organic growth and acquisitions, the filing said.

Key strategies cited by Post to be pursued after the spin-off include:
• “strengthening the company’s selling approach by upgrading coverage for the largest accounts;
• “driving merchandising and improving trade spending return on investment through more effective use of deployed analytics and more effective programming;
• “improving the overall value proposition of the Post brands by improving the quality of the products and new pricing strategies;
• “continuously innovating around rel-evant themes, gaps in consumer demand and licensing opportunities; and
• “improving marketing effectiveness by reorganizing the marketing department to put business leaders in charge of all brands, retooling our agency roster, increasing our use of social and digital media, and increasing our use of public relations.”
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