Post Holdings, Inc. (POST 1.07%) released its financial results for the fourth quarter and full fiscal 2014, and the results were in line with most expectations, with one $295 million caveat. Adjusted earnings per share came in at $0.13, about double the $0.12 analysts were expecting, and sales from acquisitions continue to grow, while revenues in the ready-to-eat, or RTE, cereal business continue to slip.
However, that one caveat -- $295 million in non-cash adjustments -- drove a whopping $5.86 loss per share in non-adjusted earnings. Let's take a closer look at the highlights and see what we can learn about the company.
Mind the (non-) GAAP
One of the things that can be most confusing about understanding a company's prospects and results is when it also reports so-called "adjusted," or non-GAAP, earnings along with the earnings based on GAAP, or generally accepted accounting practices -- the earnings that are the "real" results.
With a company like Post Holdings, understanding both GAAP and adjusted earnings numbers can often give investors a better understanding of what's happening with the business. A great example this quarter is the $295.6 million impairment the company took, $264 million of which is tied to the decline in the RTE cereal category.
Post's cereal business is losing value. Source: Post Holdings.
What does this mean exactly? When Post acquires a brand, it will add to the goodwill line item. This is where the company accounts for the value of intangibles such as a name brand, versus tangibles such as inventory, equipment, and real estate.
The issue with goodwill is that it can be difficult to value. For Post Holdings, this $264 million goodwill reduction means that the company is expecting to get less value going forward from the company's RTE cereal brands and is reducing the value of its intangible assets to reflect it.
Since it's a non-cash charge, it doesn't really affect the company's financial position. Rather, it reflects a reduction in the value of an asset, which means that asset will generate reduced returns going forward.
The impact of all the acquisitions
Michael Foods is already twice the size of the Post cereal business. Source: Michael Foods.
To take the conversation to the next step, the goodwill line item doubled over the past year, from $1.49 billion to $2.89 billion, as a result of all of the acquisitions the company has made.
It's early yet to tell how much these acquisitions will add to the bottom line, but net sales increased 233% for the year, and a whopping 357% for the quarter. As the company rationalizes its business and integrates acquisitions, those acquisitions should begin contributing meaningfully to cash flows. But for the year, cash from operations increased 54%, to $183.1 million, which is a far cry from what more than doubling sales should do.
The company made two more significant acquisitions since the end of the quarter, buying the PowerBar and Musashi brands from Nestle S.A., and American Blanching Company, respectively. Since these acquisitions occurred after the end of the quarter, it hasn't yet been reported what additional goodwill value the company will carry related to the new brands.
Reoganization should aid in future integration
The reality is, Post Holdings is likely to make several acquisitions every year and could eventually begin jettisoning some of its legacy brands if they continue to underperform.
To better support the path forward, the company recently announced that it's reorganizing into three operating groups: Consumer Brands, made up of the RTE cereal and active nutrition brands; Michael Foods, for foodservice and commercial customers; and Private Label, manufacturing nut butters, cereals, granola, and other packaged foods that are sold under store brands.
This organization will be a reduction from five operating segments, and it should lead to lower operation expenses. It could also lead to an easier process for integrating future acquisitions, leading to a faster bottom-line impact.
Looking ahead: It's about trusting management
Management expects adjusted EBITDA to grow between 57% and 68% next year to a range of $540 million to $580 million, largely driven by improved operational efficiency, lower input costs, and sales growth in several key parts of the business, such as Michael Foods.
It's probably fair to expect, as well, that the company could make more than one acquisition next year, as that's part and parcel for the plans that current Executive Chairman Bill Stiritz outlined when he led the company out of its spinoff in 2012 as CEO. Current CEO Robert Vitale has worked with Stiritz for decades, and it's nearly inconceivable that he will pursue a different strategy going forward.
For investors looking ahead, it really is about trusting this management team. Today's Post Holdings is incredibly changed in just the past year, and depending on the available targets, more acquisitions could lead to even more change in another year. With the core RTE cereal business in steady decline, that's probably a good thing.
Will all these investments pay off? If they do, it will be due to the guiding hand of a management team with experience doing this sort of thing. If you invest in Post Holdings, you pretty much have to trust that they'll get it done.
