Post Holdings' net sales will be slightly lower in fiscal 2012 than fiscal 2011 but will grow modestly in 2013 as result of new products and relaunches of some of its brands, S&P estimates
October 23, 2012
Standard & Poor's Ratings Services affirmed its 'B+' corporate credit and senior unsecured debt ratings on St. Louis-based Post Holdings Inc. Its senior unsecured notes due 2022 will now total $975 million. The recovery rating on the senior unsecured debt remains '4', indicating our expectation for average (30% to 50%) recovery in the event of a payment default.
The outlook is stable. Pro forma for the transaction, we estimate that the company will have about $1.1 billion in reported debt outstanding, before any debt repayment.
We continue to view Post Holdings Inc.'s financial risk profile as "aggressive" given its significant debt obligations following its spin-off from Ralcorp Holdings Inc. (BBB-/Negative/--) early in 2012. Key credit factors considered in our assessment of Post's "weak" business risk profile include our view of Post's narrow product portfolio, participation in the highly competitive ready-to-eat (RTE) cereal category, exposure to volatile commodity costs, and limited brand and geographic diversity.
We estimate that following this debt offering, Post will have approximately $1.2 billion of adjusted debt (including our adjustments for operating leases and pension obligations) outstanding, and pro forma leverage will increase to about 5.5x for the 12 months ended June 30, 2012 from roughly $1 billion prior to the add-on notes. However, if the company applies the proceeds to debt reduction on its term loan, then we estimate leverage would be closer to 4.5x. For the third fiscal quarter ended June 30, 2012, net sales declined about 2.3% driven by a 5.5% decline in volume, partially offset by increased pricing. Adjusted EBITDA declined by about 4% primarily due to higher commodity and operating costs. Both of these were in line with our expectations as the company attempts to stabilize its volume and net sales declines. The company estimates that its market share for the quarter was about 10.3% according to Nielsen all channel data, slightly short of the company's stabilizing goal of 10.5% to 11.0%. While the company experienced volume declines across most brands, it continues to focus on innovation and announced a segmentation strategy whereby it will begin rolling out a value price point brand called Good Morenings.
We estimate that net sales will be slightly lower by the end of fiscal 2012 than they were in fiscal 2011 but will grow modestly in 2013 as a result of new products and re-launches of some its brands. Absent any debt repayment or significant acquisition, following this debt add-on, we estimate that pro forma leverage will be 5.5x and that funds from operations (FFO) to total debt will be roughly 10%. However, we believe that credit protection measures could improve with debt repayment or an accretive acquisition, including leverage under 5x and FFO to total debt above 12%. These ratios are in line with our indicative ratios for an "aggressive" financial risk profile, including leverage in the 4x to 5x range and FFO to total debt of 12% to 20%.
Our base case forecast assumptions that support this are that:
-- We expect that net sales will begin to increase beginning in fiscal 2013, assuming Post's management is able to curtail volume declines through innovation and effective brand and advertising spending. Our forecast assumes sales growth in the mid-single digits.
-- We also assume EBITDA margin of around 20% in fiscal 2012 and 2013 as compared with a pro forma margin of 26% at the end of fiscal 2011. The EBITDA margin decline reflects the company's higher stand-alone company costs, our expectation that commodity costs will remain elevated through fiscal 2013, and that the company will continue its current levels of brand support.
-- We also estimate that the company will generate at least $90 million in discretionary cash flows in fiscal 2012 and will likely generate at least that level annually during the next two years, assuming capital expenditures remain in the mid $20 million area. Our estimate assumes no dividends.
-- We assume no additional share repurchases in fiscal 2013 after Post's Sept. 28, 2012 repurchase of approximately $53.4 million shares that were held by Ralcorp as part of the spin-off with cash on hand.
We view the company's business risk profile as "weak". Post is a manufacturer, marketer, and distributor of branded RTE cereals. Key brands include Honey Bunches of Oats, Pebbles, Great Grains, Grape-Nuts, Raisin Bran, Honeycomb, Alpha-Bits, Golden Crisp, and Shredded Wheat. The company has the third-largest market share position in the North America branded RTE cereal category behind larger, financially stronger competitors such as Kellogg Co. (BBB+/Negative/A-2) and General Mills Inc. (BBB+/Stable/A-2). Relative to these competitors, Post has limited brand diversity, with Honey of Bunches of Oats constituting roughly 46% of its fiscal 2011 revenues. In our opinion, the RTE category is highly competitive, as demonstrated by significant spending on advertising and trade promotion, and a private brand presence of nearly 10% of the dollar share of the market. We believe that growth in the category is driven by product innovation, which Post lacked before becoming a stand-alone company. Moderate customer concentration exists, with Wal-Mart Stores Inc. (AA/Stable/A-1+) accounting for about 21% of fiscal 2011 sales and the top 10 customers making up 56% of net sales in fiscal 2011. Geographic diversification is limited, with over 90% of sales generated in the U.S. and the majority of the remainder in Canada. We believe Post is exposed to commodity cost volatility, including exposure to key ingredient wheat, the cost of which has fluctuated significantly during the past few years.
We believe Post will have adequate liquidity, as defined in our criteria. This includes our anticipation that liquidity sources (including cash, FFO, and availability under the company's revolving credit facility) will exceed uses by well over 1.2x during the next 12 months. We anticipate that liquidity sources will likely continue to exceed uses, even if EBITDA were to decline by 15%.
This is based on the following information and assumptions:
-- Pro forma for this $200 million add-on and $53.4 million share repurchase in September, the company had roughly $237 million in cash at June 30, 2012.
-- The company had no borrowings and only $0.5 million in outstanding letters of credit on its $175 million revolver credit facility due in 2017 at June 30, 2012.
-- As of June 30, 2012, the company was in compliance with its financial covenants with adequate cushion. As part of this transaction, the company amended its maximum net leverage covenant (net of $50 million maximum cash) starting in October 2012, to 5.75x from 5.25x, but which becomes more restrictive over time, with step-downs annually. The company's interest coverage covenant remains at 2.5x. We expect the company to maintain adequate cushion on both covenants.
-- Debt maturities are manageable for the next few years, with $15.3 million due in fiscal 2013.
We believe that Post has sound relationships with its banks and a generally satisfactory standing in the credit markets.
The issue-level rating on the company's now $975 million senior unsecured notes due 2022 is 'B+'. The recovery rating is '4', indicating our expectation for average (30% to 50%) recovery for lenders in the event of a payment default.
The issue-level rating on the company's $175 million, five-year first-lien term loan A and $175 million, five-year revolving credit facility, both of which are due in 2017, are rated 'BB'. The recovery rating is '1', indicating our expectation for very high (90% to 100%) recovery in the event of a payment default.
For the complete recovery analysis, please see our recovery report to be published following this report on RatingsDirect on the Global Credit Portal.
The stable outlook reflects our expectation that Post will strengthen its key credit ratios within the next 12 months (including leverage below 5x), will maintain adequate liquidity, and will continue to generate positive discretionary cash flow.
We would consider lowering the ratings if leverage remained at 5.5x or above for the next few consecutive quarters, or the company's covenant cushion declines and the company does not maintain adequate cushion, thus weakening its liquidity position. We estimate this could occur if the company does not repay debt or make an accretive acquisition and EBITDA does not grow from fiscal 2012 estimated levels.
Although unlikely within the next year, we could consider an upgrade if Post can reduce and sustain leverage in the 3x and 4x range and increase FFO to debt above 20%, continue to generate positive discretionary cash flows, and maintain a financial policy consistent with a higher rating, including deleveraging.
Related Criteria And Research
-- Corporate Ratings Criteria 2008, April 15, 2008
-- Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012
-- Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
-- Key Credit Factors: Criteria for Rating The Global Branded Nondurable Consumer Products Industry, April 28, 2011
-- Recovery: Criteria Guidelines for Recovery Ratings on Global Industrials Issuers' Speculative-Grade Debt, Aug. 10, 2009
Post Holdings Inc.
Corporate Credit Rating B+/Stable/--
Senior Secured BB
Recovery Rating 1
Senior Unsecured B+
Recovery Rating 4