Ralcorp Holdings Announces Results for the Q2 of Fiscal 2012

Net sales increased 16%, largely due to the acquisition of Refrigerated Dough. Base-business net sales increased 7% as a result of an increase in overall net pricing in response to significantly higher raw material (ingredients and packaging) and freight costs.

23 May 2012 --- Ralcorp Holdings, Inc., reported results for the quarter ended March 31, 2012.  Ralcorp's results include the operations of the North American private-brand refrigerated dough business of Sara Lee Corp. (Refrigerated Dough) since it was acquired on October 3, 2011.  The operations of the Post brand cereals business (formerly, the Branded Cereal Products segment), which was distributed to shareholders effective February 3, 2012, are presented as discontinued operations for all periods and related amounts are excluded from the reported amounts and discussions below, except as separately identified in the condensed consolidated statements of earnings.  Unless otherwise indicated, all comparisons of results in the following discussions are for the second quarter of Ralcorp's fiscal 2012 relative to the second quarter of fiscal 2011 ended March 31, 2011.

- Net Sales grew as a result of the Refrigerated Dough acquisition as well as higher net pricing in all segments in response to rising commodity costs.
- Refrigerated Dough contributed approximately $.08 to adjusted diluted earnings per share for the second quarter.  The company estimates that this business will contribute between $.34 and $.36 to adjusted diluted earnings per share during fiscal 2012, an increase from prior estimate of $.30.
- Diluted Earnings per Share (EPS) in this year's second quarter were negatively impacted by amounts related to plant closures, provision for a legal settlement, merger and integration costs, and the accelerated amortization of intangible assets, partially offset by a mark-to-market gain on economic hedges.  Last year's diluted EPS benefitted from mark-to-market gains on economic hedges.  The effects of all of these items are excluded from Adjusted Diluted EPS from Continuing Operations (Adjusted Diluted EPS).  Adjusted Diluted EPS include the effect of normal amortization expense, including the amortization of intangible assets that are only recorded through business acquisitions (mostly trademarks and customer relationships) with a combined impact of $.22 per share and $.18 per share in the three months ended March 31, 2012 and 2011, respectively.

Net sales increased 16%, largely due to the acquisition of Refrigerated Dough.  Base-business net sales increased 7% as a result of an increase in overall net pricing in response to significantly higher raw material (ingredients and packaging) and freight costs.  This increase was partially offset by an overall 4% volume decline driven by weakness in all but the Cereal Products segment.

Gross profit margin for the second quarter of 2012 benefitted from $2.9 million of net adjustments for economic hedge contracts.  In the second quarter of 2011, gross profit margin was positively impacted by $4.9 million of net adjustments for economic hedge contracts.  Excluding the effect of these items, adjusted gross profit margin decreased from 22.9% last year to 20.7% this year.  Gross margins declined 200 basis points as pricing and mix improvements offset the dollar amount of increases in raw materials and freight.  Base-business raw material and freight costs (net of hedging activities) were approximately $95 million higher, with the most significant impact in snack nuts (included in the Snacks, Sauces & Spreads segment) and durum wheat (included in the Pasta segment).  Gross margins were also reduced by 100 basis points due to manufacturing inefficiencies and fixed cost absorption on lower volumes. These declines were partially offset by a 100 basis point improvement due to the positive impact of the addition of higher-margin products of Refrigerated Dough.

For the second quarter of 2012, selling, general and administrative (SG&A) expenses as a percentage of net sales increased to 11.0% from 10.3%.  The SG&A percentage was negatively impacted by merger and integration costs in the 2012 quarter.  Excluding the effect of these items, adjusted SG&A expense as a percentage of net sales increased from 10.3% to 10.9%.  The increase in SG&A was driven primarily by the Post transition services agreement costs that are recorded in SG&A (while the billings for those costs are recorded in "Other operating expenses, net").  SG&A was also impacted by higher divisional expenses (R&D, foreign exchange rates, and selling costs) and higher corporate costs (stock-based compensation, legal, and IT expenses). 

Total amortization expense for the second quarter of fiscal 2012 was $20.1 million ($.23 per diluted share) compared to $16.3 million ($.19 per share) a year ago.  The increase is primarily due to the acquisition of Refrigerated Dough.  Amortization expense for both fiscal 2012 and 2011 was impacted by accelerated amortization expense of $1.2 million for the three-month periods ended March 31 due to a shortened estimate of the remaining life of a customer relationship intangible asset.

In addition to the items discussed above, the second quarter operating profit margin was affected by amounts related to plant closures, provision for legal settlement as described below, and other merger and integration costs.

Cereal Products

Net sales increased 11% in the three months ended March 31, 2012 due to increased volumes and higher net selling prices (which were increased in response to commodity cost increases).  The increase in volumes for ready-to-eat and hot cereal was driven by retailers' strong promotional programs and expanded distribution of existing products. Nutritional bar volume was positive for the quarter, but as expected, declined in March as a co-manufacturing customer began its withdrawal. 

Segment operating profit decreased 10% for the quarter ended March 31, 2012.  During the second quarter, the Los Alamitos, California manufacturing facility was closed after relinquishing co-manufacturing business that did not meet minimum margin requirements.  The lower operating profit for the quarter reflects manufacturing inefficiencies as the company rescales its co-manufacturing operations at another facility.  These inefficiencies were partially offset by the impact of improved pricing and higher volumes net of higher input costs (driven by oats, corn, wheat, rice, fruits, freight costs, and distribution costs).  While Ralcorp fully expects to correct the operating issues, the Company is cautious about the timing of these improvements and anticipates that segment operating profit for the full fiscal year will be negatively affected by the manufacturing issues at Bloomfield.

Snacks, Sauces & Spreads

Net sales grew 7% in the three months ended March 31, 2012 as a result of increased net selling prices and a favorable overall sales mix including customer and product mix, partially offset by lower overall volume.  Net selling prices were raised in response to significantly higher commodity costs across many of the segment's product categories, but most notably in snack nuts and peanut butter.  The higher net selling prices had an adverse impact on volumes, especially for snack nuts and peanut butter.

Segment operating profit decreased 2% for the quarter ended March 31, 2012 as the benefits of improved net selling prices and favorable sales mix (primarily due to higher cracker and cookie volume and lower snack nut volumes) were offset by lower volumes and significantly higher raw material costs (primarily cashews, peanuts, and tree nuts, but also including oils, wheat items, and packaging), as well as increased freight costs and higher selling expenses.

Frozen Bakery Products

Net sales were up 43% in the three months ended March 31, 2012, primarily attributable to incremental sales from the acquisition of Refrigerated Dough.  Excluding results from this acquisition, base business net sales were up 2% for the second quarter.  Base-business net sales were driven by price increases (net of increased trade promotion spending) in response to commodity cost increases and a favorable sales mix shift from retail and in-store bakery bread to retail cookies, partially offset by lower overall volumes.  Volume gains from a new product launch in foodservice were offset by the effects of volume declines in retail griddle products and bread sales to in-store bakery and retail channels.

Segment operating profit was up 17% in the three months ended March 31, 2012, primarily due to the acquisition of Refrigerated Dough.  Excluding this acquisition, segment operating profit decreased 29% in the second quarter, driven by lower volumes, higher raw materials (primarily flour, dairy, and eggs), freight, plant overhead, and research and development costs as well as unfavorable foreign exchange, partially offset by improved net selling prices.

Pasta

Net sales were up 11% for the three ended March 31, 2012, partially attributable to incremental sales from the acquisition of Annoni.  Excluding results from this acquisition, base business net sales were up 9% in the second quarter.  The increase in net sales is primarily due to higher net selling prices in response to rising raw materials costs partially offset by volume declines.  Retail sales volume was down 3% primarily due to declines in domestic and international private-brand products partially offset by higher branded volume.  Institutional volumes declined 4% due to lower ingredient sales, partially offset by higher secondary volumes.

Base-business segment operating profit decreased 31% in the three months ended March 31, 2012, partially as a result of the lower sales volumes, but primarily due to significantly higher raw material costs (primarily durum and semolina wheat) which were not completely offset by the related net selling price increases.