Acquisitions lead to gains for Ralcorp

by Eric Schroeder
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ST. LOUIS — Earnings at Ralcorp Holdings, Inc. rose 6% in the first quarter, boosted in part by a sharp gain in sales. Net income in the quarter ended Dec. 31, 2010, totaled $71.3 million, equal to $1.30 per share on the common stock, up from $67.2 million, or $1.20 per share, in the same period of fiscal 2010.

Net sales in the quarter increased 18% to $1,173.3 million from $991.9 million in the same period a year ago.

“We continue to be pleased with our fiscal 2010 acquisitions,” said Kevin Hunt, co-chief executive officer. “Synergies totaling $3.8 million were realized in the first quarter, and we expect each acquisition to continue to deliver value to Ralcorp.”

Mr. Hunt also indicated Ralcorp expects commodity cost trends to continue.

“We and the food industry are facing dramatic inflation in raw material costs, which will affect all of our businesses,” he said. “In our effort to offset these cost increases, we are continuing to aggressively cut internal costs, eliminate inefficient trade spending and raise prices as appropriate. We began to realize pricing on some product lines late in the first quarter.”

Profit contribution in the Branded Cereal Products segment totaled $49.7 million in the first quarter, up 1% from $49.1 million in the same period a year ago. Net sales in the segment totaled $221.6 million, down 10% from $245.9 million.

“We continue to focus on improving innovation at Post,” said David Skarie, co-c.e.o. “During the quarter, we introduced Honey Bunches of Oats-Raisin Medley and Pebbles Treats. We have had outstanding feedback from our trade partners for these new items and have put new consumer and trade programs in place to support each launch. Developing new products and improving our existing products will be a major focus area for us.”
In the company’s Other Cereal Products segment, profit contribution fell 12% during the first quarter of fiscal 2011 to $21.2 million from $24.2 million, while sales were up 5% at $204.7 million, which compared with $194.9 million in the same period a year ago.

“Net sales increased 5% fueled by significant volume growth for nutritional bars (up 51%),” Ralcorp said. “Overall net sales growth outpaced volumetric growth due to a positive sales mix (with a shift to nutritional bars, which have a higher price per lb) and lower discounts and allowances, partially offset by lower net sales prices for nutritional bars compared to last year. Private brand ready-to-eat cereal volumes were down 4%, as the overall weakness in the ready-to-eat cereal category and competitive promotional activities impacted sales to many of the segment’s retail customers.”

Full-year profit contribution in the Frozen Bakery Products segment fell 13% to $23 million from $26.4 million, while sales moved up 7% to $193.7 million.

Ralcorp attributed the sales gain to the fiscal 2010 acquisition of Sepp’s Gourmet Foods business as well as increases within the company’s in-store bakery cookies business.

Profit contribution in the Snacks, Sauces & Spreads segment decreased 21% to $37.4 million from $47.5 million, while sales increased 13% to $417.4 million from $369.3 million. Ralcorp said the recently acquired J.T. Bakeries and North American Baking businesses contributed 9 percentage points of the sales increase.

Additionally, a favorable sales mix shift from wet-filled products to snack nut products added to the growth.
Profit contribution in Pasta, which comprises the American Italian Pasta Co. business, was $28.2 million in the first quarter, while sales in the unit totaled $135.9 million.

“Retail volumes were flat, with private brands gaining 4% offset by lower volumes for branded pasta products,” Ralcorp said. “Lower volumes for the branded pasta products were due to exiting certain geographic markets where the brands were underperforming the market and shifting focus to private brand products.”

Looking ahead to the rest of fiscal 2011, Ralcorp said, “We incurred $14 million (net of hedges) in ingredient, packaging, and freight cost increases during the quarter. Based on our current exposures and projected volume, we expect the net year-over-year increase in unit costs for ingredients, packaging, and freight will be $200 million net of hedges for the full year, with a majority of the cost inflation to occur in the second half of the year.

“The primary risks to this estimate are durum wheat, cashews, tree nuts (particularly almonds and pecans), and peanuts. We undertook pricing actions in the vast majority of our categories in recent months as a result of these significant cost increases. Pricing actions will accelerate throughout the rest of the year, but we project the price increases to lag input cost increases in the second quarter. We expect pricing actions and other cost reduction initiatives to largely offset cost inflation in the second half of the year.

“In our Branded Cereal Products segment, we will build on recent new product introductions and expect new product revenue to increase significantly through the year driven by increased distribution, advertising, and consumer support. We would also expect to substantially boost advertising and support for the rest of our branded cereal products during the year. This cost increase will be partially offset by reductions in trade spending. While these actions may negatively impact margins in the near term, we feel this support is critical to the long-term health of the Post brand.

“Due to our strong cash flows from operations and 18% adjusted EBITDA growth, we repaid over $120 million of debt during the first quarter of fiscal 2011, reducing our leverage ratio (total debt to pro forma EBITDA) to 3.3 times. The timing of tax and interest payments will limit the amount of debt reductions in the second fiscal quarter, but we expect to get to our target leverage range (below 3.0 times) during the third quarter.”

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