Ralcorp earnings rise on strength in branded cereal

by Eric Schroeder
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ST. LOUIS — Acquisitions helped drive earnings and sales gains at Ralcorp Holdings, Inc. in the second quarter of fiscal 2011. Net income in the quarter ended March 31 was $83.3 million, equal to $1.52 per share on the common stock, up 78% from $46.7 million, or 85c per share, in the same quarter a year ago.

Net sales were $1,172.6 million, up 22% from $965 million in the first quarter of fiscal 2010.

“Our acquisitions completed in fiscal 2010 continued to perform well and produced 30c per share of accretion during the quarter,” said Kevin Hunt, co-chief executive officer. “While we expect lower accretion in the third quarter due to higher commodity costs (primarily durum wheat at AIPC), the earnings from these acquisitions are expected to exceed our original expectations for the year. Additionally, given our continued strong operating earnings and cash flow (with adjusted EBITDA growth of more than 32% for the second quarter), we would expect to be within our target leverage ratio that will allow us to consider share repurchases and acquisitions in our third quarter.

“We continue to expect ingredient, packaging, and freight inflation amounting to about $200 million for fiscal year 2011. As we have noted in the prior quarters, we expect to be able to cover all of this inflation through a combination of the reduction of inefficient trade spending and internal costs, and pricing adjustments, where justified. We realized the benefit of some of these actions in the second quarter and expect additional benefit in the second half of the year. While we will continue to work to mitigate the rising input costs by other means, the costs of several commodities are approaching all time highs, making further price increases unavoidable.”

Profit contribution in the Branded Cereal Products segment totaled $56.9 million in the second quarter, up 3% from $55 million in the same period a year ago. Net sales in the segment totaled $255.3 million, down 2% from $260.6 million.

“We are pleased with our accomplishments at Post during the quarter,” said David Skarie, co-c.e.o. “We eliminated a significant amount of inefficient trade spending while increasing advertising and consumer spending 29% over the last year. For the quarter, our two flagship brands, Honey Bunches of Oats and Pebbles, grew revenue 8% and 18%, respectively. The combination of these factors helped us achieve our objective of improving market share each month during the quarter, which is a trend that we expect to continue into the third quarter.

“We are excited about the initial performance of our new products, Pebbles Treats (which is Post’s first entry outside of ready-to-eat cereal) and Honey Bunches of Oats Raisin Medley, both of which have met with strong retailer and consumer acceptance. These products reflect the beginning of our efforts to significantly improve our new product pipeline. Additionally, our re-launch of Great Grains, supported by a new advertising campaign featuring celebrity chef Curtis Stone, has been very well received. We expect these products to drive revenue improvement in the back half of the year. Due to continued cost increases, we have announced pricing actions on many of our products.”

In the company’s Other Cereal Products segment, profit contribution fell 3% during the second quarter of fiscal 2011 to $21.3 million from $22 million, while sales were up 3% at $198.9 million, which compared with $193.3 million in the same period a year ago.

“Net sales increased 3% fueled by strong volume growth for nutritional bars (up 11%),” Ralcorp said. “The segment’s overall net sales growth was due to higher net selling prices and a positive sales mix (with a shift to nutritional bars, which have a higher price per pound), partially offset by the effect of a decline in overall volume. Private brand ready-to-eat cereal volume was down 7%, as the overall weakness in the ready-to-eat category and competitive promotional activities impacted sales to many of the segment's retail customers.”

Profit contribution in the Frozen Bakery Products segment rose 26% to $22.9 million from $18.2 million, while sales moved up 11% to $192.7 million.

Ralcorp attributed the sales gain to volume gains for food service and retail products, incremental sales from the fiscal 2010 acquisition of Sepp’s Gourmet Foods, and higher pricing. The effects of volume declines in the in-store bakery channel partially offset the gains.

Profit contribution in the Snacks, Sauces & Spreads segment decreased 18% to $33.3 million from $40.5 million, while sales increased 13% to $382.2 million from $338.2 million. Ralcorp said the recently acquired J.T. Bakeries and North American Baking businesses contributed 6 percentage points of the sales increase.

Additionally, a favorable sales mix shift from products with a lower price per lb to products with a higher price per lb added to the overall sales growth.

Profit contribution in Pasta, which comprises the American Italian Pasta Co. business, was $36.6 million in the second quarter, while sales in the unit totaled $143.5 million.

“Retail sales volume was flat as a 6% increase in private brands was offset by declines in branded products,” Ralcorp said. “Last year, AIPC exited certain geographic markets where the brands were underperforming the market and shifted focus to private-brand products. Institutional volumes declined 13%, primarily as a result of reduced sales to food service customers.”

Overall, net earnings at Ralcorp in the six months ended March 31 totaled $154.6 million, or $2.82 per share, up 36% from $113.9 million, or $2.06 per share, in the same period a year ago. Net sales were $2,345.9 million, up 20% from $1,956.9 million.

Mr. Hunt said Ralcorp is optimistic looking forward to the remainder of fiscal 2011, and he expected full-year earnings per share to be between $5.45 and $5.55.
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