Higher costs hurt Ralcorp full-year results

by Eric Schroeder
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ST. LOUIS — Higher costs contributed to lower earnings at Ralcorp Holdings, Inc. during fiscal 2010. Net income in the year ended Sept. 30 totaled $208.8 million, equal to $3.79 per share on the common stock, down 28% from $290.4 million, or $5.16 per share, in fiscal 2009. Excluding special items such as acquisition expenses, the company earned $4.68 per share in fiscal 2010.

Net sales in fiscal 2010 rose 4% to $4,048.5 million from $3,891.9 million.

For the fourth quarter, net income totaled $41.9 million, or 76c per share, down 48% from $79.9 million in the same period a year ago. Net sales were $1,129.2 million, up 15% from $983.2 million.

Profit contribution in the Branded Cereal Products segment totaled $220.6 million in the year, down 12% from $250.6 million in fiscal 2009, and for the quarter fell 15% to $62.4 million. Net sales in the segment totaled $987.5 million in the year, down 8% from $1.070.6 million. For the fourth quarter, net sales fell 12% to $238.3 million.

“This was a transitional quarter for Post as we executed our previously announced plans to reduce our trade spending,” said David Skarie, co-chief executive officer. “We will continue to focus on improving innovation and trade spending efficiency in 2011. We are excited about our new product pipeline and improvements to our existing products that we will announce during the year.”

In the company’s Other Cereal Products segment, profit contribution fell 2% during fiscal 2010 to $90.3 million from $92 million, while sales were basically flat at $799.7 million, which compared with $803.3 million in fiscal 2009. For the fourth quarter, profit contribution was $22.1 million, up 6% from $20.9 million, and sales were 5% higher, at $213.9 million compared with $204.6 million.

“The increase was driven by 2% volume growth and a favorable mix, partially offset by lower selling prices,” Ralcorp said. “Favorable variances in volume and mix are mainly attributable to a 42% volume increase in nutritional bars, as ready-to-eat cereal volume declined nearly 6% for the fourth quarter.”

Full-year profit contribution in the Frozen Bakery Products segment rose 17% to $80.8 million from $69.1 million, while sales moved up 1% to $698.3 million. For the fourth quarter, profit contribution eased 6% to $18.7 million from $20 million in the same period a year ago. Net sales were $181.4 million, up 10% from $164.8 million.

Ralcorp attributed the sales gain to the recently acquired Sepp’s Gourmet Foods business as well as increases within the company’s base business.

Profit contribution in the Snacks, Sauces & Spreads segment jumped 30% to $152.6 million from $117.6.6 million on a 10% gain in sales to $1,461.6 million. For the fourth quarter, profit rose 2% to $28.7 million from $28 million, while sales increased 15% to $394.2 million. Ralcorp said the recently acquired J.T. Bakeries and North American Baking businesses helped drive the sales gains.

Profit contribution in Pasta, which comprises the American Italian Pasta Co. business, was $21.6 million in the full year and fourth quarter, while sales in the unit totaled $101.4 million.

Ralcorp completed four acquisitions during fiscal 2010. During the three months ended Sept. 30, Ralcorp recorded approximately $14.5 million of expenses related to recent acquisitions. The expenses included professional services fees and a one-time finished goods inventory revaluation adjustment related to the AIPC transaction, as well as Post Foods transition and integration costs, and severance costs related to all four fiscal 2010 acquisitions. No additional Post Foods transition and integration costs will be incurred in fiscal 2011, Ralcorp said. Of the $14.5 million merger and integration costs, $4.5 million is included in “Cost of goods sold,” $1.6 million in “Selling, general and administrative expenses,” and $8.4 million in “Other operating expense, net.”

Looking ahead to fiscal 2011, Ralcorp said it expects ingredient, packaging and freight costs to rise approximately $200 million net of hedges for fiscal 2011, with the most significant impacts from wheat (durum and common), nuts, sugar, and oils.

“Given this level of commodity cost increase and anticipated inflation, we are implementing a number of strategies,” Ralcorp said. “First, we are aggressively reducing costs internally through continuous improvement programs and capital-related projects. Second, we are reducing inefficient trade programs and increasing prices when justified. The timing of these pricing actions is expected to lag our cost increases, particularly in the first quarter of fiscal 2011.

“Our Post cereal operating results were hurt in fiscal 2010 by lower volumes, notwithstanding higher promotional spending. While the promotional spending achieved its objective of increasing market share, some of the spending was inefficient and did not achieve targeted sales volume increases. During fiscal 2011, we plan to improve several of our existing products and introduce some innovative new products into the market. We also plan to eliminate inefficient trade programs as we increase our investment in advertising and consumer spending to support our new product initiatives.”

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