Ralcorp: Announces Results for Q4 and FY 2012

St. Louis / MO. (rh) Ralcorp Holdings Inc. reported results for the quarter ended September 30, 2012. Ralcorp´s results include the effects of acquisitions completed during fiscal 2012, including the North American private-brand refrigerated dough business of Sara Lee Corporation, Pastificio Annoni S.p.A., Petri Baking Products Inc. and Gelit S.r.l.. The operations of the Post cereals business are presented as discontinued operations (and excluded from continuing operations) for all periods. Unless otherwise indicated, all comparisons of results in the following discussions are for the fourth quarter ended September 30, 2012 relative to the fourth quarter ended September 30, 2011. Summary:

  • Net Sales grew as a result of acquisitions completed during fiscal 2012, primarily Refrigerated Dough and Petri, as well as higher net pricing in response to rising commodity costs, partially offset by lower volumes.
  • Diluted Earnings per Share (EPS) in this year´s and last year´s fourth quarter were negatively impacted by special items as provided for in the attached re-conciliations of non-GAAP measures, primarily non-cash loss on investment in Post, non-cash impairment of intangible assets, restructuring and plant closure costs. The effects of all of the special items are excluded from adjusted diluted EPS from continuing operations (Adjusted Diluted EPS). Adjusted diluted EPS excluding acquisition-related amortization (Adjusted Diluted EPS Exclusive Acquisition-related Amortisation».) excludes the effect of normal amortization of intangible assets that are only recorded through business acquisitions (mostly customer relationships and trademarks) with a combined impact of 0,21 USD per share and 0,15 USD per share in the three months ended September 30, 2012 and 2011, respectively.
  • Acquisitions contributed approximately 0,05 USD to Adjusted Diluted EPS for the fourth quarter.

Net Sales

Net sales increased eight percent, due to acquisitions completed in fiscal 2012, primarily Refrigerated Dough and Petri. Base-business net sales declined two percent as volumes declined six percent driven by the voluntary resignation from a co-manufacturing contract in the Cereal Products segment and weakness in our Snacks, Sauces + Spreads segment. The volume decline was partially offset by a four percent increase in pricing (and mix) in response to significantly higher raw material (ingredients and packaging) and freight costs.

Margins

Gross profit margin for the fourth quarter of 2012 benefited from 5,5 million USD of net adjustments from economic hedge contracts and was negatively impacted by 2,8 million USD in abnormal inventory losses and 0,4 million USD in accelerated depreciation. In the fourth quarter of 2011, gross profit margin was negatively impacted by 14,9 million USD of net adjustments for economic hedge contracts. Excluding the effect of these items, adjusted gross profit margin decreased from 20,9 percent last year to 19,2 percent this year. Adjusted gross profit margins declined 140 basis points as base-business raw material and freight costs (net of hedging activities) grew more quickly than base-business pricing and mix. On a Dollar basis, base-business pricing and mix was unable to offset approximately 51 million USD in higher raw material and freight costs, with the most significant impact in snack nuts (included in the Snacks, Sauces + Spreads segment) and durum wheat (included in the Pasta segment). Additionally, adjusted gross margins declined by 50 basis points as a result of costs related to the inefficiencies experienced at the Bloomfield operations (included in the Cereal Products segment). These declines were partially offset by the positive impact of our recent acquisitions, Refrigerated Dough and Petri, which include higher-margin products.

For the fourth quarter of 2012, selling, general and administrative (SG+A) expenses were up ten basis points as a percentage of net sales compared to the fourth quarter of 2011. The SG+A percentage was negatively impacted by financial statement restatement costs, merger and integration costs and restructuring costs in the 2012 quarter. Excluding the effect of these items, adjusted SG+A expense as a percentage of net sales declined to 10,0 percent as compared to 10,2 percent in the fourth quarter of 2011. The decrease in adjusted SG+A as a percentage of sales was driven by lower corporate costs (incentive compensation) and favourable foreign exchange, partially offset by unallocated Post transition services expenses (the billing for which is recorded in Other operating expenses, net).

Total amortization expense for the fourth quarter of fiscal 2012 was 21,1 million USD compared to 16,5 million USD a year ago. The increase is primarily due to the acquisitions completed during fiscal 2012. Amortization for the fourth quarter of fiscal 2012 and 2011 was impacted by accelerated amortization expense of 0,8 million USD and 1,2 million USD, respectively, due to a shortened estimate of the remaining life of a customer relationship intangible asset. The fourth quarter operating profit margin was affected by amounts related to the impairment of intangible assets, restructuring costs, plant closures and provision for legal settlement which are discussed below.

Adjustments for Economic Hedges

Certain derivative contracts do not qualify for cash flow hedge accounting but are used as economic hedges of Ralcorp´s exposure to changes in commodity costs. Realized and unrealized gains and losses on such contracts are recognized at a corporate level but not allocated to affect segment operating profit until the hedged exposure affects earnings. In fiscal 2012, net mark-to-market adjustments on such derivatives and reclassifications to segment operating profit resulted in a net gain adjustment for economic hedges of 5,5 million USD in the fourth quarter. In the prior year, the corresponding net loss adjustment for economic hedges was 14,9 million USD. These net adjustments were recognized in cost of goods sold on the statement of earnings but excluded from segment operating profit and the Company´s non-GAAP measures of Adjusted Ebitda, Adjusted Diluted EPS and Adjusted Diluted EPS Exclusive Acquisition-related Amortisation.

Impairment of Intangible Assets

In the fourth quarter of fiscal 2012, Ralcorp recorded a non-cash charge of 31,6 million USD related to intangible assets of our Bloomfield operations, included in the Cereal Products segment. These charges were recorded as a 28,5 million USD non-cash impairment of goodwill and a 2,1 million USD non-cash impairment of other intangible assets (customer relationships).

Restructuring Costs

On July 31, 2012, Ralcorp initiated a strategic restructuring to improve organizational effectiveness and reduce costs. These initiatives are anticipated to result in one-time pre-tax costs of approximately 26 million USD consisting primarily of employee separation and related expenses. During the three months ended September 30, 2012, Ralcorp recorded 13,8 million USD of expenses related to restructuring activities.

During the three months ended September 30, 2012 and 2011, Ralcorp recorded approximately 12,1 million USD and 1,3 million USD, respectively, of expenses related to plant closures (included in «Other operating expenses, net»). In 2012, those costs include primarily losses on and impairments of fixed assets and employee termination costs related to the closing of the Poteau, Oklahoma facility (included in the Snacks, Sauces + Spreads segment), Los Alamitos, California facility (included in the Cereal Products segment) and Delta, British Columbia facility (included in the Frozen Bakery Products segment).

Other Special Items

In addition to the previous items, the fourth quarter operating profit margin was affected by merger and integration costs, costs related to the restatement of our financial statements, a provision for legal settlement primarily related to the exit of certain customers in our Bloomfield operations and an abnormal inventory loss due to product spoilage.

Loss on Investment in Post

Ralcorp retained a 19,7 percent ownership interest in Post Holdings Inc. in conjunction with the separation of the Post brand cereals business. During the fourth quarter of fiscal 2012, Ralcorp entered into a short-term borrowing and a debt exchange agreement which facilitated the tax-free disposition of 100 percent of the company´s investment in Post stock, resulting in net cash received of 198,3 million USD and a non-cash net loss of 48,9 million USD. The non-cash net loss was recorded in the statement of operations as «Loss on investment in Post».

Interest Expense and Income Taxes

Interest expense decreased 0,8 million USD for the fourth quarter. The decrease is due to a 267 million USD decrease in weighted-average outstanding borrowings compared to the prior year, partially offset by an increase in the weighted-average interest rate. The weighted-average interest rate on all of the Company´s outstanding borrowings was 6,0 percent and 5,6 percent in the quarters ended September 30, 2012 and 2011, respectively. Fourth quarter income taxes decreased 22,6 million USD from expense of 11,9 million USD last year to a tax benefit of 10,7 million USD in fiscal 2011 driven by changes in (loss) earnings before income taxes. This year´s effective tax rate was significantly impacted by a 48,9 million USD loss on investment in Post, which is a permanent difference item that does not impact income tax expense. In addition, fourth quarter income taxes for both years include adjustments to current and deferred income tax assets and liabilities to revise the estimates previously recorded to the amounts reflected on recently filed tax returns, including the effects of lower than anticipated effective state rates. The fourth quarter of fiscal 2012 also includes the effects of adjustments to deferred income tax assets and liabilities due to changes in enacted future state tax rates. The total impact of these adjustments reduced income tax expense by 5,8 million USD in the fourth quarter of fiscal 2012. Management currently expects the fiscal 2013 overall effective tax rate to be approximately 34,75 percent.

Segment Results – Cereal Products

Net sales declined eleven percent in the three months ended September 30, 2012 as a 13 percent decline in volume driven by the previously announced customer exit was partially offset by a two percent increase in pricing and mix. Excluding the impact of the customer exit, net sales were flat as a six percent increase in price and mix was offset by a six percent decline in volumes. The decreases in volumes for ready-to-eat and hot cereal were driven by lower promotional support from retailer programs as compared to last year and weak private-brand category performance. Fourth quarter segment operating profit decreased 45 percent or 8,1 million USD. Of the 8,1 million USD decline, 5,80 USD was attributable to the inefficiencies and 1,50 USD to volume loss at our Bloomfield facility. Notable, however, was the positive performance at Bloomfield in both September of this fiscal year and October of fiscal 2013. The remainder of the decline was the result of lower volumes in ready-to-eat and hot cereals, partially offset by lower selling, general and administrative costs.

Segment Results – Snacks, Sauces + Spreads

Net sales grew five percent in the three months ended September 30, 2012 as improved net pricing and product mix along with the impact of the Petri acquisition more than offset a five percent decline in volume. Excluding the impact of the Petri acquisition, net sales grew one percent as a result of ten percent higher pricing and mix which was mostly offset by a nine percent decline in volumes. Volume declines in nut-related categories accounted for one-third of the segment´s volume declines with the balance of declines mostly in the sauce and spread categories. Fourth quarter segment profit declined 13 percent on the impact of lower volumes and higher input costs (peanuts, sweeteners and oils), partially offset by higher pricing, favourable mix and the acquisition of Petri. Excluding the Petri acquisition, segment profit declined 17 percent.

Segment Results – Frozen Bakery Products

Net sales were up 37 percent in the three months ended September 30, 2012, primarily attributable to incremental sales from the acquisition of Refrigerated Dough which also drove a 31 percent increase in volume. Excluding results from this acquisition, base-business net sales were up two percent for the third quarter. Base-business net sales were driven by increased selling prices in response to commodity cost increases and a favourable sales mix, partially offset by a three percent decline in volume. Volume gains from a positive performance in foodservice were more than offset by the effects of volume declines in retail griddle products and breads sold to in-store bakery and retail channels. Fourth quarter segment operating profit grew 36 percent compared to last year. Excluding the acquisition of Refrigerated Dough, segment operating profit increased eight percent, driven by improved selling prices and mix, positive manufacturing rates and favourable foreign exchange rate, partially offset by higher raw material costs (primarily flour and oil) and lower volumes.

Segment Results – Pasta

Net sales were up three percent for the three months ended September 30, 2012, partially attributable to incremental sales from the acquisitions of Annoni and Gelit. Volume for the quarter was up four percent. Excluding results from these acquisitions, base-business net sales were down five percent in the fourth quarter. The decrease in net sales is primarily due to lower net selling prices in response to falling raw materials costs and a one percent volume decline. Significant volume declines in the ingredients business and a modest decline in branded pasta were essentially offset by volume increases in foodservice products. Segment operating profit for the fourth quarter decreased 34 percent due to net selling price decreases and unfavourable commodity contracts. Lower selling, general and administrative costs, improved manufacturing performance and acquisitions partially offset the decrease.

Conference Call

As separately announced, ConAgra Foods Inc. and Ralcorp Holdings Inc. have entered into a definitive merger agreement under which ConAgra Foods will acquire all of the outstanding shares of Ralcorp for 90,00 USD per share in cash. In light of this announcement, Ralcorp cancelled its Fiscal 2012 earnings conference call.

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