Ralcorp Holdings: announces results for FY 2009

St. Louis / MO. (rh) Ralcorp Holdings Inc. reported results for the fourth quarter and full fiscal year ended September 30, 2009. Reported diluted earnings per share were 1,40 USD for the quarter and 5,09 USD for the year ended September 30, 2009 compared to 0,90 USD and 5,38 USD for the corresponding periods last year, including the effects of certain special items related to Ralcorp´s investment in Vail Resorts Inc. and the Post Foods acquisition.

Fourth quarter diluted earnings per share excluding the items above were 1,14 USD compared to 0,84 USD last year, a 36 percent increase. The corresponding annual figure was 4,28 USD compared to 3,09 USD last year, a 39 percent increase.

Ralcorp acquired Post Foods (included in the Cereals segment) on August 04, 2008 and Harvest Manor Farms (included in the Snacks segment) on March 20, 2009. In addition to quantifying the incremental amounts from these acquisitions, the discussions below include references to the base businesses, meaning businesses that were owned by Ralcorp (and therefore included in operating results) for the duration of each of the periods being compared (in example excluding businesses acquired since the beginning of the comparative period of the prior fiscal year).

Fourth quarter net sales grew 109,7 million USD, with a 89,6 million USD increase from Post Foods and 44,5 million USD from Harvest Manor, and annual net sales were up 1’067,5 million USD due to an 890,1 million USD increase from Post Foods and 90,5 million USD from Harvest Manor. Total segment profit contribution for the base businesses grew 32 percent for the quarter and 36 percent for the year. Base business raw material costs were lower for the fourth quarter but nearly 70 million USD higher for the year.

Commenting on the Post Foods´ business, co-CEO David Skarie said, «Post delivered over 300 million USD in EBITDA during our first year of ownership, which met our expectations. We are pleased that the business met our objectives despite a difficult transition and increased competitive pressure, particularly in the last six months of our fiscal year. We have met with all of our major customers to reinforce our commitment to growing this business on both a short and long term basis. The customers are excited about our plans for the coming year as we improve our competitive position. In addition, now that Post is firmly on the Ralcorp platform, we will begin driving costs out of the business».

Regarding the financial condition of Ralcorp, co-CEO Kevin Hunt said, «We finished the year with a strong balance sheet and excellent liquidity. We remain dedicated to creating long-term value for our shareholders. We expect that our solid cash position and committed financing will allow us to actively evaluate value-creating acquisition opportunities and additional share repurchases». Other reported results for the quarter ended September 30, 2009 included:

• Net sales increased 13 percent, primarily as a result of the Post Foods and Harvest Manor acquisitions and improved pricing (which had lagged cost increases in previous periods), partially offset by base business volume declines in every segment.
• Total segment profit contribution was up 50 percent, primarily due to acquisitions and the timing of commodity cost changes, slightly offset by a decrease in overall base business net sales.
• Food EBITDA increased to 159,8 million USD compared to 86,4 million USD last year, generally due to incremental EBITDA from Post Foods partially offset by related transition and integration costs.
• Earnings before income taxes and equity earnings were 122,5 million USD (compared to 68,1 million USD a year ago) including the special items related to Vail Resorts and Post Foods.
• Equity in loss of Vail Resorts Inc. (after tax) was zero compared to 1,1 million USD (0,02 USD per share) a year ago.
• Net earnings were 79,9 million USD compared to 41,1 million USD last year.
• Weighted average shares for diluted EPS rose to 57,1 million USD from 45,6 million USD a year ago, primarily as a result of the 30,5 million USD shares issued in the Post Foods acquisition.

Cereals Segment Results

As detailed above, the increase in year-over-year net sales in the Cereals segment is attributable primarily to the timing of the acquisition of Post Foods last year. Post Foods´ sales were 270,1 million USD and 1’070,6 million USD for the quarter and year ended September 30, 2009, respectively. Compared to last year´s fourth quarter (including the pre-acquisition period), total Post cereal net sales were down seven percent, as a 15 percent volume shortfall was partially offset by higher pricing. That volume decline cut across most major brands and was largely due to reductions in Post promotional activity, down-weighting on selected products, and heightened competitive activity. Base business net sales (in example excluding Post Foods) grew two percent for the fourth quarter and six percent for the year. Base business volume was down one percent for the quarter and up four percent for the year, while net prices were higher. The base business continues to increase distribution with most of its largest retail cereal customers and also benefited from a favorable sales mix, excluding the effects of declines in co-manufacturing sales.

The segment´s profit contribution increased significantly as a result of the acquisition. Profit from Post Foods was about 73,6 million USD for the quarter (net of 3,2 million USD of amortization related to brands and customer relationships and 10,3 million USD of depreciation) and about 250,6 million USD for the year (net of 12,6 million USD of amortization and 38,0 million USD of depreciation) compared to 43,3 million USD (net of 2,2 million USD of amortization and 7,6 million USD of depreciation) during the final two months of the prior year. For the quarter, the remaining improvement in the segment´s profit contribution is primarily attributable to higher pricing and reduced raw material costs in the base business. For the full year, base business profit was improved by higher pricing and overall volume growth, largely offset by the impact of increased costs.

Frozen Bakery Products Segment Results

The Frozen Bakery Products segment´s net sales decreased eight percent and two percent compared to last year´s fourth quarter and year, respectively, as a result of ten percent and eleven percent volume declines partially offset by selling price improvements. The segment´s net sales are being impacted by general economic and competitive conditions. Sales volume in the foodservice channel, particularly in the higher margin bread category, has been negatively impacted by the loss of a major customer due to pricing actions and lower restaurant traffic at our casual-themed national customers. In the in-store bakery channel, volume losses were primarily attributable to lower sales of breads (particularly higher priced organic breads) and cookies, partially offset by an increase in frozen dough sales volumes. Fourth quarter volume was flat in the retail channel, but a decrease for the full year was driven by aggressive pricing and promotion by a branded competitor (particularly in the third quarter) and overall category softness, as well as reduced co-manufacturing business.

The segment´s profit contribution was up 26 percent and 8 percent for the quarter and year, respectively, as a result of significant pricing improvements, favorable raw material costs for the quarter and favorable exchange rates, partially offset by the volume declines and an unfavorable product mix. Although overall raw material costs were favorable for the fourth quarter, they were unfavorable for the year.

Snacks Segment Results

For the three and twelve months ended September 30, 2009, net sales for the Snacks segment increased 18 percent and 16 percent, respectively, primarily due to the acquisition of Harvest Manor, as discussed above. Fourth quarter net sales for the base business were down seven percent on an eight percent volume shortfall. For the full year, base business sales were up two percent, as a result of price improvements offset by a seven percent volume decline. Base business volume declines in both the quarter and the year are primarily attributable to segment management´s decision to exit lower margin business in response to the rapid raw material cost escalation over the last eighteen months.

The segment´s profit contribution for the fourth quarter and full year was higher than last year as a result of incremental profit from Harvest Manor, improved mix, and higher pricing driven by higher input costs. Results from Harvest Manor added about 1,1 million USD for the quarter and about 5,6 million USD for the year. Raw material costs in the segment´s base business were favorable for the quarter but unfavorable for the full year.

Sauces and Spreads Segment Results

In the Sauces and Spreads segment, fourth quarter net sales decreased two percent as a result of volume declines partially offset by higher selling prices. Fourth quarter volume was four percent lower, primarily due to the loss of a major low-margin spoonable salad dressing customer and lower sales of jellies and table syrup. For the year, volume was down one percent but net sales increased eight percent, primarily as a result of the timing of price increases in response to rising costs, partially offset by the effect of a change in product mix.

Profit contribution was significantly higher than last year as a result of the improved selling prices in the three and twelve months ended September 30, 2009, partially offset in the twelve-month period by higher input costs. The segment´s raw material costs were favorable in the fourth quarter but unfavorable for the full year.

Special Items Related to Vail Resorts Inc. and Post Foods

Earnings comparability was affected by changes in the fair value of the Company´s forward sale contracts related to its shares of Vail Resorts Inc. (Vail), gains of the sale of Vail shares, and equity method earnings from its investment in Vail. Fair value adjustments on forward sale contracts resulted in a gain of 27,8 million USD for the quarter ended September 30, 2008. On November 21, 2008, the first tranche of the initial contract was settled and Ralcorp delivered 890’000 shares, and on June 04, 2009, all remaining contracts were settled and Ralcorp delivered 3’503’263 shares. As a result of this significant reduction in ownership, Ralcorp ceased recognizing earnings from Vail on the equity method as of June 2009. Ralcorp sold its remaining 2’601’543 shares on the open market during the fourth quarter of 2009 with gains totaling 26,8 million USD, while results for the fourth quarter of fiscal 2008 included a 7,1 million USD gain on the sale of 368’700 shares on the open market. As of September 30, 2009, Ralcorp owned zero shares of Vail common stock.

As planned, Ralcorp is incurring significant costs related to transitioning Post Foods into Ralcorp´s operations, including decoupling the cereal assets of Post Foods from those of other operations of Kraft Foods Inc. (the former owner), developing stand-alone Post Foods information systems, developing independent sales, logistics and purchasing functions for Post Foods, and other integration tasks. While a portion of those costs are capitalized, the expense portion totaled 3,5 million USD and 31,6 million USD in the quarter and year ended September 30, 2009, respectively, and 6,3 million USD and 7,9 million USD in the corresponding periods last year.

Finished goods inventory acquired in the Post Foods acquisition was valued essentially as if Ralcorp were a distributor purchasing the inventory. This resulted in a one-time allocation of purchase price to acquired inventory which was 23,4 million USD higher than the historical manufacturing cost of the inventory. Inventory value and cost of products sold were based on post-acquisition production costs for all product manufactured after the acquisition date. In the quarter ended September 30, 2008, all of the 23,4 million USD (non-cash) inventory valuation adjustment was recognized in cost of products sold, reducing net earnings by approximately 15,0 million USD after the related tax effect.

Info: See also «Ralcorp Holdings Announces Results for the Quarter and Year Ended September 30, 2009» (complete press release).