US: Sales, hedging gain boost Ralcorp Q3 profits
By Dean Best | 8 August 2012
- Q3 profits up
- Hedging gain, M&A-driven sales boost earnings
Acquisitions boosted sales, which helped Ralcorp's Q3 profits
US private-label food group Ralcorp Holdings has reported an increase in third-quarter profits, helped by higher sales and a gain from hedging contracts.
Ralcorp, which makes cereals, sauces and pasta for US retailers, booked net earnings of US$29.8m for the three months to the end of June, compared to $28.3m a year earlier. Operating profit was $77.1m, against $56.7m a year ago.
A series of acquisitions in the last year boosted sales, which in turn helped profits. Net sales increased 11% to $1.03bn. Ralcorp was also lapping a $15.7m charge it incurred last year from hedging contracts. In this year's third quarter, it recorded a gain of $3.1m from adjustments to hedging contracts.
Over the first nine months of Ralcorp's financial year, net earnings were down 36% at $117.6m. This year's results include a lower contribution from branded cereals company Post Holdings, which Ralcorp spun off.
Last week, Ralcorp announced plans to bring its subsidiaries together to save money and drive "sustainable" growth. Ralcorp will consolidate its snacks, sauces and spreads, as well as its cereal and pasta, units into a single company. Analysts will expect to hear more about those plans today (8 August).
Click here to read more insight into Ralcorp's third-quarter results.
Ralcorp Holdings Announces Results For The Third Quarter Of Fiscal 2012
8/8/2012 7:02:03 AM
- Net sales up 11%, including 2% base-business growth
- Adjusted diluted EPS from continuing operations of $.60 compared to $.51 for the 2011 quarter
- Acquisitions contribute approximately $.03 to adjusted diluted EPS
- Bloomfield inefficiencies total $8.2 million
ST. LOUIS, Aug. 8, 2012 /PRNewswire/ -- Ralcorp Holdings, Inc. (NYSE: RAH) today reported results for the quarter ended June 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 Corp. ("Refrigerated Dough"), Pastificio Annoni S.p.A. ("Annoni"), Petri Baking Products, Inc. ("Petri"), and Gelit S.r.l. ("Gelit"). 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 third quarter of Ralcorp's fiscal 2012 relative to the third quarter of fiscal 2011 ended June 30, 2011.
Net Sales grew as a result of acquisitions completed during fiscal 2012, primarily Refrigerated Dough and Petri, as well as higher net pricing in all segments in response to rising commodity costs.
Acquisitions contributed approximately $.03 to adjusted diluted earnings per share for the third quarter. The company continues to estimate that the Refrigerated Dough business will contribute a total of between $.34 and $.36 to adjusted diluted earnings per share during fiscal 2012.
Diluted Earnings per Share (EPS) in this year's third quarter were negatively impacted by amounts related to plant closures, merger and integration costs, and the accelerated amortization of intangible assets, partially offset by a mark-to-market gain on economic hedges. Last year's diluted EPS were negatively impacted by amounts related to mark-to-market losses on economic hedges, amounts related to plant closures, merger and integration costs, and the accelerated amortization of intangible assets. The effects of all of these items are excluded from adjusted diluted EPS from continuing operations ("Adjusted Diluted EPS"). Adjusted Diluted EPS include the effect of normal amortization expense, including the amortization of intangible assets that are only recorded through business acquisitions (mostly trademarks and customer relationships) with a combined impact of $.22 per share and $.17 per share in the three months ended June 30, 2012 and 2011, respectively.
Net sales increased 11%, largely due to the acquisitions of Refrigerated Dough and Petri. Base-business net sales increased 2% as a result of an increase in overall net pricing in response to significantly higher raw material (ingredients and packaging) and freight costs. This increase was partially offset by an overall 6% volume decline driven by weakness in the Snacks, Sauces & Spreads segment and the voluntary resignation of a co-manufacturing contract in the Cereal Products segment.
Gross profit margin for the third quarter of 2012 benefitted from $3.1 million of net adjustments for economic hedge contracts (discussed below), while in the third quarter of 2011, gross profit margin was negatively impacted by $15.7 million of net adjustments for economic hedge contracts. Excluding the effect of these items, adjusted gross profit margin decreased from 20.6% last year to 19.6% this year. Adjusted gross margins declined 100 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 more than offset approximately $68 million in higher raw material and freight costs, the most significant impact in snack nuts (included in the Snacks, Sauces & Spreads segment) and durum wheat (included in the Pasta segment). Additionally, gross margins were reduced by 80 basis points as a result of costs related to the inefficiencies experienced at the Bloomfield Bakers facility (included in the Cereal Products segment). These declines were partially offset due to the positive impact of the addition of higher-margin products of Refrigerated Dough and Petri and favorable manufacturing performance in the Snacks, Sauces & Spreads, Frozen Bakery Products, and Pasta segments.
For the third quarter of 2012, selling, general and administrative (SG&A) expenses declined as a percentage of net sales by four tenths of one percentage point compared to the third quarter of 2011. The SG&A percentage was negatively impacted by merger and integration costs in the 2012 quarter. Excluding the effect of these items, adjusted SG&A expense as a percentage of net sales decreased from 10.5% to 10.0%. The decrease in SG&A was driven by lower corporate costs (deferred compensation) and favorable foreign exchange.
Total amortization expense for the third quarter of fiscal 2012 was $20.3 million compared to $16.5 million a year ago. The increase is primarily due to the acquisition of Refrigerated Dough. Amortization expense for both fiscal 2012 and 2011 was impacted by accelerated amortization expense of $1.3 million for the three-month periods ending June 30 due to a shortened estimate of the remaining life of a customer relationship intangible asset.
In addition to the items discussed above, the third quarter operating profit margin was affected by amounts related to plant closures and other merger and integration costs, 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 the Company'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 $3.1 million in the third quarter. In the prior year, the corresponding net loss adjustment for economic hedges was $15.7 million. 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 and Adjusted Diluted EPS.
The amounts reported in this earnings release for the nine months ended June 30, 2012 include revised amounts of adjustments for economic hedges related to the second quarter compared to the second quarter amounts previously reported. The revision reflects an additional pre-tax loss adjustment for economic hedges of $5.7 million.
Merger and Integration Costs
During the three months ended June 30, 2012 and 2011, Ralcorp recorded approximately $2.4 million and $1.2 million, respectively, of expenses related to acquisition activity. In 2012, those costs related primarily to the acquisition of Refrigerated Dough, Annoni, Petri, and Gelit. Of the $2.4 million net merger and integration costs recorded in the three months ended June 30, 2012, $1.2 million is included in "Selling, general and administrative expenses," and $1.2 million is included in "Other operating expenses, net."
Amounts Related to Plant Closures
During the three months ended June 30, 2012 and 2011, Ralcorp recorded approximately $4.7 million and $2.4 million, 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) and Los Alamitos, California facility (included in the Cereal Products segment).
Interest Expense and Income Taxes
Interest expense decreased $2.6 million for the third quarter. The decrease is due to a $435 million 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 6.4% and 5.6% in the quarters ended June 30, 2012 and 2011, respectively.
The effective income tax rate for continuing operations was approximately 35.1% in the third quarter of 2012, up from 33.3% in last year's third quarter. The prior year rate was affected by discrete income tax adjustments based on the completion of prior year tax returns and assessments of uncertain tax positions and valuation allowances.
Net sales declined 10% in the three months ended June 30, 2012 as a 12% decline in volume driven by the previously announced customer exit was partially offset by volume growth in the ready-to-eat and hot cereal retail channels. Excluding the impact of the customer exit, net sales were up 7% though volume declined by 1%. The increase in volumes for ready-to-eat and hot cereal was driven by continued support from retailer promotional programs and expanded distribution of nutritionally improved products, partially offset by declines in institutional volumes.
Third quarter segment operating profit decreased 36%, or $8.4 million. While pricing and mix changes offset the impact of lower volume and higher input costs (corn, oats, wheat, rice, fruits and nuts), the segment continues to be negatively impacted by the inefficiencies at its Bloomfield facility. Essentially all of the negative operating profit variance is attributable to the Bloomfield inefficiencies.
Snacks, Sauces & Spreads
Net sales grew 11% in the three months ended June 30, 2012 as improved net pricing and product mix along with the impact of the Petri acquisition more than offset a 4% decline in volume. Excluding the impact of the Petri acquisition, net sales grew 9% despite a 6% decline in volumes. High single-digit volume growth in cookies and crackers was more than offset by declines in other categories, primarily a 21% decline in nut-related products driven by significantly higher net selling prices needed to offset the dramatic increase in the cost of nuts.
Third quarter segment operating profit increased 27%. Excluding the impact of the Petri acquisition, segment profit was up 20% as the benefit of pricing and mix more than offset the effect of lower volumes and higher input costs (peanuts, sweeteners, and oils).
Frozen Bakery Products
Net sales were up 35% in the three months ended June 30, 2012, primarily attributable to incremental sales from the acquisition of Refrigerated Dough which also drove a 29% increase in volume. Excluding results from this acquisition, base-business net sales were up 2% for the third quarter. Base-business net sales were driven by increased selling prices (net of increased trade promotion spending) in response to commodity cost increases and a favorable sales mix shift from retail to foodservice, partially offset by a 3% decline in volume. Volume gains from a new product launch 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.
Third quarter segment operating profit was flat compared to last year. Excluding the acquisition of Refrigerated Dough, segment operating profit decreased 19%, driven by higher raw materials (primarily flour and oil), lower volumes, and unfavorable foreign exchange rates, partially offset by improved net selling prices.
Net sales were up 7% for the three months ended June 30, 2012, partially attributable to incremental sales from the acquisitions of Annoni and Gelit. Volume for the quarter was down 1%. Excluding results from these acquisitions, base-business net sales were up 4% in the third quarter. The increase in net sales is primarily due to higher net selling prices in response to rising raw materials costs, partially offset by a 3% volume decline. Significant volume declines in the ingredients business and a modest decline in private brand pasta were essentially offset by volume increases in branded product and European operations.
Base-business segment operating profit for the third quarter decreased 6% due to net selling price increases and improved manufacturing performance not completely offsetting significantly higher raw material costs (primarily durum and semolina wheat) and lower sales volumes.
Original source: Ralcorp Holdings
Companies: Ralcorp Holdings
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