Ralcorp Holdings Earnings Call Insights: Numbers for ’13, Retail Channels

On Wednesday, Ralcorp Holdings, Inc. (NYSE:RAH) reported its second quarter earnings and discussed the following topics in its earnings conference call. Here’s what executives shared.

Numbers for ’13

Andrew Lazar – Barclays Capital: I guess to start off, it seems this quarter is certainly was one where there was, I guess, sort of maximum pain on a number of fronts including weaker volumes, peak input costs, not being able to get through as much as prices you would like, and certainly executional issues on top of everything else that you talked about and I realize some of this clearly bleeds into the fiscal second half as well. So I guess what would be very helpful to me and you covered a little bit of this in your prepared remarks, what we really trying to quantify some of these key discrete items that hurt you this year, that may go away next year. Really trying to get a better handle on numbers for ’13 from and EPS perspective and maybe a starting point would be some of the discrete costs on a more annual basis that you talked about in terms of inefficiencies and whatnot that go away. Based on spot prices today, where would you anticipate costs would be for 2013 even if it is just directionally up, down, magnitude kind of percentage wise range would be helpful? And then maybe a review of all the sort of accretion and potential for even an accelerated I guess accelerated cost reduction program, specifically for ’13, because as a lot of moving pieces are realized, and I want to try and get them all together in my head to get a sense of whether the numbers have to come fairly dramatically for ’12, it doesn’t seem like that would be the case for ’13, but I want to get a sense if I am on the right track?

Scott Monette – CFO, CVP, Treasurer and CDO: That’s a big question, Andrew. Let me start and then Kevin can jump in. If you dissect the quarter volume was clearly the biggest driver in the profit change that had a $10 million impact, so that’s the starting point. I think the second item to highlight is manufacturing inefficiencies $7 million is what we saw in total, of that $5 million were specifically related to Bloomfield. So, I think those are two most important changes quarter-over-quarter that negatively impacted segment operating profit. I guess if we look at the commodity environment, I will highlight several of these, as we noted in the script, peanuts and durum represented approximately half of our overall inflation for the period. Durum hit a peak of $18.15 a bushel, and that was about $10 a bushel. Peanuts hit a peak of about $1.20 a pound, now its $0.90 and falling. Wheat is down 15% to 25% year-over-year depending on what class of wheat you are looking at. So, there is a very clear pathway based on at least those three, which are large for us – inputs, to see improvement in ’13. So, I would say, we would focus first on correcting the Bloomfield situation. Obviously, as Kevin noted, we have the resources in place, we have the operating team in place to make sure that happens. We’ve done that before. We successfully executed the Poteau plant closure. I would also note that we’ll see a full years of synergies in refrigerated dough acquisition and we will see most of the synergies in the Petri acquisition also full in year two. I would also note, as you noted as well, the accelerated cost reduction program, which we remain confident around, as Kevin noted, there is the Poteau, Oklahoma Cracker facility that we closed, and which will generate between $10 million and $12 million a year in annual savings as part of ACR program. So, we always look for additional costs and that is our history, so hopefully, that gives some background.

Andrew Lazar – Barclays Capital: A follow on would of course be, and Kevin alluded to this, hopefully, as volumes start to improve as you lap some of the pricing and the promotional activity of last year, you are in some categories clearly where there are some pass-through dynamics and a lot of this will depend on sort of the branded players as well, but one of the concerns of course is that, as input cost flexibility becomes somewhat more apparent to manufacturers to the extent that they try and drive volume like happened back in 2010, pricing starts to work its way somewhat lower, hopefully with some form of a lag. What percent of the portfolio now is what you consider truly more pass-through in nature and by how much does that typically sort of lag a reduction in spot prices in other words, I’m trying to make sure that the net benefit you can get in ’13 from pricing and costs is still what I think it is, or is still pretty sizable, but a lot of that will depend on how pricing impacts or relates to the cost coming down.

Kevin J. Hunt – CEO and President: Andrew, this is Kevin, let me answer that. In general, we do not have pass through contracts or arrangements with our customers with some exceptions, and those tend to be in our food service area with our frozen unit and we also have some contracts, but again they are not the majority in our private brand retail businesses. So, we are predominantly not on that type of program. To your specific question about those programs, how much like, typically it varies, but typically they lag a quarter and again as I said that, that does vary. So, over the course of the year it should pretty well leave out, but typically they lag a quarter and they are evaluated generally on a quarterly basis.

Andrew Lazar – Barclays Capital: One last thing and I’ll pass it on. I appreciate it. It doesn’t sound like from your comments on overall sort of category volume picture for the industry that we’re yet at a point where you’ve started to see any real sort of more positive data points, that would certainly be consistent with what my sense is from other manufacturers but given your kind of later in the game to report, maybe a little bit more forward-looking perspective from some the recent data, is that accurate or are there any sort of bright lights on volume that we have started to see? I’m trying here.

Kevin J. Hunt – CEO and President: I’m going to try too, because this – really it was – we’re not alone, when you look at the quarter I mean the volumes were really, really difficult across the spectrum of the categories we are in both for brand as well as for private brands. So I would agree with you, I think short-term in the quarter – in the quarter or so we certainly don’t have anything fundamental to say that we are seeing a big turnaround. I’m just going to mentioned two things, because we just got the category information on two categories for the last four week periods in Cereal and Pasta and they are both down about 5% year-over-year. Now, I’m not jumping for joy here, but the last four week period they were down 9% or 10%, so again we’ve got a lot of pricing that has gone in. We are comparing against what were still promotional periods back in ’11, so still our view is that, it should kind of get back into equilibrium. I would agree with you that short-term it’s still going to be an issue.

Retail Channels

Jon Feeney – Janney Montgomery Scott: Just couple of questions. First, in terms of this, it seems like the brands maybe getting a little bit of share back by lagging prices. As you mentioned, it seems like private label pricing might be a little bit more pronounced this quarter. I wonder between measured, non-measured, I guess more stuffs getting measured these days, but is there any trend in channel performance for private label relative to brands across your 22 categories, price differential, like including clubs, (indiscernible) traditional retail, et cetera. I know you called out some strength what appears to be traditional retail around Bowl Full of Change, but any specifics you give us in channel, their relative performance between measured and what’s historically been described as not measured that would be helpful?

Kevin J. Hunt – CEO and President: Again, I would say, in measured channels John, which would include mass merch here if you look at it on a 52-week basis, private label share is pretty much flat, I mean we are not – again, this is just looking at it over the last 52-weeks and you have to bear in mind that private label did take in general more quicker pricing as we looked at this commodity run-up in ’11 and it has taken on a percentage basis more, but overall, for that period, we are looking at pretty flat share situation. As it relates to non-measured and again, in this case I would be talking about the loaded assortment environment, as well as dollar stores, they are, as you know, predominantly private brand. We as a supplier will have our ups and downs with them because they would bid a division out here and there, but generally it is a positive trend. They are growing, they are predominantly private and there is definitely growth there.

Scott Monette – CFO, CVP, Treasurer and CDO: I would just add a couple of things here, if we look over the last six 13-week periods private label has gained share in four of those six periods. So, I think it is a recent trend that we certainly saw in the last quarter and we also saw it in last summer’s 13-week period, but to Kevin’s point, I don’t think there is anything that’s sustained. I think just the opposite is happening really that the private label has grown share during most of these periods.

Jon Feeney – Janney Montgomery Scott: Secondly, you mentioned in your portion of the prepared remarks that how you expect improvement in the Pasta business with normalization, it sounded like I guess getting back more towards spot on durum side, but I look back over the long sweep of history, what gives you so much confidence that Pasta business can improve margin, because if you go back to the late 90s in this business and this type of margin was maybe more typical? I know we covered some of this at the time of the acquisition, but has this – do you have any – what gives you so much confidence that the structure of the business really did change so much in the past couple of years that it can sustain that 20%, 20% plus type margins that has (indiscernible) largely sustained since you bought it, I mean what gives you that confidence?

Scott Monette – CFO, CVP, Treasurer and CDO: So, let me start here. So, I would highlight that the first part of your question, which is we were concerned going into the year about the supply of durum. As I noted, the lowest inventory in 20 years, so we wanted to make sure we had a sufficient supply of durum. So, in contrast to our normal process, we extended coverage to protect our supply commitments. Obviously, during this most recent period, durum prices on the spot market have fallen. So, that presents a significant difference between our current costs of durum and the spot market. That will resolve itself as we move through the rest of 2012. So, we are very comfortable that the cost of business then gets back to a more normalized margin structure as we move through the rest of the year. In terms of the sustainable margin, you’re right. I’ll highlight one thing that it is certainly a lot different from the time period you specifically referenced, which is industry capacity. We did a lot of work during our due diligence around capacity within the industry and we’ve seen a significant reduction in the capacity in the industry, so that is a fundamental change. I would also highlight the barriers entry in this business are significant. There are enormous amounts of capital that goes into these production facilities and production line, so I would highlight those two items as important factors in terms of the sustainable margin being more in the 25%, low to mid 20% EBITDA margin that we focused on when we made the acquisition couple of weeks ago.

Kevin J. Hunt – CEO and President: John, Kevin. Just a couple of more things I’d add. The category is – the private label share within this category is quite high and as you know, we have a very strong share of that private brand business and the other thing I would also add which is something we knew before we made the acquisition in 2010, but we certainly have seen a lot of evidence as we watched Walt George and his team, these guys understand how to approach the market on a value-added basis. They can offer a lot of information to customers about what the right price gaps are, a lot of information benchmarking on how to build not just the private brand business within the category, but the category itself. So, I think that might be a little more qualitative, but that’s a very important differentiating factor about AIPC.