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Executives

Matt Pudlowski – Director, Business Development

Kevin Hunt – Co-CEO and President

David Skarie – Co-CEO and President

Scott Monette – Corporate VP, Treasurer and Corporate Development Officer

Analysts

Andrew Lazar – Barclays Capital

Jonathan Feeney – Janney

Amit Sharma – BMO Capital Markets

Heather Jones – BB&T Capital Markets

David Palmer – UBS

Chris Growe – Stifel, Nicolaus

Mike (ph) – Suntrust

Ralcorp Holdings, Inc. (RAH) F3Q 2011 Earnings Call August 9, 2011 8:30 AM ET

Operator

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Ralcorp Holdings Third Quarter Earnings Conference Call and Web cast. (Operator Instructions) And the call will be open for your questions following managements’ prepared remarks. (Operator Instructions) I would now like to turn the call over to Matt Pudlowski, Director of Business Development for Ralcorp Holdings. Please go ahead.

Matt Pudlowski

Thank you, Jackie, and good morning, everyone. Welcome to today’s conference call to discuss Ralcorp’s financial results for the third quarter ended June 30, 2011. Participating on the call this morning are Kevin Hunt and Dave Skarie, Ralcorp’s Co-CEOs and President; and Scott Monette, Corporate Vice President, Treasurer and Corporate Development Officer.

Before we begin I would like to remind everyone that today’s remarks contain forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995. These statements involve risks and uncertainties which may cause actual results to differ materially from those included in the forward-looking statements.

Ralcorp undertakes no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise. Forward-looking statements and these remarks should be evaluated together with the many uncertainties that effect Ralcorp’s business. Particularly those mentioned in the cautionary statements in today’s release and in Ralcorp’s annual report on Form 10-K for the fiscal year ended September 30, 2010 and its intervening quarterly reports.

In addition, during today’s call we will reference certain non-GAAP financial measures, such as adjusted earnings before interest, income tax and depreciation and amortization and adjusted diluted earnings per share, which have been reconciled to the most comparable GAAP measures in this morning’s press release.

We’d also like to point out that today – a replay of today’s call will be available on our Web site. At the conclusion of the prepared remarks we will open up the call for questions. Please note that the purpose of today’s call is to discuss Ralcorp’s third quarter earnings results, the announcement of our acquisition of Sara Lee’s private brand, refrigerated dough business and to provide information related to the previously announced plan to separate Ralcorp and Post Foods. As such we would ask that you please limit your questions to those topics. With that, let me now turn the call over to Kevin.

Kevin Hunt

Thank you, Matt, and good morning, everyone. Welcome to the Ralcorp’s third quarter conference call. We appreciate your joining us today. I will start off by giving you an overview of our earnings for the third quarter and discuss the announcement of our acquisition of Sara Lee’s refrigerated dough business. Then I will provide a review of the July 14 announcement regarding the anticipated separation of Post Foods from Ralcorp and a tax free spin off to Ralcorp’s shareholders. At which time Dave will provide some additional detail on the mechanics of the separation process and what to expect over the next few months. Following that Scott will provide a detailed overview of the segment results.

Turning to the third quarter. Diluted earnings per share for the third quarter were $0.50. Diluted earnings per share were negatively affected by $0.37 for impairment of intangible assets, $024 for mark-to-market losses on economic hedges, $0.03 for amounts related to plant closures and $0.01 for minor, merger and integration costs. The adjustment to intangible assets was due to a $32.1 million trademark impairment at post booths that Scott will discuss in more detail later on the call. Excluding these reductions, adjusted diluted earnings per share for the quarter were $1.15 in line with the preliminary results we provided a few weeks ago.

Net sales grew 22% over the prior-year third quarter, driven primarily by the AIPC acquisition completed in July 2010. Our base business net sales increased 5% over the same period, driven by our Private Brand and Food Services businesses. Base business is defined as our business less the impact of the AIPC and three other acquisitions completed during our fiscal year 2010.

Private brand continues to trend positively as consumers capture the 33% average savings from private brand products as reported by the Private Label Manufacturers’ Association. Furthermore according to a 2010 industry data study also from PLMA, private brand food in measured channels has annual sales of nearly $89 billion and continues to grow more quickly than branded foods. We believe that the factors shaping this trend, retailer consolidation, improved product and packaging quality and higher margins for retailers and branded products will continue to make private brand foods a very attractive segment.

The fragmented nature of the industry also affords us significant acquisition opportunities. As a leader in private-brand food in North America, we are excited about our future. In our Private Brand business, pricing initiatives lag raw material and freight increases in the third quarter primarily in our Snack, Sauces and Spreads business. As in the past, we expect to cover these costs through accommodation of internal costs and productivity improvements, such as our recently announced accelerated cost-reduction program. The reduction of inefficient trade spending and price increases were justified. Additional pricing is already in place to address raw material inflation in the fourth quarter.

The accelerated cost-reduction program is designed to fundamentally improve the competitive positioning of each of our businesses, focusing primarily on cost structure. We expect the program to result in an additional $80 to $100 million in operating profit in total over the fiscal years 2012 to 2014. Capital expenditures for the entire program are expected to be in the range of $115 to $135 million. We have already approved several projects and expect savings to begin to flow in fiscal 2012; however the majority of the savings are expected to occur in 2014 due to the scale of these efforts.

We have incurred cost increased of over $100 million through the first three quarters and expect between $185 and $190 million for our full fiscal year, representing a 5% increase in our cost of sales over the prior fiscal year. We currently expect higher inflation in fiscal year 2012 so our cost initiatives will be critical to maintaining and improving our profitability. While we have not finalized our estimates of ingredients, packaging and freight costs for fiscal 2012, our initial view is that costs are expected to be higher than fiscal 2011.

We have managed through volatile cost environments in the past and are fully prepared to take steps necessary for the remainder of this fiscal year and into fiscal year 2012 to be successful.

Our AIPC acquisition continues to exceed our original expectations. Despite a dramatic increase in raw material costs, AIPC continues to grow sales while maintaining its margins. This is a credit to the company’s competitive position in the dry pasta market and the excellent management team in place at AIPC.

For the quarter, contribution from all acquisitions completed last year was $0.20 per share primarily driven by the performance at AIPC. We expect the contribution from those acquisitions for the full year to be at least $1.00 per share.

I would also like to discuss the announcement this morning that we have signed a definitive agreement to acquire Sara Lee’s refrigerated dough business. We could not be more excited about this opportunity. The business is a leader in the private brand category with a complete line of refrigerated dough products, primarily biscuits, cookies, dinner breads and sweet goods.

Refrigerated dough is a $1.8 billion category at retail, the number one brand has a 70% market share and the number two brand has a 10% share with the remainder comprised of private brands at around 20% market share. The refrigerated dough business has a leading share of the private brand portion of this category, this business will operate as part of our frozen bakery division and we would expect the acquisition to close in 60 to 90 days. This acquisition is consistent with our go-through acquisition strategy and allows Ralcorp to immediately become a private brand leader in the refrigerated dough category.

Sara Lee’s refrigerated dough business has two operating facilities in Texas and Georgia. The business has over $300 million in annual sales through June 2011 and primarily serves the retail market. The company has a great reputation in the private label industry and we look forward to welcoming its employees to Ralcorp.

The purchase price will be $545 million. However, Ralcorp will receive the tax benefits of a stepped up basis in acquired assets that will reduce our cash income in the future. The net present value of these tax benefits is over $100 million. We will also have synergies of between $68 million per year after year three of the acquisition. Including the value of the tax benefits and synergies, we are paying at 6.5 times EBITDA multiple for this business.

In terms of accretion, we would expect GAAP accretion to be $0.30 per share in year one, including synergies but excluding one-time transition cost. We have made an assumption on the impact of tangible assets, primarily customer relationships and amortization that could impact accretion. We will update this estimate shortly after closing.

However, on a cash basis, we would expect accretion to be $0.50 per share in year one. Cash accretion will not be affected by amortization. As you can tell from the accretion, Sara Lee’s refrigerated dough has higher margins and free cash flow than our existing private brand business. Additionally, after the Post Foods separation, a percentage impact of this accretion will be more significant since our private brand earnings base will be smaller.

We will fund this acquisition with short-term debt that will be repaid with the proceeds from the post-food separation. Given the high quality of the business, the tax attributes, the synergy potential and the attractive financing markets, this acquisition represents the continuation of our strategy of enhancing shareholder value through private brand acquisitions.

Let me turn now to the July 14 announcement regarding the anticipated separation of Post Foods from Ralcorp including some additional context around the mechanics of the separation and what to expect in the coming months. By way of background, the board has been carefully evaluating tax re separation alternatives for some time. And we believe the separation of Post Foods from Ralcorp will benefit the businesses of Ralcorp and Post and unlock significant value for our shareholders. We believe that Ralcorp and Post Foods will benefit by operating as pure play independent companies with distinct financial profiles, capital structures appropriate for their respective businesses and their own equity currencies. Separation also allows for more efficient investments for investors interested in discreet themes in terms of consumer trends.

After the separation, Ralcorp will continue to be the leading producer of private brand foods and a major producer of food service products. The company’s go-forward strategic plan will focus on enhancing its position as a private brand leader, with a diverse product, customer and input array, operating low-cost, efficient and safe manufacturing facilities and continuing to identify attractive and affordable acquisition opportunities while maintaining conservative financial policies.

As part of the separation, Post Foods will issue between $1.1 billion and $1.2 billion of debt with the net cash proceeds of approximately $1 billion going to Ralcorp. The Ralcorp Board intends to use these proceeds to reduce debt, aggressively pursue private brand acquisition such as the acquisition of the refrigerated dough business announced earlier today, and pursue additional share repurchases under the company’s remaining share repurchase authorization of approximately 5 million shares.

Ralcorp has a strong track record of consistent growth and significant shareholder value creation. We are confident that given the enhanced balance sheet and separate equity currency Ralcorp will have as a result of the separation, the company’s acquisition prospects will be greater and that it will be better able to selectively buy back stock, which have been the historical methods for enhancing value in the Private Brand business.

Pat Mulcahy, the Vice Chairman of Ralcorp’s Board will serve as Chairman of Ralcorp following the separation, and I will assume the roll of CEO and President of Ralcorp. As you know, Dave Skarie has announced his intention to retire at the end of the year after a long and successful career at Ralcorp and its predecessors. During the interim period, he will be leading the separation of Post Foods from Ralcorp.

Upon completion of the separation, Post Foods will be the third largest branded ready-to-eat cereal manufacturer in the U.S. We believe that the enhanced focus and accountability of being a standalone branded public company will lead to the business generating even better results. The margin and cash flow profile of Post Foods is quite different that Ralcorp’s Private Brand business, and there are many unique development opportunities for this business.

Specifically, as an independent public company, Post Food’s go-forward strategic plan will focus on growing its most important brands, particularly Honey Bunches of Oats, maintaining best-in-class EBITDA margins and free cash flow profile, improving innovation and extending Post’s valuable portfolio brands into adjacent categories and continuing to grow Post Foods’ presence among Hispanic consumers. Bill Stiritz, Ralcorp’s Chairman since 1994 will serve as Chairman of Post Foods, upon completion of the separation. Given Bill’s prior success in conducting spin offs and leading several new public companies, we are confident that Post Foods will have a great future. I’ll now turn the call over to Dave.

David Skarie

Thanks, Kevin. I look forward to leading the separation efforts of Ralcorp and Post Foods. During this time I’ll be working closely with Ron Wilkinson, currently President of Ralcorp Cereal Products. After my retirement Ron will continue to lead the ongoing transitional relationship between the two companies. Ron and I have been in the business for a long time. We know our organizations inside and out and have a clear vision for how to affect this transaction, so we expect a smooth transition and one that enables us to continue to serve our customers with the same level of service they have come to expect from our company.

One of our top priorities will be to identify a strong management team for Post Foods, as we announced on the 14th, the board has established a search committee to identify potential candidates to serve as CEO upon completion of the spin off. As we move through the separation process we will share further details about the management and board structure of both Ralcorp and Post Foods. Similar to our arrangement with Kraft, when we acquired Post, Ralcorp and Post Foods will have a transition services agreement.

We would expect this arrangement to facilitate the separation while maintaining low cost and flexibility for both companies. Some of the current services provided by Ralcorp will have to be phased out more quickly, due to the competitive nature of the businesses perceptively. However we are already working on ways to minimize the impacts in those areas. In total we expect that additional cost will be approximately 3% of our combined EBITDA.

With respect to timing, we expect to file our Form 10 with the Securities and Exchange Commission in early September, once an audit of the requisite financial statements have been completed. This document will outline the separation in more detail and provide standalone financial information for Post Foods. While we still have much work to do we feel comfortable with the initial estimate of completion of four to six months from the announcement date.

As Kevin mentioned, our board carefully evaluated separation alternatives for some time and is confident that this plan will deliver significant value for Ralcorp shareholders. We firmly believe that by creating two strongly focused companies, each with its own solid growth profile that both will be better positioned to compete more effectively and efficiently in the market. We will continue to provide updates on our progress as milestones are achieved. While Post Foods’ baseline business still has challenges, we feel the key to success in the category is innovation, which ultimately drives consumers to our products. With that in mind, I want to highlight the success of our recent innovation programs and the reintroduction of Great Grains.

As you recall, our focus this year has been on improving our new product pipeline, and we think we are off to a great start with Pebbles Treats and Honey Bunches of Oats Raisin Medley. Starting with Pebble Treats, we have gained 4.4% market share of the treats category in measured channels. We have taken advantage of the distinct Pebbles brand strength with consumers to launch our first product outside of ready-to-eat cereal. Importantly, we’re also driving category growth with Pebbles Treats, which is critical to our retailers. This will allow us to build momentum with retailers as we launch additional products in adjacent categories during fiscal 2012.

Second, HBO Raisin Medley has achieved a 2.6 market share in measured channels since its introduction earlier this year. This unique product combines the great taste that HBO is known for with three different kinds of raisins. This introduction continues to expand the breadth of the HBO line, which is the number three equity in the $9 billion ready-to-eat cereal category.

Finally, Great Grains is a strong story. First introduced in 1992, we made the decision earlier this year to reintroduce the product and tell the nutrition story of Great Grains. Assisted by our celebrity chef spokesperson, Curtis Stone, our less processed for better nutrition message is resonating with consumers searching for healthier alternatives. As a result, Great Grain’s volumes are up 22% over a year ago, and we have gained 0.2 share points since the reintroduction. We are supporting these initiatives with enhanced advertising and promotion spending, which rose 47% during the quarter. We feel that shifting our marketing investment from trade to advertising and consumer spending is the right direction for our business and for the ready-to-eat cereal category. We are excited about our early successes with this approach.

We will continue to build on our new and reintroduced product successes in 2011 with new products for 2012. We have completed a comprehensive study of the breakfast opportunities available to Post and identified over $200 million in additional revenue opportunities in ready-to-eat cereal and adjacent categories. We have developed a detailed and multi-year new product plan prioritized by size and risk. We believe this disciplined and multi-year approach to new product development is a first for Post. 2011 was just the beginning and we are excited about our future new product pipeline.

Overall, the ready-to-eat cereal category is beginning to show signs of growth with the most recent four-week measured channel data showing growth for the first time since 2009. Higher net pricing and further improved innovation are primary drivers for the change in our view, and we are optimistic that the trend can continue.

With that I’ll turn the call over to Scott to review the financial highlights of Ralcorp.

Scott Monette

Thank you, Dave. I’ll now review our segment results for the third quarter. At Post we grew net sales 1% despite the impact of 14% lower volumes in the quarter. Lower volumes were driven by comparison to last year’s third quarter which was the peak of our high levels of trade promotional spending. After reviewing these trade programs in more detail, the returns were poor and they were eliminated this year.

Dave has already highlighted the benefits of both new product introductions including Honey Bunches of Oats Raisin Medley which has gained a 0.26 market share and a re-launch of Great Grain, all of which helped drive revenue in the quarter. Profits and margins were essentially flat for the quarter.

The significantly lower trade spending helped offset the impact of lower volumes, higher raw material cost and a 47% increase in advertising and promotion spending. As Dave alluded to earlier, we feel that shifting our marketing investment from trade to advertising and promotion spending will improve our brand positioning and allow us to help build the category.

As Kevin mentioned earlier in the call, we recognized a $32.1 million impairment of trademarks at Post on our Shredded Wheat and Great Nuts brand. Our impairment testing normally occurs closer to our fiscal yearend in September. However, in light of our plan to separate Post, we completed the testing at the end of the June quarter.

When we acquired Post in 2008, we established revenue estimates for each of the major brands and set trademark values accordingly. These brands have not been as responsive to our marketing efforts as originally planned so the trademark values have been reduced. Unfortunately, accounting rules do not allow us to reflect the additional value in the Honey Bunches of Oats’ Pebbles or Great Grains brand.

I’ll know ask Dave to explain how we’re going to change our marketing approach with these brands.

David Skarie

Thanks, Scott. Shredded Wheat and Great Nuts are two of the most distinct brands in the Post portfolio. We’re going to change our advertising approach to reflect the unique health positioning enjoyed. By each of these brands by targeting digital and social media platforms, we believe will be better able to communicate these positive health-focused messages more effectively and efficiently. Using digital and social media will also allow us to target our advertising and promotion more precisely and leverage our investment more effectively. We remain optimistic about the future for both Shredded Wheat and Grape Nuts and look forward to implementing our new advertising approach. Scott?

Scott Monette

Thanks, Dave. Now let me turn to soft snack sauces and spreads. The segment saw net sales of $383 million for the quarter which is minimally effected by last year’s acquisition. Base business volume was down 1% with overall net sale up 3% driven by higher pricing. Peanut butter, Mexican sauces and corn snacks also double digit volume increases during the quarter. Profit for the segment was down $9.9 million versus last year’s third quarter. Higher raw material costs driven by cashews, peanuts, wheat and soy oil, combined with higher freight, more than offset higher pricing. The pricing lag versus raw materials is most pronounced in this division.

AIPC’s revenue grew 4% for the quarter, private brand volume grew 1% and our strategic brands increased volume by 2% in the third quarter. Total volume fell 5% due to lower ingredient sales. Higher pricing offset lower volumes. This is the final quarter where we had no impact from AIPC’s acquisition in last year’s result, given the incremental cost of the acquisition, primarily through higher amortization and depreciation; comparisons with last year on an operating profit basis are not relevant. However, EBITDA margin comparisons are not affected and since the acquisition in July 2010, AIPC’s margins have exceeded our expectations. As Kevin noted in his remarks, this is remarkable in the face of significant cost pressures and difficult competitive dynamics.

Other cereal products saw net sales increase by 19.5 million or 10% including overall volume growth of 4%. This increase is largely driven by strong volume growth in nutritional bars, 12%. Recovering volume in both ready-to-eat of 2% and hot cereals at 4% which included strong promotional results and reduced branded trade, promotional activity. For the segment, profit was flat. Higher pricing largely offset higher ingredient and packaging costs and production inefficiencies at Bloomfield, our nutritional bar manufacturer that we acquired in 2007. Negative product mix was a primary driver behind the reduction in margin percentage for the quarter.

The Raw Food, Frozen Bakery Products segment saw net sales growth of 15% versus year ago’s quarter. Base business sales growth of 10% was driven by 2% volume growth and higher pricing. Growth was primarily contributed to volume gains for food service and retail products, incremental sales from the acquisition of Sepp’s Gourmet Foods and fiscal 2010 and higher pricing.

Strong net sales growth in the retail channel was fueled by new growth products attributed through two major retailers. Food service sales benefited from a new product with a major restaurant chain and volume growth at food service distributors. Increased net selling price to cover commodity cost increases drove 3% growth. Segment profit was up 23% as the effects of higher volumes, increased selling prices, the acquisition of Sepp’s Gourment Foods and the supply chain improvements were partially offset by higher commodity costs and unfavorable effective exchange rate changes.

I’ll now turn the call back to Kevin.

Kevin Hunt

Thank you, Scott. Before we begin the Q&A, I want to discuss our guidance for fiscal 2011, and provide a summary of what has so far been an exciting year for Ralcorp.

Turning to guidance, as we announced our press release this morning, we are reaffirming the guidance provided on July 14, of between $5.20 to $5.35 per share of adjusted diluted earnings per share for the full fiscal 2011 year. As we said earlier, the primary factors causing the change from prior guidance include a lack of pricing realization versus changes in the cost of primary raw materials in the private brand businesses, lower than expected volume in Post Foods and an increased number of diluted shares outstanding, as well as increased expense on certain share-based compensation resulting from the increase in Ralcorp’s share price.

We are pleased to be moving forward with a strategic plan to create value for our shareholders. We believe that the separation of Post Foods and Ralcorp will provide each company with the ability to exploit unique opportunities suited for their respective businesses. The separation is on track and we are working to position the companies for success in the future.

As I mentioned earlier, we are a leader in private-brand food in North America, a category that continues to grow faster than branded foods. We believe that the factors shaping this trend: retailer consolidation, improved product and packaging quality, and higher margins for retailers in branded products will continue to make private-brand food a very attractive segment.

Our announced acquisition of Sarah Lee’s private brand refrigerated dough business is an example of the opportunities available to Ralcorp. We are very excited about this acquisition, as it allows Ralcorp to immediately become a private brand leader in the $1.8 billion refrigerated dough category. The transaction is also consistent with Ralcorp’s growth through acquisition strategy.

At Post we continue to implement our strategy of driving consumers to our products through innovation. We are building momentum by introducing new, attractive products and innovating in adjacent categories. In particular, the launch of Honey Bunches of Oats Raisin Medley and Pebbles Treats, as well as the reintroduction of Great Grains have all been encouraging successes. We are excited to build on this success in the coming year, and have developed a detailed and multi-year new product plan, prioritized by size and risk. We believe that there are over $200 million in additional revenue opportunities in ready-to-eat cereal and adjacent categories. The ready-to-eat cereal category is showing signs of growth, and we are optimistic that the trend can continue.

We have also been addressing increasing costs resulting from higher commodity prices. Additional pricing is already in place to address raw material inflation in the fourth quarter. Our accelerated cost-reduction program is also being implemented to fundamentally improve the competitive positioning of each of our businesses, focusing primarily on cost structure.

We expect the program to result in an additional $80 million to $100 million in operating profit in total over the fiscal years 2012 to 2014. As I mentioned earlier, we have managed through volatile cost environments in the past and are fully prepared to take the steps necessary for the remainder of this fiscal year and into fiscal year 2012 to be successful.

With that, we would now be happy to answer your questions. I would like to reiterate that given that the purpose of today’s call is to discuss Ralcorp’s third quarter earnings, the acquisition of the Refrigerated Dough business as well as the separation of Post Foods, we ask that you please limit your questions to those topics. Thank you.

Question-and-Answer Session

Operator

The call is now open for questions. (Operator Instructions) Our first question is coming from Andrew Lazar of Barclays Capital.

Andrew Lazar – Barclays Capital

Good morning, everyone.

David Skarie

Good morning, Andrew.

Andrew Lazar – Barclays Capital

I feel like I’ve been waiting 10 years to ask a question on an earnings call. So I’m feeling good.

Scott Monette

It better be a good question, then.

Andrew Lazar – Barclays Capital

Yeah. I’m feeling a little bit of pressure, I have to tell you. The first one I’d love to explore a little bit would be Post. I think the acquisition you’ve announced today seems to make a lot of sense strategically for the core Private Label business. That’s kind of right in your wheelhouse of what you do, and the financial aspect makes a lot of sense too. With Post, I guess the first question would be, what’s most interesting this year is despite the sort of year-over-year volume drops due to the change in the promotional strategy, you’ve managed to kind of maintain the margin structure of Post.

So I’m trying to get a sense of, I think it was in the low 20%’s. Going forward, is that the right margin for Post, given you’re obviously going to have to spend a bit more on not only the advertising side behind innovation, but I’m assuming a little bit more promotion, obviously because we don’t want to see volumes continue to decline at double-digit rates? What is the right sort of margin structure ongoing? And is there opportunity on the upside to margins, whether it be from cost saves and things like that? And then I’ve got a follow-up.

Scott Monette

Hi, Andrew. This is Scott. Let me weigh in here, then I’ll let Dave jump in too. No, you’re right. We’re at about 21.1% operating margin for this quarter compared to 22.3% last quarter. I would say it’s certainly a much different business this year than it was last year, and Dave and Kevin both have spoken about the reinvestment in the business in terms of advertising and promotion spending being up 47%.

So we have rededicated ourselves away from trade spending to more investment in building category, and that is showing strong results in not only the support of the new product initiatives in Honey Bunches of Oats Raisin Medley and Pebbles Treats, but also in Great Grains. So I think our strategy is moving in the right direction, and I think our margin structure reflects that.

Andrew Lazar – Barclays Capital

And then as we think about Post in terms of what its profile will be going forward, its reason for being if you will, you’ve talked about some incremental revenue opportunities. Are we thinking about this, or are you thinking about it internally as sort of a top-line growth story? One of stable margins but top-line growth? Or is it sort of debt deleveraging, a return of cash to shareholders story? I’m just trying to get a sense, I know you’ll lay this more out in the filings and such, but how are you thinking about the growth profile from top-line, EBIT and EPS as you go forward?

David Skarie

Andrew, this is Dave. I think the real key for us is to continue to do and to build off of what we did in 2011, which is improving the innovation, which is allowing us to bring new news to our business with the reintroduction of Great Grains as a great example of what was the right thing to do, and we got playback on that. I think the other key thing would be is the investment in Hispanic advertising where we’ve gotten great returns for the two key brands, HBO and Pebbles. So as we look forward the key will be continuing to build off the success of that innovation.

Andrew Lazar – Barclays Capital

And then last would be, just to the extent you can comment on this. With respect to the spin, perhaps you can get into a little bit more detail around what you are able to do with each of the two separate assets once the spin occurs. So given you’re doing this in a tax free nature, what are, if any, are the restrictions around those businesses as they trade on their own in terms of M&A from other players. Are there many people who you have not had, I guess, substantial discussions with that would allow there to be other options, as opposed to them just trading on their own going forward.

David Skarie

Yeah, I think if you’re – one of the things that we’re – this is Dave again. One of the things that we’re looking at that will be critical, but not is we’re following the Form 10 in early September with the SEC and that will give more details on Post specifically and that will give us the opportunity to talk more about what the forward plans are.

Andrew Lazar – Barclays Capital

Okay. Thanks very much.

David Skarie

Thank you, Andrew.

Operator

Your next question comes from the line of Jonathan Feeney with Janney.

Jonathan Feeney – Janney

Good morning, guys. Thank you.

David Skarie

Hey, Jon.

Kevin Hunt

Hey, Jon.

Scott Monette

Hey, Jon.

Jonathan Feeney – Janney

I appreciate this once every four year conference call, it’s sort of like college or high school.

David Skarie

We’re going to take a shot with every one of you guys.

Jonathan Feeney – Janney

It gives me a chance to really think carefully. The first question would be, can you tell me exactly what role the proposed separation of Post does is enabling, if any, enabling for you to do this deal either from a financing standpoint or strategically. Did that separation change your thought process? I mean the timing seems awfully coincidental.

Scott Monette

Hi, Jon. This is Scott. We can’t control when people decide to move assets, so this was obviously a publicly announced transaction at Sara Lee. And so that was really the primary driver.

Jonathan Feeney – Janney

And it was like an auction process type thing, Scott?

Scott Monette

It as an auction, that’s exactly right, Jon.

Jonathan Feeney – Janney

Great. That makes perfect sense. Second question would be, when you look at this Post deal an on a pro forma, sort of separated basis and maybe this is getting ahead of ourselves, but I’m looking at – do you think this leaves the private brand focus company with any dry powder to do, you know, the kind of – these kind of deals in the future on a Post separation basis?

Kevin Hunt

Well, Jon, it’s Kevin. I mean as we mentioned the $1.1 to $1.2 billion debt that we’ll take on at the Post will yield proceeds of about $1 billion over to the Private Brand business. And our priorities there are repay debt, do acquisitions and then opportunistically buy back shares. So we would view those to continue to be the priorities there. And there are ample opportunities as Scott mentioned in the private brand acquisition world.

Jonathan Feeney – Janney

But I guess just from a financing standpoint. Again, I know this – while this is preliminary and no one knows what 2012 is going to look like. But – so I’m looking at like if you got $1 billion back, you have like two-two in net debt or something right now and this adds 545. So I’m looking at about three times debt what looks like pro forma EBITDA in the Private Brands business. Does that sound about right? And if that is about right, what’s a comfortable kind of debt level where you can do those things? You just talked about share repurchase or deals.

Scott Monette

Right, John. No. You’re – this is Scott. Sorry. But you’re exactly right. Yeah. We’ll be in 2.5 to three times levered on a pro forma basis for this acquisition and with the Post proceeds. So I mean – we established long-term leverage targets of between two-and-a-half to three times. However, with the AIPC acquisition, we clearly went above that and paid down debt rapidly given the free cash flow profile of the business. The same structure with Post, we went above that and then repaid debt rapidly. So we do have more financing flexibility built into our capital structure. And the free cash flow profile – I mean it’s obvious it gives us a lot more flexibility.

Jonathan Feeney – Janney

Thank you much. Just one last quick one if I could. Kevin, you mentioned specifically private brands continue to trend. I mean I remember early ‘09 in our last kind of financial panic, there was a rush toward private brand. Are we seeing anything like that right now?

Kevin Hunt

Two points. One is if you look over time, I think we actually talked about this, John. And you look at private brand growth versus brands, the private-brand growth exceeds brands in all economic times. What happens or what happened in ‘08, as you mentioned, ‘09 is when the bad economy we saw a higher growth rate in private brand, which we kind of view as a great trial period because typically when this happens, we see that the shares stick. We – the second part of your question. At this point, we are not seeing a spike – anything significantly above the trend for the last 13 weeks. Having said that, we’ll see because if this does result or if we end up in what – I don’t want to use the word recession. But if that’s where it goes, there is certainly a potential for that.

Jonathan Feeney – Janney

Great. Thank you very much.

David Skarie

Thanks, Jon.

Kevin Hunt

Thanks, Jon.

Operator

Your next question comes from the line of Amit Sharma with BMO Capital Markets.

Amit Sharma – BMO Capital Markets

Good morning, everyone.

David Skarie

Good morning, Amit.

Amit Sharma – BMO Capital Markets

Just a quick question regarding the spin-off. Just following up on Andrew’s question, when the spin-off does happen, is there any timing limitation in terms of what those two separate companies can do in terms of M&A transaction without jeopardizing the tax free spin-off status?

Scott Monette

Yes. Hi, Amit. This is Scott. I think what we’ll have to do is we’re still expecting the complete spin-off in four to six months. And the Form 10 that we will file in early September will be able to provide additional detail to that question directly. So at this point, I think we got to say that early September will be the timeframe where we’ll be able to give you a more complete answer to that.

Amit Sharma – BMO Capital Markets

Okay. And the 3% of the EBITDA in terms of extra cost, is that just transitional related services cost, or is it a total SG&A cost for the separate company?

Scott Monette

Hi, Amit. This is Scott again. That is going to be primarily driven by the fact that we’ll have two separate public companies.

Amit Sharma – BMO Capital Markets

But that’s all extra cost, the $25 million or so.

Scott Monette

That’s a majority of it. Right. That’s not all of it, but that’s certainly the vast majority of it. That’s correct, Amit.

Amit Sharma – BMO Capital Markets

Okay. Great. A quick question on the deal, when you look at the refrigerated dough deal, is this simply opportunistic buy to – you get great access to categories that present a strategic private label business? Or is it like a strategic deal in terms of it gets you to the refrigerated section of the store as well? How do you see that playing over time?

Kevin Hunt

Amit, this is Kevin. We have had our eyes on this business for a long time. I mean it was such – we’re spaced here in St. Louis, not that we are incapable of looking beyond St. Louism but it was part of Earth Graings and then (inaudible) then it was part of Earth Grains and of course now Sara Lee. So we’ve always liked the business, know the management team and think very highly of them. So definitely, on its own we thought it was a good opportunity. It is also our first platform in the refrigerated area, and we think there would definitely be some opportunities there.

Amit Sharma – BMO Capital Markets

Great. And my final question is when you look at your private label business Post, when you look at your portfolio versus your main competitor in private label, do you feel like your categories are disadvantaged or your distribution is in any way inferior to what Treehouse has or the ability to do more acquisition with them?

David Skarie

I would say no. I think both companies are in some very good categories and have some very good positions. We don’t really compete in – we don’t overlap a lot. And then I don’t think there is any – I think we just talked about this. I think the financial wherewithal that we will have to make private brand acquisitions is going to be there. We have a strong track record, and we expect that’ll continue.

Scott Monette

And then just a couple of things, I would say if you look at our leadership position in very large category, and the shares that we have in those, that gives us a significant competitive advantage that we feel will be durable.

Amit Sharma – BMO Capital Markets

I agree. Thank you very much for taking my questions.

Operator

Your next question comes from the line of Heather Jones with BB&T Capital Markets.

Scott Monette

Good morning, Heather.

Operator

Heather, your line is open.

Heather Jones – BB&T Capital Markets

Good morning. Sorry about that.

David Skarie

Hey, Heather.

Heather Jones – BB&T Capital Markets

Thank you for hosting the call. I just had a couple of questions, I’m wondering as far as your fiscal 2012 cost pressures, wondering where you anticipate the greatest pressure going into 2012, in which categories?

Scott Monette

Heather, this is Scott. We’ll be able provide more detailed guidance on fiscal 2012 when we release our 10-K in November. I think we’ll have to put that on hold until that point.

Heather Jones – BB&T Capital Markets

Well, given the lag you’ve experienced this year, and then we’ve heard some other public companies speak of, do you believe the timeframe, the lead time as far as taking pricing has increased? And are you working on taking those price increases now? Could you just give us some color on that?

Kevin Hunt

Yeah. Heather, it’s Kevin. Some of the fiscal ‘12 pricing is going in as we speak, and so we are trying to anticipate that and price or plan accordingly. So the answer to that is yes, we are doing that.

Heather Jones – BB&T Capital Markets

Okay. And then my final question is in the Sauce, Snacks or Spreads business, I understand you’ve had issues with price lagging costs, but last year margins, if I remember correctly, I’m out of the office, but if I remember correctly in the low double digits, they were substantially improved from fiscal ‘09. I’m just wondering if you could give us a sense of where you think a normalized margin target range is for that business.

Kevin Hunt

Heather, Kevin again. We think the business can be in double digits. And I guess what you have to bear in mind, which you know, is there is going to be swings quarter to quarter as pricing and then the costs don’t always match up exactly. But over the longer term, we believe, that the business can be a double-digit margin situation.

Heather Jones – BB&T Capital Markets

Okay, perfect. Thank you.

Kevin Hunt

Thank you, Heather.

Operator

Your next question comes from the line of David Palmer. With UBS.

David Palmer – UBS

Hi, I think that is me. Hey guys.

Scott Monette

Good morning, David.

David Palmer – UBS

Thanks for hosting this call. I just wanted to follow up on Andrew’s original question on Post, and I guess I’m hoping for more numbers if you can maybe put some sort of bracket around this? After the Post spin off there might be some level of reinvestment needed on two different parts. First, of course, is that reinvestment in marketing and R&D that you’re already making. You’ve talked about the R&D marketing increase, I guess, it was almost 50%.

And then the other was the synergies that you’ve captured some of which may need to be reversed. The distribution, I think, you said some of those deals can remain but there might be other overhead synergies that might need to be reversed. Any color on those two would be great? Thanks.

David Skarie

David, this is Dave. One of the things that we talked about was the extension of the TSA agreement, which would be critical for both companies as we go forward. And so for a period of time we believe that TSA will keep the costs low and maintain the flexibility that we need and that will also give us an opportunity to evaluate those areas where we need to make any kind of adjustments, but that will happen over an extended period of time.

David Palmer – UBS

And I guess is there any sort of feeling about what sort of numbers with regard to other overhead may need to be added back in terms of long-term capabilities or just simple support mechanisms? Anything with that or is that something that needs to wait for further disclosure?

David Skarie

Part of it is for further disclosure but it’s also included in that 3% EBITDA number that we’ve already talked about.

David Palmer – UBS

And with regard to marketing do you feel like you’re already there in terms of a pure level of support or do feel like the marketing reinvestment numbers that maybe we’re going to have to do this on a multi-year basis?

Scott Monette

I think if you look at what our goal is, which is to continue innovation, we need to be investing in the innovation not only on the R&D side but in the marketing side. And as long as we have a story to tell about what we believe will be long-term additions to our line. We’ll continue to invest to make sure that those are successful.

David Skarie

Thanks, and congratulations on the deal.

David Palmer – UBS

Thanks, Dave.

Operator

Your next question comes from line of Chris Growe with Stifel, Nicolaus.

Chris Growe – Stifel, Nicolaus

Good morning.

David Skarie

Good morning, Chris.

Chris Growe – Stifel, Nicolaus

I echo all those same thoughts about the call, so thanks for having the call.

David Skarie

Your welcome.

Chris Growe – Stifel, Nicolaus

So I just had a couple quick ones here. The first one be – I just wonder if you could characterize the pricing you have in place in relation to your cost inflation? So in Q4, as an example, are you caught up in terms of pricing in relation to cost inflation? Are there any categories you call out? We know snack nuts is one that you’ve lagged in. Are there other categories where you’ve seen inflation pick up, say where your pricing needs to pick up as well?

Scott Monette

Yeah. Hi, Chris, this is Scott. As Kevin noted, we feel comfortable that the pricing lag in the fourth quarter will be eliminated. So we feel like the pricing is going to catch up in the fourth quarter. You’re right, in terms of snack nuts is the primary area as is our former Carriage House division. So we feel like those are the primary areas where we’ve got more improvement to show in the fourth quarter which will be evidenced in our next report.

Chris Growe – Stifel, Nicolaus

Okay. And then I just wondered – we’ve been pretty closely tracking branded pricing and private-label pricing including in just your categories. And we’ve seen private label up until the – just (inaudible) IRI data, pretty much keep pace with the brands. And I’m looking at retail pricing here. Is there another increase in pricing to occur given some of the lags you had, so like in July and August, that would cause price gaps to narrow further? Is that a risk for your business as you see it today?

Kevin Hunt

Chris, it’s Kevin. I would say that A, we probably will see some increase in retail pricing in July and August, but we would expect that to be both brands and private brand. So we are looking at the same data you are and are seeing price gaps pretty much stay where they have been. But I would say that given the amount of pricing that the private-brand world and the brands have taken in recent months, we’re probably going to see higher retails in both areas.

Scott Monette

Chris, this is Scott. And the other thing I’m sure you’re seeing as well is significantly higher promoted price points as we’re seeing in cereal across a lot of categories. So that continues to help private label across our categories as well.

Chris Growe – Stifel, Nicolaus

Sure. Okay. And I have one final question for you on Post. And obviously there was a bit of a volume short fall in this quarter as you indicated. I’m just curious, given the new product benefit, given the advertising increases? Do you see that turning pretty quickly? I know your comps get easier as well. In the fourth quarter, is this just a steady improvement in terms of volume? I’m really trying to understand how the volume trends here for that business continue?

David Skarie

Yeah. Chris, this is Dave. I think the key for us is to stick with what we believe is working, which is the innovation and focusing on that as well as the Great Grains, so that’s a slow, steady profile that we want to keep doing, because we’ve seen benefit of it over the last six or seven months.

Chris Growe – Stifel, Nicolaus

Okay. Thank you.

Operator

Your final question comes from the line of Bill Chappell with Suntrust.

Mike – Suntrust

Hey. Good morning.

Kevin Hunt

Hi, Bill.

Matt Pudlowski

Good morning, Bill.

Mike – Suntrust

This is actually Mike filling in for Bill.

Kevin Hunt

Good morning, Mike.

Mike – Suntrust

Just one quick question, I wanted to touch on the accretion math from those fiscal ‘10 acquisitions and just get some more color around that? I think when you initially made those or acquired those properties, you outlined at least $0.50 of accretion. And now in your latest release you’re saying at least $1. Could you give us some color or some thoughts on why that bogie is moving higher? And do you see similar opportunities with Sara Lee? I know you provided the GAAP accretion of $0.30, but what’s to say that’s not going to be $0.40 or $0.50 down the road given what you’ve saying with the AIPC and some of the other smaller acquisitions?

Scott Monette

Hi, Mike. This is Scott. I can characterize the increase with four letters, and those are AIPC. Clearly of the acquisitions we’ve made, and we’ve made four in the last fiscal year 2010, the vast majority of that as you can imagine, $1.2 billion acquisition was AIPC. So as Kevin noted earlier in the call, that has been a very good story in the face of, as everybody knows, a very difficult raw material environment and some interesting competitive dynamics, the business has performed well above our expectations. So that would be the primary driver for the additional accretion that we’re seeing in 2011.

In terms of the accretion from the Sara Lee business, Sara Lee refrigerated dough business, we’ve made the assumption that we’re actually burdening the business with an interest burden of about 2%. So the upside to that, just from a financial standpoint, would be after we received the proceeds from the Post spin-off, the interest burden obviously is going to be eliminated. So there would be some potential benefit there. So we’re looking forward to owning the business, and we’re very excited about the opportunities it presents.

Mike – Suntrust

Great. Thanks a lot for the color.

Scott Monette

Thank you, Mike.

Matt Pudlowski

Okay. I want to thank the operator, and thank you all for joining our call today. We believe both Ralcorp and Post Foods have very bright futures, and we look forward to providing you with an update on the progress of the separation. Thanks again.

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