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Ralcorp Holdings Inc. (NYSE:RAH)

Q4 2011 Earnings Call

November 30, 2011 8:00 AM ET

Executives

Matt Pudlowski – Director, Business Development

Kevin Hunt – Co- Chief Executive Officer and President

Dave Skarie – Co-Chief Executive Officer and President

Scott Monette – Corporate Vice President, Treasurer and Corporate Development Officer

Analysts

Jonathan Feeney – Janney Capital Markets

David Palmer – UBS

Brett Hundley – BB&T Capital Markets

Alton Stump – Longbow Research

Chris Growe – Stifel Nicolaus

Amit Sharma – BMO Capital Markets

Bill Chappell – Suntrust

Alexia Howard – Sanford Bernstein

Operator

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Ralcorp Holdings Fourth Quarter 2011 Earnings Conference Call and Webcast. At this time, all participants have been placed in a listen-only mode 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 fourth quarter and fiscal year ended September 30, 2011. Participating on the call this morning are Kevin Hunt and Dave Skarie, Ralcorp’s Co-CEOs and President’s; and Scott Monette, Corporate Vice President, Treasurer and Corporate Development Officer.

Before we begin, I’d like to remind everyone that today’s call contains 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 statement whether as a result of new information, future events or otherwise.

Forward-looking statements and these remarks should be evaluated together with the many risks and uncertainties that affect Ralcorp’s business, particularly those mentioned in the cautionary statements in yesterday’s earnings press release and the periodic reports filed by Ralcorp with the Securities and Exchange Commission.

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

I would also like to point out that a replay of today’s call will be made available on our website. At the conclusion of our prepared remarks, we will open the call for questions.

With that, let me now turn the call over to Kevin.

Kevin Hunt

Thank you, Matt, and good morning, everyone. I will start off by giving you on overview of our earnings for the fourth quarter and full year fiscal 2011. And then I will discuss our acquisition of Sara Lee’s Refrigerated Dough business. Following that, Dave will provide an update on the post-separation and then Scott will provide an overview of the segment results.

Adjusted fourth quarter fully diluted earnings per share was $1.34 versus $1.26 last year or a 6% increase. EPS was adjusted for a number of items that were highlighted in the press release last night, primarily the non-cash impairment of post-intangible assets.

I’m pleased to highlight the fact that pricing was more closely aligned with raw material inflation in the quarter, particularly in our Snacks, Sauces and Spreads and Pasta businesses. Adjusted EBITDA, an important measuring stick for our performance internally also grew 8% over last year.

Our total revenue for the quarter was in line with expectations and up 8% to $1.2 billion due to a full quarter of sales from AIPC and higher net pricing. Volumes in our private brand business were up 4% in the quarter versus last year driven by an extra month of AIPC.

AIPC volume for its top 20 customers was up 2% in the quarter versus last year. Also in the quarter, we saw 2% volume growth in private label ready-to-eat cereal and 4% volume growth in hot cereal, both versus last year.

Our Frozen division benefited from new product activity with a major food service customer. Our volume in our Snacks, Sauces and Spreads business was negatively impacted by decisions we made to rationalize certain low margin customers.

As most of you know, this is a process we have done before and we remain committed to taking a discipline approach particularly where we have dramatic increases in raw material costs that necessitate significant price increases.

Next, let me spend a moment commenting on AIPC’s performance for the quarter and for the period since the acquisition. As a reminder, AIPC was our largest ever private brand acquisition with a purchase price of $1.2 billion. We completed the acquisition in July 2010, around the same time we completed three other smaller acquisitions.

You may recall that we originally projected earnings per share accretion of $0.50 for fiscal year 2011 for all four of those acquisitions with the primary driver being AIPC, actual accretion for fiscal year 2011 was $1.09 or more than double our original expectations, an outstanding performance.

For the fourth quarter AIPC contributed accretion of approximately $0.31 per share, compared to $0.17 in the prior year. AIPC’s was even -- AIPC’s performance is even more remarkable given durum wheat, which is AIPC’s principal raw material, cost increase of almost 90% since the acquisition was completed. AIPC successfully matched the benefits of pricing and product mix to protect margins despite the significant cost inflation.

To-date, we’ve been able to deliver $16 million in synergies, which was in line with our expectations. The Ralcorp and AIPC integrations teams were very successful in rapidly delivering these synergies, Walt George and AIPC management team did a great job in developing and executing their plan in their first year with Ralcorp.

Regarding Post, earnings were below our forecast for the quarter driven by lower volume. Post revenue was down 2% for the quarter as higher pricing did not overcome the volume shortfalls. Volume shortfalls versus projections forced the supply chain to absorb extended closures that reduced production efficiencies and drove up costs.

Trade spending was up slightly in the quarter, reflecting the very low trade levels in last year’s fourth quarter. Last year’s fourth quarter was the highest gross margin and operating profit margin of the year, so it was a difficult comparable period, particularly as we scaled back the inefficient trade spending during the quarter.

On the positive side, we continued to make significant investments in advertising and consumer spending, which was up over 50% in the quarter versus last year as we continue to support several of Post’s brands. As I mentioned, Dave will be discussing the separation, as well as the impairment in more detail later in the call.

For fiscal year 2011, Ralcorp’s adjusted diluted earnings per share were $5.22, a 12% increase over fiscal 2011. Net sales increased 17% to $4.7 billion for the year, driven primarily by higher net pricing in all segments and a full year of sales from AIPC. Adjusted EBITDA grew to over $800 million, a 19% increase over fiscal year 2010.

As the leader in private brand foods, we continue to be excited about the opportunities that exist in the private brand or store brand market. We think it is clear that during periods of economic weakness, store brands will do very well relative to national brands.

However, we have found that store brands hold their shares and continue to grow even during periods of economic growth. We view a weak economic period as a time when the trial of store brands increases and then translates into a new long-term consumer, based on improve product quality, packaging, product assortment and the overall consumption experience.

On our next call and after the separation, we plan to provide an update on what we believe to be the exciting opportunities in market dynamics of the private brand industry as Ralcorp moves ahead as an independent company.

I would now like to discuss our acquisition of Sara Lee’s Private Brand Refrigerated Dough business. We are excited to have recently announced the completion of this acquisition, which makes Ralcorp the private brand leader in the $1.8 billion refrigerated dough category.

We are making progress integrating this business and expect to complete the process over the next several months. We are very confident in the prospects and opportunities this business line will bring to Ralcorp.

Moving forward, we anticipate first year cash accretion to be $0.50 per share including synergies but excluding one-time acquisition related expenses. We are finalizing appraisals to calculate GAAP accretion and should have that completed by calendar year end. We would anticipate announcing our GAAP accretion expectations during our first quarter earnings conference call in February.

As for further growth, we are excited about the continued opportunities we see in our strategy of growth through acquisitions and we are comfortable with our ability to identify and execute our transactions that we believe will benefit Ralcorp and our shareholders. We have a successful track record of getting private brand deals done that create value for shareholders as illustrated most recently by our AIPC and refrigerated dough acquisitions.

When we look at the current acquisition pipeline, we’ve identified approximately $10 billion in additional annual sales, representing over 50 individual companies that meet our initial criteria for strategic acquisitions ranked by margin and synergy with our existing business.

Clearly, despite industry sales approaching $100 billion, the store brand market remains highly fragmented. Our management team has a strong track record of identifying, acquiring and integrating store brand companies which is a significant advantage for us as we go forward.

As a standalone company, Ralcorp will be better positioned to implement our strategic plan of focusing on enhancing our position as a private brand leader with a diverse product, customer and input array.

Furthermore, Ralcorp maintains the financial flexibility to continue executing on our strategy and as always we will remain disciplined with respect to acquisition price and strategic fit. That said, we continually review our use of capital with the goal of maximizing shareholder value in a number of different ways including share repurchases.

With that, I will now turn the call over to Dave to provide an update on the statues of the Post separation process. Dave?

Dave Skarie

Thanks, Kevin. I’d like to begin by restating the benefits of the planned spin-off of Post. A spin is a particularly effective technique to maximize value for a low tax basis asset like Post, where cash sale proceeds would be greatly reduced.

Second, we expect the separation to create greater management focus and also improve our ability to attract and retain employees. We would also expect it attract to more focused shareholder base, as investors can select specific risk return profiles through pure plays in both store brands and branded foods.

Third, the separation will allow optimal resource allocation and capital deployment, including providing greater strategic flexibility for acquisitions.

Finally, the spin can occur with minimal additional costs.

As we progress with the separation process, our top priority has been to identify a strong management team for Post. We are excited that Ralcorp’s Chairman, Bill Stiritz, will serve as CEO and Chairman of Post following the separation.

As many of you know, Bill has a tremendously successful track record in spin-offs, including Ralcorp and energizer among others, that have generated significant shareholder value and we’re fortunate to have him lead Post as it grows as a separate entity.

Furthermore, we’ve recently announced the creation of a new management team at Post, including Robert Vitale, who will serve as Chief Financial Officer; Jim Holbrook, who will be Executive Vice President for Marketing; and Terry Block, who will join Ralcorp on January 1, 2012 as President and Chief Operating Officer and will be a member of the Post Board of Directors.

We are very pleased with the caliber of the talent and the expertise of these individuals. In addition, the Post team is continuing to fill other key leadership roles, so that it is fully prepared to operate as an independent company when the separation is complete.

The new management team is currently in the process of refining the go-forward strategy for Post. They are carefully reviewing every aspect of the business and examining every opportunity to include Post operations.

Based upon a preliminary review of the business in October, new Post management has determined that additional strategic steps are needed to stabilize the business and improve the competitive positioning of the brands.

Management’s review determined that recent weak performance, competitive dynamics in the branded ready-to-eat cereal category and the continued weakness in the broader economy will result in reduced except net sales growth rates and profitability of certain Post brands in the near-term.

As a result, Ralcorp recorded a non-cash impairment charge of $471.4 million affecting Post goodwill and trademarks. As a reminder, Ralcorp recorded over $1.8 billion in goodwill when we acquired Post in August 2008. Additionally, despite the impairment Post’s cash flow remains strong and Post will dividend $900 million to Ralcorp at spin, preserving financial flexibility for the both companies.

Now we are pleased to give you an update on our progress around the spin. First, on September 26, 2011 we filed our initial Form 10 Registration Statement with the SEC and important milestone in the process.

Second, our submittal of a private letter tax ruling request with the IRS, which will confirm the tax-free nature of the transactions related to the separation, is proceeding as planned. Driven in part by the necessary to determine the impairment, we now expect the separation to be completed around the end of January 2012.

Regarding Post product performance we are pleased with the launch of Honey Bunches of Oats Raisin Medley earlier this year which has continued to gain share. We believe that extending the reach of the HBO line is an exciting prospect for Post. As you know we made the decision earlier this year to reintroduce Great Grains and made its great nutrition story the focal point of the launch.

With it, we are reaching consumers who are looking for nutritional value. With the help of our celebrity chef spokesperson, Curtis Stone and our less processed for better nutrition message, we are proud to announce that Great Grains volumes were up 21% in this quarter, reflecting a total year-over-year increase of 26%.

One of Post’s best assets is its great brand name and I know that the Post management team looks forward to leading the company in a creative and adaptive manner to enhance shareholder value. Given the continued separation process and the new management team’s ongoing review we will not be able to comment on the specifics of Post business following the separation beyond our prepared remarks.

Finally, I’d like to discuss the 20% stake Ralcorp will retain in Post. Having this large ownership position speaks to the Board’s and management team’s belief in the current value creation and future prospects of Post.

There are exciting opportunities at Post that in our opinion will result in enhanced value for our shareholders. We believe that this Post ownership will be a sound investment and we will look at ways to monetize the stake in a tax efficient manner allowing a addition -- allowing for additional share repurchases or debt repayment.

Leading these separation efforts has been exciting and I’m proud of what we have accomplished these past several months. Working closely with me throughout the separation has been Ron Wilkinson, President of Ralcorp Cereal Products. After my retirement, Ron will continue to lead the ongoing transitional relationship between the two companies.

With that, I’ll turn the call over to Scott for a review of the financial highlights of the quarter and fiscal year. But before doing so, I would like to take this time to acknowledge his transition to Corporate Vice President and Chief Financial Officer when Tom Granneman, Ralcorp’s Chief Accounting Officer retires at the end of the year. I would also like to thank Tom for his many years of service and contributions to Ralcorp.

Scott Monette

Thank you, Dave. I’ll now review our segment results for the fourth quarter. Starting first with Post, during the fourth quarter net sales declined 2% as the impact of lower volumes was partially offset by increased net selling prices. Overall volumes were down 5% with most of the Post brands showing volume declines with the exception of Great Grains, which responded strongly to increase advertising support.

Trading spending was slightly unfavorable as the segment lapped the significant spending reductions that took place in the fourth quarter of the prior year as we eliminated low return trade programs.

Segment profit decreased 27% as a result of increased marketing investments, unfavorable manufacturing expenses due to the negative impact of lower production volumes from plant utilization and fixed cost absorption, lower sales volumes and higher raw material costs driven by nuts and wheat. These unfavorable variances were partially offset by an increased net selling prices and favorable warehouse and brokerage expenses.

Moving to other cereal products, net sales increased 2% in the quarter as higher net selling prices were partially offset by lower overall volumes and a negative sales mix for the shift away from nutritional bars which have a higher price per pound.

Nutritional bar volume decreased 10% versus a 42% increase last year due to sales weakness from major home manufacturing customer and SKU rationalization in a second home manufacturing customer.

This decline was partially offset by volume improvements in both private brand ready-to-eat cereal, which is up 2% and hot cereal which was up 4% due to improved promotional program results and reduced brand and trade promotional activity.

Segment profit declined 18% and increased sales were more than offset by higher raw material costs, production costs, freight costs and SG&A expenses due to higher distribution and consumer promotion costs.

In particular, we saw some inefficiencies at our Bloomfield plant due to below planned yield, unfavorable material usage during the quarter. Bloomfield also lagged raw material inflation with pricing. We’re confident in our plan to address these issues at Bloomfield, closing one manufacturing facility, more efficiently utilizing capacity and implementing additional pricing.

Moving to Snacks, Sauces and Spreads, net sales grew 7% to $420 million due to increased net selling prices and a positive sales mix, partially offset by declining volumes resulting from the decisions to surrender unprofitable business.

For the quarter, overall volumes declined 5%, as compared to a 9% increase last year. Net selling prices increased in the quarter in reaction to significantly higher commodity costs across many of our product categories but most notably in snack nuts.

The segment profit increased 35% for the quarter compared to prior year driven by improved net selling prices related to rising commodity costs of wheat, oats, fruits and nuts. A positive sales mix, favorable manufacturing costs and lower SG&A expense.

Pricing is flowing through the system and as the lag would indicate the fourth quarter did not include all of our pricing initiatives. As we move into fiscal 2012, we expect to see further pricing taking hold. That said, it is difficult to predict the volume impact at retail and consumer levels due to the commodity inflation in corresponding pricing.

Turning to Pasta, the AIPC acquisition closed July 27, 2010, but fiscal 2010 was a partial year for the segment. Including pre-acquisition results from July last year, net sales increased 17% for the fourth quarter due to higher net selling prices on flat volumes.

Overall, our volume for our top 20 customers increased 2% versus last year, despite the significant pricing actions required by commodity inflation. During the quarter we also saw less deep promotion in the category which benefits private brands by normalizing gaps with branded products.

The segments profit was up 58% primarily due to the additional month of results. Comparing only the corresponding two months period of our ownership, segment profit increased 20% as improved net selling prices, as well as lower freight manufacturing costs more than offset significantly higher raw material costs, driven primarily by durum and semolina wheat.

We believe the results in the Pasta segment are particularly impressive given these dramatic commodity cost increases and we remain confident in our competitive position in Pasta.

Finally, net sales in our Frozen Bakery Product segment were up 7%, with growth primarily attributable to higher pricing along with volume gains for food service products. These results were partially offset by the affect of volume declines in retail griddle products and in-store bakery channel, primarily frozen dough and bread.

Buying was down slightly by 1% quarter-over-quarter due to lower sales of heavier products as we saw strong volume in cookies, cakes, waffles and hot cereal. Food Service sales benefited from a new product for a major national restaurant chain and volume growth at food service distributors.

The segment profit for the quarter was up 10% as higher net selling prices, supply chain cost efficiencies reduced overhead costs more than offset higher commodity costs and negative foreign exchange rate changes.

During the quarter we continued to implement our accelerated cost recovery program in order to improve the competitive positioning at each of our businesses, particularly our Sauces, Snacks and Spreads division, focusing primarily on cost structure.

We expect the [ATR] program to result in an additional $80 to $100 million in operating profit over the fiscal years 2012 and 2014. We’ve already approved several projects and we expect to see savings begin in fiscal 2012. However, due to the scale of these efforts, the majority of the savings are expected to occur in fiscal 2014. We expect to use between $115 and $135 million of capital in the next two to three years to complete these projects.

In total for 2011 fiscal year, our raw material inflation was $185 million, representing 6% of cost of goods sold. While the total amount of inflation was roughly in line with the guidance we provided at this time last year, the components were different than our forecast.

Peanuts, cashews, tree nuts and durum all rose more quickly than we forecast and represented 63% of the total raw material increase. These commodities are difficult to hedge, so cost certainty is an issue.

To try to put these increases in perspective, recent stock prices for a ton of unprocessed peanuts have increased from $450 a year ago to $1,150 recently or 150% increase. Similarly, cashews have increased from $3.50 a pound to $4.65 a pound over the last year. Finally, we’ve already noted the 90% increase in durum year-over-year.

Turning to cost inflation guidance for fiscal year 2012, we see our cost of goods sold increasing 10% to 12% for the year. However, when excluding Pasta and Snack nuts we expect an increase of 5% to 6%.

While we’re using cost reduction and pricing were justified to counteract the inflation, we’re also carefully watching for the potential negative impact on volumes from retailers and consumers. Further, similar to fiscal year 2011, we could be exposed to price gaps in rapidly escalating raw material environments. Needless to say this will be an area of significant focus for us over the course of fiscal 2012.

Our ongoing cost initiatives will be critical to maintaining and improving our profitability in the next year. We will provide additional guidance on capital expenditures, tax rate, share count and interest expense on our February earnings call after the spin is completed.

With that, I’ll turn the call back to Kevin.

Kevin Hunt

Thanks, Scott. Before we turn to the Q&A, I would like to take this time to thank Dave Skarie for his contributions to Ralcorp. As you know, Dave has announced that he will retire at the end of the year. We will greatly miss the enthusiasm he brings day in and day out. He has had a fantastic career including spending most of the last four decades at Ralston and Ralcorp successfully running several of our businesses.

In addition to this work, Dave has been active in industry associations, as well as undertaking numerous philanthropic endeavors. We wish him the best in the future. On a personal note, Dave and I have been doing our Co-CEO thing for the last eight years. It’s been a real pleasure working with him. I’ll miss him but I know he’ll do well as he moves forward.

I would also like to note that given the great feedback we have received from all of you, we’ve decided that Ralcorp will continue to hold quarterly earnings calls moving forward. In addition, we will participate in select major industry conferences and we’ll inform you of our plans and the appropriate details in advance of those events.

With that, we would now be happy to answer your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question is coming from the line of Jonathan Feeney with Janney Capital Markets.

Jonathan Feeney – Janney Capital Markets

Good morning, guys. Thank you.

Kevin Hunt

Good morning, Jon.

Dave Skarie

Good morning, Jon.

Jonathan Feeney – Janney Capital Markets

Dave congratulations and great career, best of luck.

Dave Skarie

Thank you.

Jonathan Feeney – Janney Capital Markets

I wanted to ask either Kevin or Scott about the organic, it appears to me the organic trend in private label volume was down, it looks like somewhere between 2.5% and 3% depending on what, whether you include the extra month of AIPC whether you told us or not. I’m wondering, what do you think the industry in your categories is up, just as far as private label goes, not the industry, but just an -- yeah the industry as a whole, but the private label segment of it. Because there are some other private label companies putting up stronger organic volume numbers, but your profits are good. So could you give us a little more color about that?

Kevin Hunt

Yeah. Jon, it’s Kevin. Just to talk factory sales here for a minute, overall our -- if you strip out acquisitions for the fiscal year, we’re about even in terms of our private label volume and maybe up slightly.

The fourth quarter we’re actually, again, if you strip out acquisitions and you take out Post, we’re down about 3% in tonnage. And a big portion of that, Jon, is in our SSS business, where we have effectively surrendered low margin or unprofitable business in the pace of the need to take price increases. So overall I would say that what we’re seeing is, if you again strip out lost business, if you want to call it that, it’s been a positive trend. I wouldn’t call it dramatic increases but certainly positive.

Looking at just the overall sort of the Nielsen Universe, we are now in 21 different categories and what we’re seeing is a big increase in price realization in the last quarter. If you just look at the last quarter versus the last year, in 19 of those categories we’re seeing an accelerating rate of price increase on a price per pound basis. Now both brands and private label have taken pricing there but overall we’re seeing a lot of pricing.

And then I would also comment that those categories are also down in volume, not dramatically, but they’re down in volume. So I think the whole pricing equation has got something to do with this as well, Jon.

Jonathan Feeney – Janney Capital Markets

Okay. Thank you, Kevin. Just one final detail question, I know that K is delayed for a couple weeks here, but Scott, could you give us the ending cash and debt balances?

Scott Monette

We’ll follow-up with that, Jon, if you don’t mind. At this point, we’d -- we’ll need to follow-up with you on that. That’s -- we’re still looking at, like you said, another of couple of weeks before we finalize the 10-K and we’ll need to follow-up with you on that for your information.

Jonathan Feeney – Janney Capital Markets

Understood. Thank you. And add me to the overwhelming positive feedback for your…

Kevin Hunt

Thanks, John.

Scott Monette

Thank you, John.

Dave Skarie

Thanks, John.

Operator

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

David Palmer – UBS

Thanks. Hi. Just a simple question, I’m sure this is something, a simple question that you get a lot when you hit the road. But do you see where your stock price is today relative to the bid you got from ConAgra of at least $94, what specifically do you think that the market is missing that your Board saw when it rejected that bid?

Kevin Hunt

Dave, this is Kevin. We felt and still feel that the as an aggregate Post and Ralcorp the business was being undervalued. So the spin-off is the critical element for us in terms of releasing shareholder value. I mean it is – it’s creates a two pure-play companies with different profiles that will enhance optimal resource capital deployment, management focus and it will give investors a very clear choice whether to invest in a branded cereal business or a branded business as opposed to a private brand business. So, we remain committed and really believe that is a key to creating shareholder value.

I think just commenting on the private brand side of this, when the spin-off occurs with the way that the financials will work. We’re going to end up with good fire power, good capability on our balance sheet to execute our growth through acquisitions strategy and to do opportunistic things like share repurchases. So that’s really the focus and we believe that is certainly our view of the optimal way to create shareholder value going forward.

David Palmer – UBS

Are you going to provide more detailed guidance in the near-term, I think you might have said something to that effect earlier in the call.

Scott Monette

Yeah. Dave, this is Scott. When we -- we anticipate when we -- when the spin is completed and in our February earnings call we will provide more detail of guidance on things like share count, interest expense, tax rate, capital expenditures, things along those lines that we would traditionally provide now.

But given this spin it probably makes more sense for us to do that after the spin is completed and just looking solely at Ralcorp, because the obvious question is how will the spin impact all these numbers?

David Palmer – UBS

Right. I’ll stop there. Thanks, Scott.

Scott Monette

Thank you, Dave.

Kevin Hunt

Thanks, Dave.

Operator

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

Brett Hundley – BB&T Capital Markets

Hi. Good morning, gentlemen. This is Brett Hundley standing in for Heather this morning.

Kevin Hunt

Well, hi, Brett. How are you?

Dave Skarie

Hi, Brett.

Brett Hundley – BB&T Capital Markets

I’m good. Thanks. I guess, Dave, you touched on the Post spin going to late January, I think you said. Are there any other issues in your mind that could delay that further?

Dave Skarie

At this time, this is Dave, obviously, at this time we believe that we’re on track with both key pieces of this, which is the SEC letter and the IRS ruling. I don’t know if I see anything other than what we’ve talked about before which is we’re on progress, we’ve worked on the TSAs and so we’re still looking at the around the end of January for the finalization of the spin.

Brett Hundley – BB&T Capital Markets

Okay. Thanks for that. And then, I wanted to look at your core private label cereal business, earnings there, missed our estimate. You guys called out a slew of higher costs and I was just curious as to when we might see margins recover in that segment and how you think about cost in that segment?

Dave Skarie

Yeah. I think the, this is Dave, again. If you look at other cereal products with the volume we talked about that the ready-to-eat cereal volume was up and the hot cereal volume was up, most of the issues are in the Bloomfield piece of that business, which we are addressing through taking some major costs out of that with the plant closing that we addressed. So the base ready-to-eat cereal and hot cereal business, we believe is strong and will continue to grow as the market rationalizes some of the trade spending on the branded side.

Brett Hundley – BB&T Capital Markets

Okay. Thank you. And then, Scott, in your input cost outlook for 2012, I think you said, 5% to 6% ex-durum and Snack nuts? Is that right?

Scott Monette

That’s correct, Brett. Right.

Brett Hundley – BB&T Capital Markets

Can you talk about what makes up that 5% to 6% component elsewhere besides those two commodities?

Scott Monette

Yeah. I mean, some of the things I would highlight would be sugar, would be one of the things that we would expect year-over-year increases. Corn would be another thing we would highlight. Oats would be another thing we would highlight. So, I’d say those and wheat would clearly be another item. So those would probably be the top four that would beyond what we highlighted in terms of durum, semolina, cashews, peanuts and tree nuts.

Brett Hundley – BB&T Capital Markets

And would you guys be willing to quantify the additional private label pricing needed next year. Could you at least compare it to your actions taken during 2011?

Kevin Hunt

Yeah. Got, this is Kevin, Brett. I would comment on this. We clearly have a big year-over-year increase after a big one from ‘10 to ‘11. We have a big one that we’re looking at next year. As we took pricing in fourth quarter and we had a bid on what our fiscal ‘12 costs were going to be, so we have largely scaled that to those assumptions.

So, and again, you can clearly see that there was a lot of pricing that went in fourth quarter. And then we have a considerable amount that’s also going in first quarter. So the way I would characterize this is we have already implemented a majority of the pricing that we’re going need in the fourth quarter and the rest of it is in process pretty much in the first and some in the second quarter for next year.

Brett Hundley – BB&T Capital Markets

Okay. That’s helpful. All right. I’ll stop there. Thanks for that and congrats from us here as well, Dave. Thanks, again.

Dave Skarie

Thank you.

Operator

Your next question comes from the line of Alton Stump with Longbow Research.

Alton Stump – Longbow Research

Hey. Thank you. Good morning.

Dave Skarie

Hey, Alton.

Kevin Hunt

Hey, Alton.

Alton Stump – Longbow Research

Yeah. Just for the AIPC as you pointed out was a good deal of upside from your first original $0.50 accretion. First off, is it fair to say that that would have been an even bigger upside having not had that wheat cost up 90% year-over-year. And then sort of in that vein, is there potential for similar upside with the Sara Lee’s Frozen Dough business? Thanks.

Kevin Hunt

Well, if I could just wrap my mind around what would have happened if we hadn’t had that durum increase, I mean, it’s just, Alton, it’s so difficult to separate the pricing moves from the input cost increases, so I just, sorry, just, I’m not sure, I can come up with an answer on that. But clearly, we’ve had a run up here and I think generally have been able to do a good job in dealing with that.

As it relates to the Frozen Dough business, I guess, we’ll see how things are going. We’re very pleased with the business. We’ve known the business through the private label world for a long time, very, very high on the management team. They’re actually, they’ve always kind of run as a separate private brand management team within Sara Lee and also within prior ownership.

And we’re feeling good about the integration. A big part of the integration is cutting them over to our IT system and that’s a six to nine month process. It’s moving along well. So, I guess, in general we’re pleased with the business, pleased with the management team and the integration is putting along pretty well.

Alton Stump – Longbow Research

Okay. Great. That’s all I had. And I also wish you well, Dave, in your future endeavors.

Dave Skarie

Thank you.

Operator

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

Chris Growe – Stifel Nicolaus

Hi. Good morning.

Kevin Hunt

Good morning, Chris.

Dave Skarie

Good morning, Chris.

Chris Growe – Stifel Nicolaus

Hi. Dave, good luck, of course and I hope all goes well. I just had a couple quick questions for you. I think you sort of answered this a couple of questions ago, but in relation to, I look at the experience you had in 2011, fiscal ‘11, with pricing versus cost inflation and being a little bit behind the curve. I get the sense given the increases you put in place here in Q4, you’re very much trying to get ahead of the curve here on your price increases. Is that true? Do you see a better balance occurring in 2012 between price and costs?

Kevin Hunt

Chris, Kevin here. Yeah. There’s no question as we went through ‘11, particularly in the second and really the third quarter, we struggled to catch-up, particularly when you look at the whole Snack nuts, peanut butter situation. So and then, when you look at fourth quarter, you can see that we’ve certainly got more of that pricing in.

So I would say in answering your question we do feel that we have – we are more ahead. I just can’t predict particularly with uncovered commodities, like Snack nuts and peanut butter, what might happen. I think we’re in a good position to respond to that but that’s sort of always the wild card if you will.

Chris Growe – Stifel Nicolaus

Okay. And then, I wanted to ask about Post and the degree of marketing increase in the quarter, obviously, was that the major factor for your profit decline? And I guess related to that, you noted that promotional spending was up, I guess, in dollars in the quarter and I was surprised that, given that that’s been one of the methods you used to try and raise prices. So I wonder if you could speak to those two factors and then Post?

Dave Skarie

Yeah. Chris, this is Dave. The promotional spending was up year-over-year because if you remember we started the major pullback a year ago after the heavy first three quarter spending. So it was up slightly over that timeframe, more to what a normalized rate would be. A&P spending or A&C spending, meaning advertising and consumer promotion spending was up significantly because we believe that investment is important to work on the brands.

And the other big piece was the volume shortfall across some major supply chain inefficiencies and including production and warehousing. So that was the real effect there but it was more normalized as we moved into this fiscal year.

Chris Growe – Stifel Nicolaus

Can you say what the fourth quarter or even the full year increase in marketing was for Post? A&C I guess would you define it?

Dave Skarie

I don’t, yeah.

Kevin Hunt

Chris, yeah, we’re over 50%.

Scott Monette

Yeah. Over 50%, Chris, year-over-year. This is Scott. So, yeah, until the K comes out we’re uncomfortable going into the dollars, but 58% basically year-over-year, so it was a significant increase. And it does reflect our, as Dave mentioned, our move to more advertising and consumer based marketing.

Chris Growe – Stifel Nicolaus

Okay. And just had one quick follow-up, which would be on the private letter ruling. I mean now that you expect this draft to be at the end of January, does that mean you’ve knocked out the private letter ruling that you’re waiting for? Would that come by the end of December I guess or what’s the timeframe for that, or you could push the date around a little then?

Scott Monette

Yeah. We would expect the private letter ruling by the end of the calendar year but as you’re aware we don’t have any real control over that. The original process was 10 weeks. It might move to 14 weeks. So we still feel comfortable that 10 to 14 weeks from the time we submitted it is the right amount which would get us to the end of the calendar year. So, all is moving forward positively on that front.

Chris Growe – Stifel Nicolaus

Okay. Thank you.

Scott Monette

Thank you.

Operator

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

Amit Sharma – BMO Capital Markets

Hi. Good morning, everyone.

Kevin Hunt

Good morning, Amit.

Dave Skarie

Good morning, Amit.

Amit Sharma – BMO Capital Markets

Kevin, you addressed the spin-off and how it impacts financially your ability through acquisitions going forward? But operationally, once the spin off happens, what does -- does it do anything to the way you run your other cereal segment, in terms your ability to be a bit more aggressive on pricing or going after business more aggressively?

Dave Skarie

This is Dave, Amit, I don’t think it does anything different how we’re going to operate the other cereal product business. It gives us the same kind of focus and it will also be included in our look at what other opportunities there are to add to that segment of our business.

Scott Monette

And Amit, this is Scott. I just address the financial elements of this. Clearly, with $900 million coming back to Ralcorp that will certainly help us from a financial flexibility standpoint and give us plenty of opportunity to continue our growth through acquisition strategy, so it was important for us to preserve financial flexibility with both companies and we think this structure does that.

Amit Sharma – BMO Capital Markets

Great. And other thing is, clearly, it appears that you are ahead of the curve on pricing. But if we look at pricing gap in your categories, 20 or so categories that we look at, that pricing gap appears to be creeping up. I mean, are you worried about that gap is getting wider to the point where it might have an impact more than price elasticity -- plus price elasticity might apply?

Kevin Hunt

Yeah. Amit, Kevin here. Let me just give you a little color on that question, because we’re constantly looking at sort of the whole Neilsen environment and the gap environment and let me just be clear now.

A wider gap is a good thing and what we’re seeing interestingly particularly in the last quarter is that the categories as I mentioned are taking accelerating pricing. Net realization of pricing is coming in driven by the brands, although private label has also taken accelerating pricing during that period.

But what’s interesting is and largely the percent gap has held, so what we’re seeing in almost all of the categories is the actual penny gap or the difference in pennies, number one brand versus the private label alternative, that gap on a penny basis is actually going up.

So now again, all the prices are going up, but what we’re seeing is that the consumer when she’s at the shelf is actually looking at on an absolute penny basis potentially more savings. So I would say in general what we’re seeing again in the last quarter on an absolute basis pennies -- the penny gap is increasing, the percent gap is holding in an environment of increasing category pricing.

Amit Sharma – BMO Capital Markets

Great. Thank you. And just one final detail, Scott, did I hear you right? You said 10% to 12% inflation on total COGS or ingredients?

Scott Monette

Total COGS.

Amit Sharma – BMO Capital Markets

Total COGS. Okay. Great. Thank you very much.

Scott Monette

Thank you, Amit.

Operator

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

Bill Chappell – Suntrust

Good morning.

Kevin Hunt

Good morning, Bill.

Scott Monette

Good morning.

Bill Chappell – Suntrust

Just the first question going back to AIPC, I think historically AIPC had hedged six to nine months out on durum wheat. I was just trying to understand, excuse me, how much, as we’re looking at kind of the fourth quarter specifically whether prices were ahead of that or behind that, will margins get better sequentially or worse, how should I be looking at that?

Kevin Hunt

Bill, it’s Kevin. I think in general, I would call it we’re striving for equilibrium here and that’s largely what happened this year, that’s what I would say, we will be looking to achieve going forward.

As it relates to the commodity, the durum situation, I think you’re still -- the whole six to nine month thing is still a fair assessment, recognize of course this is not a Chicago Board of Trade situation. This is a real ground pounding effort where our AIPC folks are out there actually securing contracts. So it’s a different sort of the more, as I mentioned ground pounding process. But I think generally that’s what we’re looking for is that six, maybe nine-month period.

Bill Chappell – Suntrust

Yeah. I’m just trying to understand like have we seen all the pricing from your standpoint in this quarter or will there be incremental pricing for to offset the durum wheat as it flows through?

Scott Monette

Bill, I’m not -- this is Scott. I’m not sure we’re more on the comment of our pricing strategy is going forward. I think it comes back to Kevin’s answer in terms of we’ll strive for equilibrium among pricing and a raw material ingredient.

Bill Chappell – Suntrust

Okay. And then just switching gears going back given the split, any idea kind of I understand with Post and the private label cereal business, they were run with separate sales forces and what have you?

But I imagine over the past three years there were a fair amount of synergies of combing the two. There’s some manufacturing, some distribution. I mean, any idea kind of what leakage or what would disclose those synergies as you break those two apart and maybe some color how hard it is to break some of those two things apart?

Dave Skarie

This is Dave, Bill. This is Dave. I think what we’re looking at and that’s part of the transition services agreement is whether or not there are opportunities, just like you’re seeing with other major companies, where we can take advantage of the math between two, in this case competing companies, just the way Hershey has done to try to mitigate some of that.

In some cases, the synergy piece, we’ve looked over time and we still believe that even with the separation, there will be synergies for both companies that we identified as part of the process. So I don’t know if we have a number but we know that there’s obviously going to be some leakage but we think it will be minor as we pull these companies apart.

Scott Monette

Bill, just to try to comment on the numbers, we had $800 million of EBITDA in the quarter. We would expect 3% reduction as a result of the separation. The vast majority of that is two public companies. So hopefully that gives you a little bit more clarity in terms of to help model this, which I’m sure where you’re headed.

Bill Chappell – Suntrust

Yeah. Absolutely. Thanks. And one last one, I mean, going back to the Post transition of a couple of years ago, where your two big competitors took advantage of the transition? Are you seeing anything different on the competitive landscape there, where they’re trying to make more noise than normal?

Dave Skarie

I think. This is Dave, again. I think the difference is that when that split happened, we had not organization in place and that really set us behind the eight ball on that. This separation, Post already has a sales organization and dedicated throughout this process. So I think the difference is the preparedness for the separation versus having it carved out of craft.

Bill Chappell – Suntrust

Great. Thanks for the color.

Dave Skarie

You’re welcome.

Operator

Your final question comes from Alexia Howard with Sanford Bernstein.

Alexia Howard – Sanford Bernstein

Good morning, everyone.

Kevin Hunt

Good morning.

Dave Skarie

Good morning, Alexia.

Scott Monette

Good morning.

Alexia Howard – Sanford Bernstein

Just wondering if you could give us a little bit more detail on the kind of strategic sets that you’re considering to stabilize Post? It seems to me that there’s a long tail of smaller brands that can’t really afford to support big national advertising campaigns and that might be some of the reason for the volume decline? So I’m wondering, in terms of pricing, promotion, innovation, what kinds of things could be done there to stabilize that business?

Dave Skarie

Alexia, this is Dave. In the next two weeks the Form 10 will come out with specifics on the new management team’s look at the business. And so, I think, I’ll defer to what they are preparing to make public during that timeframe.

Alexia Howard – Sanford Bernstein

Okay. I’ll wait for that to come out. And then, just as a follow-up, you mentioned that there was a customer that may be lost in the other cereal business. I was wondering if you could let us know how significant that is in terms of sales volumes and are you likely to built to backfill and find you going to fill that?

Scott Monette

Alexia, this is Scott. Yeah, we talked in the Bloomfield section, specifically as rise of Bloomfield about sales weakness with one co-manufacturing customer and SKU rationalization with a second co-manufacturing customer. So we didn’t talk anything about a lost customer. So your co-manufacturing, as every relationship does with co-manufacturing, ebbs and flows, and we would think that would just represent a normal ebb and flow in a quarter.

And I would also note that nutritional bars was where the sales weakness occurs and 42% was what we were comparing ourselves against in the comparable period, so it’s very, very difficult comparable period.

Alexia Howard – Sanford Bernstein

Okay. Thank you very much. I’ll pass it on.

Operator

That concludes the question-and-answer portion of the call. At this time, I’d like to turn the call back over to management for concluding remark.

Kevin Hunt

This is Kevin. Thank you, Operator, and thank you all for joining our call today. We look forward in the coming months to continuing to execute our strategic plan and on providing you with an update on our next call. Thanks again to everybody.

Operator

Thank you for participating in today’s conference call. You may now disconnect.

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