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Ralcorp Holdings, Inc. (NYSE:RAH)

F1Q12 Earnings Conference Call

February 08, 2012, 08:00 a.m. ET

Executives

Matt Pudlowski - Director, Business Development

Kevin Hunt - President and CEO

Scott Monette - Corporate VP and CFO

Analysts

Andrew Lazar - Barclays Capital

Jonathan Feeney - Janney Montgomery Scott

Chris Growe - Stifel Nicolaus

Eric Serotta - Wells Fargo

Heather Jones - BB&T Capital Markets

David Palmer - UBS

Operator

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Ralcorp Holdings First Quarter 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 management’s 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, Kelly, and good morning, everyone. Welcome to today’s conference call to discuss Ralcorp’s financial results for the first quarter. Participating on the call this morning are Kevin Hunt, Ralcorp’s CEO and President, and Scott Monette, Corporate Vice President and Chief Financial 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 that 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 many risks and uncertainties that affect Ralcorp’s business, particularly those mentioned in the cautionary statements in yesterday’s earnings press release and in 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 the 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. First, I want to acknowledge that this has been a very busy quarter and past several months for Ralcorp. I will spend some time on today’s call highlighting a few of Ralcorp’s recent major accomplishments, including the spin-off of Post. I will also clarify the strategic focus of the new Ralcorp going forward and help you better understand the private brand industry and related dynamics in some of our largest product categories.

Next, I will provide an overview of Ralcorp’s results for the quarter and will then turn it over to Scott who will conclude our prepared remarks with details on our segments’ results, including a brief review of Post’s performance.

Our most significant accomplishment was the separation of the Post cereals business, which we announced in a press release on Monday. We first announced our intent to separate these businesses in July of last year. This type of complex transaction often takes companies well over a year to complete and thanks to the hard work of numerous employees at Ralcorp and Post. We successfully spun off Post in just over six-and-a-half months. I would also like to congratulate the senior management teams of both these businesses for their hard work and cooperation. We think this accomplishment is remarkable and we look forward to the bright futures ahead for both Ralcorp and Post.

Ralcorp received $900 million in cash from transactions related to the spin-off. We have used a portion of the proceeds from the transactions to repay short-term debt incurred in connection with the Refrigerated Dough acquisition as well as other outstanding pre-payable debt. As previously announced, we plan to use the remainder of these proceeds for general corporate purposes, including acquisitions and share repurchases.

To ensure the smoothest possible transition for both businesses, Ralcorp will continue to provide support to Post for specified periods of time through a transition services agreement covering areas such as distribution, information technology, payroll and benefits.

We believe the separation unlocks value for shareholders over the long-term and allows investors to select discrete themes in terms of private brand and branded foods. For Ralcorp, this means returning to our private brand and food service roots, allowing us greater opportunity to focus on growing our business and expanding our leadership position in private brands.

In addition to working on the Post separation, during the past quarter we also completed two acquisitions. As we discussed briefly on our last call, the first of these was our acquisition of Sara Lee’s North American private brand Refrigerated Dough business, which we completed on October 3rd. This acquisition immediately positioned Ralcorp in the number one private brand position in this $1.8 billion Refrigerated Dough category.

We are off to a great start with the Refrigerated Dough acquisition, which is our second largest private brand acquisition behind American Italian Pasta Company. The integration of this business is going very well and we are on-track in all areas. We still have much work ahead of us and I am confident that we will be successful in realizing our synergies on schedule. I appreciate the hard work of the teams and the successes that they have achieved so far.

We also recently completed the acquisition of a small Italian pasta company called Pastificio Annoni. Annoni is a leading provider of specialty Italian pastas with a production facility near Milan. Annoni was a strategic investment for Ralcorp that will expand our product line and will have synergies with our existing Pasta Lensi business in Italy. In addition, we now have the ability to increase our imports and expand our authentic Italian pasta product offerings in the U.S. We are pleased that we have been able to continue adding synergistic acquisitions to our portfolio.

Now I’d like to spend a few moments helping you understand our strategic focus as Ralcorp moves forward as an independent company, as well as the exciting opportunities and market dynamics we see in the private brand industry. As a standalone company excluding Post, Ralcorp will be better positioned to implement our strategic plan of focusing on enhancing our position as the private brand leader with a diverse product, customer and input array.

With annual pro forma net sales exceeding $4 billion, the new Ralcorp is the leading manufacturer of private brand packaged food in North America and the leading food service supplier. We compete in 22 retail categories and have the number one private brand share in most of these, including some of our largest product categories, such as ready-to-eat cereal, crackers, pasta and refrigerated dough. Our food service business is large in terms of both sales and scale, and we have a strong base of customers here.

We have built this business largely by acquiring and successfully integrating 27 businesses since 1997. This will continue to be our primary growth strategy and there are ample opportunities out there in what is still a very fragmented private brand industry. We have a proven track record and a proven management team at Ralcorp who can execute this strategy.

In addition, now that the spin-off is complete, the new standalone Ralcorp will have the financial wherewithal to support our growth strategy. Our business has an excellent margin structure as well as a strong and diverse cash flow. We have emerged from the spin-off with the ability to lever the company to three-and-a-half times and keep our advantageous investment grade ratings intact. These ratings and our financial flexibility will allow us sufficient access to capital markets as we pursue additional small and large acquisitions.

As we talk about expanding our position in private brands, I want to take some time to discuss recent dynamics in the private brand industry in terms of size, growth and retailer focus. First, to give you an idea of the size of our industry, the Private Label Manufacturers Association notes that 2011 store brand sales were $88.5 billion, or 23% of total food and beverage unit sales, which is up from 15% in 2001. When you include other channels like warehouse clubs, such as Costco, Sam’s and BJ’s, limited assortment stores like Aldi, Save-A-Lot and Trader Joe’s, as well as convenience and dollar stores, the total for private brand food and beverage annual sales is in excess of $100 billion.

Private brand growth is expected to continue for the same reasons it has grown historically, namely a high quality better value proposition to the consumer, continuing retailer consolidation in the U.S., better retailer margins, and an increasing focus by retailers on private brands as a means to differentiate their stores from competition.

It is clear that during periods of economic weakness, private brands do very well relative to national brands. However, it is important to note that private brand shares increase even in periods of economic growth, although at a slower rate. We view weak economic periods as a time when the trial of private brand products increases, but steadily builds long-term consumers thanks to the value, improved product quality, packaging product assortment and the overall consumption experience. In short, private brand growth is a secular, not cyclical growth trend.

Now I would like to make a few comments on trends we are seeing in the market across the 22 retail categories in which we compete. Unless otherwise indicated, our frame of reference here is IRI/Nielsen information for the food, drug, mass merchandise channel including Wal-Mart for the respective periods ending December 25, 2011.

It is comparable to look at how things have trended in the most recent calendar fourth quarter, which corresponds closely to the first quarter of Ralcorp’s fiscal year. Rather than take you through a data set, we’ve summarized key takeaways we believe will give you a good snapshot into our categories broadly as well as private brand performance within those categories.

Speaking of our 22 categories broadly inclusive of both brands and private brands, pound volume or tonnage is down in most categories, in 17 of Ralcorp’s 22 categories on both a 12 and 52-week basis, which is really no news here. There is a lot more pricing going on in the quarter versus the full year, but at the expense of tonnage.

Now let’s move on to what’s been happening in private brands starting with pricing. Generally, private brand pricing increases outpaced pricing in the broad categories. The vast majority of the categories where Ralcorp participates saw higher private brand pricing increases than the category for the full year. This leveled out some in the fourth quarter with just over half of the categories experiencing higher private brand pricing.

What this tells me is that overall in 2011 private brands have taken higher pricing and taken it earlier than national brands, clearly due to the significant ramp-up in input costs and a lower margin structure for manufacturers of private brand foods versus national brands.

What’s interesting is the trend in private brand price gaps versus the category and versus the number one national brand in these categories in the most recent quarter. As all of this is sorted out, the private brand price gap versus the category has actually widened on an absolute penny basis in 16 of the 22 categories in the quarter as compared with the total year and the gap widened in 14 of the 22 categories versus the number one national brand in those categories as well. So even though pricing has gone higher for both private and national brands, the consumers saw increased savings for private brands on an absolute penny basis in the latest quarter.

Now to Ralcorp’s first quarter results. Despite all of the activity around the spin-off, we have remained very focused on running our existing businesses and integrating the new Refrigerated Dough unit. As a result, we had a good quarter.

Ralcorp’s adjusted diluted earnings per share were $1.33 versus $1.28 last year, or a 5% increase for the first quarter. These earnings were adjusted for a number of items that were highlighted in the press release issued last night, primarily mark-to-market losses on economic hedges, merger and integration costs, and Post separation costs.

This was our first full year with Refrigerated Dough and it contributed $0.14 of accretion to our results in the first quarter. As Scott will discuss later, the first quarter is the Refrigerated Dough businesses strongest on a seasonal basis, which is evident in its results. We are reaffirming today that the Refrigerated Dough acquisition is expected to contribute $0.30 of accretion to our fiscal year 2012 adjusted diluted earnings per share and $0.50 of cash earnings per share including synergies and net of any one-time costs due to the high amount of amortization that is associated with our private brand acquisitions.

Our consolidated total revenue for the quarter was strong and was up 18% to approximately $1.4 million. The increase in revenue was largely due to the acquisition of the Refrigerated Dough business. Base business revenue increased 9% as a result of an increase in overall net pricing driven by higher raw materials and freight costs. Ralcorp’s overall volumes were up 8% in the first quarter, primarily driven by the Refrigerated Dough acquisition. Excluding the acquisition and Post, volumes were flat for the quarter, which we think is an impressive result given the significant pricing that flowed this quarter.

Despite overall raw material inflation of over $100 million for the quarter driven primarily by cashews, peanuts, wheat and oils, our pricing initiatives covered these increases although it varied by segment. We will update you on our expectations for cost inflation for the remainder of the year towards the end of this call.

Overall, I am pleased with our recent acquisition activity and the overall performance of Ralcorp’s private brand business in the quarter.

Now I’ll turn the call over to Scott to review the segments’ results and their volume performance. More detailed volume information for each of our major product lines will appear in our 10-Q, which we plan to file on Thursday. Scott?

Scott Monette

Thanks, Kevin, and good morning. I’ll start with our Snacks, Sauces & Spreads segment. Net sales grew 13% as a result of increased selling prices, higher volumes and positive sales mix, partially offset by increased trade promotion spending. We raised prices in the quarter in reaction to significantly higher commodity costs across many of our segment’s product categories, most notably in Snacks Nuts.

Segment profit increased 10% driven by improved selling prices related to rising commodity costs, a positive sales mix and favorable manufacturing costs. These beneficial effects were partially offset by the impact of significantly higher raw material costs, primarily cashews, peanuts and tree nuts, but also oils, wheat and packaging and freight costs.

Overall volumes for Snacks, Sauces & Spreads were up 2%. However that masked strong volume growth in several of our largest categories including Crackers plus 11%, Cookies plus 6%, Peanut Butter plus 3%, and Syrups plus 5%. These increases were driven by growth in alternative channels and contract manufacturing. These volume increases were partially offset by 11% volume decline in Snack Nuts. As we noted last quarter, we will continue to resign business that does not meet our margin requirements. The performance this quarter validates that decision particularly in a low margin category like Snack Nuts.

In our Frozen Bakery Products segment, net sales were up 59% with volumes up 46% primarily due to the incremental sales from the acquisition of Refrigerated Dough. Excluding results from this acquisition, base business net sales were up 7% driven by increased selling prices in response to rising commodity costs, partially offset by slightly lower base business volumes. Segment’s net sales also benefited from a new product for a major restaurant chain in the food service channel.

I want to note that the Refrigerated Dough business is highly seasonal and our fiscal first quarter, which includes the major winter holidays, tends to be the strongest of the year for this business and indeed we were pleased with the results.

Segment operating profit for Frozen Bakery Products was up 47%, primarily due to the acquisition of Refrigerated Dough. Excluding this acquisition, segment operating profit decreased 19%, driven by higher raw materials, primarily flour, dairy and eggs, freight, information technology costs, unfavorable foreign exchange rates, which were partially offset by improved selling prices.

Turning next to Ralcorp’s Other Cereal Products segment, net sales increased 11% as higher selling prices and a favorable sales mix were partially offset by slightly lower overall volume. Volume declines in hot cereal and contract manufacturing were almost completely offset by volume gains in nutritional bars and ready-to-eat cereals driven by new product sales, expanded distribution of existing products and the results of retailers’ strong promotional programs.

Segment operating profit for Other Cereal Products increased 28% as higher selling prices related to rising commodity costs were only partially offset by higher raw material costs driven by oats, corn, wheat, fruit and nuts, production costs primarily in nutritional bars, freight and distribution costs as well as customer promotions.

I want to talk for a minute about contract manufacturing which represented between 5% and 8% of Ralcorp’s total revenue over the last three years. Contract manufacturing is driven by our manufacture of branded products. We use this business mostly to utilize excess capacity in our production facilities primarily in our Snacks, Sauces & Spreads and Other Cereal Products segments. As those of you know who have followed Ralcorp overtime, this type of business can be volatile so it has not been a focus for us historically. Contracts are negotiated periodically with these customers.

As we discussed earlier, Ralcorp has a minimum margin requirement in all of our businesses. We were unable to reach an agreement to extend the contract manufacturing agreement with a nutritional bar customer in our Other Cereal Products Bloomfield business that would have allowed us an acceptable margin. We expect to transition out of this contract over the next year. This customer represented approximately 4% of total net sales in 2011. As a result of this decision, we are re-scaling our Bloomfield business by bringing in several new customers and closing a production facility at the end of this month. These efforts combined with base business growth will allow our Other Cereal Products segment to have an operating profit at least equal to our fiscal 2011 level in spite of this loss.

We are also encouraged by the volume performance in our Other Cereal Products segment. Despite experiencing a 1% volume decrease in the quarter, primarily due to declines in hot cereal, our private brand ready-to-eat cereal continues to gain share as a result of our customers’ strong promotional programs. Ready-to-eat cereal volume rose 3% and nutritional bar volume rose 13%.

Moving on to our Pasta segment, net sales were up 17% due to higher net selling prices in response to rising raw material cost, partially offset by lower volumes. Segment operating profit decreased 5% due to the increased cost of durum wheat as some favorable hedges rolled off combined with lower sales volume.

In Pasta, overall volume was down 2%. Private brands and our regional brands represent 75% of total volume for this segment, however our private brand volumes were flat and our branded volumes were down 1%. We think this volume performance is particularly good in light of the significant pricing that continued in the quarter. Institutional volumes declined 3% due to the lower ingredient and food service sales, partially offset by higher contract manufacturing volume.

At Post net sales declined 3% as the impact of lower volume was partially offset by increased net selling prices. Volumes were down across most of the Post brand portfolio with the exception of Great Grains, which grew 13%. Post operating performance decreased 30% as a result of increased marketing investments, higher raw material costs driven by wheat, nuts, and corn, unfavorable manufacturing expenses due to the negative impact of lower production volume on plant utilization and fixed cost absorption and lower volumes. These unfavorable variances were partially offset by increased selling prices in favorable warehouse and broker expenses.

On a consolidated basis, Ralcorp’s segment operating profit included Post increased 3% compared to the prior year due to positive pricing, an improved product mix and lower manufacturing costs. These beneficial effects were partially offset by significantly higher raw material costs. Excluding Post, our overall segment operating profit increased 17% versus last year. Excluding both Post and the Refrigerated Dough business, our base business operating profit was up 4% versus last year.

As you know, Ralcorp has retained an approximately 20% ownership position in Post. We are confident in the new Post management team and we know this team is working hard to improve Post’s operations. We believe that our investment will enhance our value to our shareholders while providing Ralcorp with additional liquidity. Our plan is to liquidate this stake in Post in a tax efficient manner to either repurchase Ralcorp’s stock or reduce debt over the next 12 months. The stake, which is currently valued at over $180 million, will improve our financial flexibility and strengthen our balance sheet.

With the successful spin-off of Post, we will begin to report Post’s results differently beginning next quarter. We will report Post as a one line item entitled ‘Discontinued Operations’ on our income statement. Our second quarter results will include the full ownership of Post through February 3rd and our 20% ownership after that date until the remaining stock is liquidated.

Lastly, I’d like to provide a brief update on our accelerated cost reduction program, or ACR, before reiterating some item-specific guidance. We continue to expect the ACR program to result in an additional $80 million to $100 million of operating profit over the fiscal years 2012 through 2014 with most of the savings expected in fiscal 2014 and continued savings thereafter.

We expect to use between $115 million and $135 million of capital in the next two or three years to complete these projects. We’ve already approved several significant capital projects and we remain optimistic about our plans.

For the year ended September 30, 2012, excluding amounts related to Post, we expect depreciation of between $120 million and $125 million, amortization of between $83 million and $85 million including the Refrigerated Dough acquisition, capital expenditures of between $190 million and $210 million including capital associated with our ACR projects, an effective income tax rate of 35.5%, and a weighted average numbers shares outstanding on a diluted basis of between 56 million and 56.5 million shares.

As of the separation date, we will have a cash balance of $130 million to $140 million, total or gross debt of $1.96 billion, weighted average interest rate, outstanding debt of 6.3%, and our percentage of debt with a fixed rate is 100%. Ralcorp has no debt pre-payable at par after receipt of the proceeds from the separation of Post.

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

Kevin Hunt

Thanks, Scott. Before we head into the Q&A, I would like to take a moment to discuss our outlook for the remainder of the year. Starting with our cost inflation outlook, we would expect inflation of cost of goods sold to be 10% to 12% during fiscal year 2012 and will consist of increases in raw materials, packaging and freight. The primary drivers are consistent with last year’s, being durum wheat, cashews, tree nuts, particularly almonds and pecans and peanuts. Excluding durum wheat and snack nuts, this increase would be 5% to 6%.

While we have seen a few of our commodities fall in price on the spot market recently, our normal practice of six to nine months of hedging will not allow us to realize these prices immediately. Our objective is to provide as much cost certainty as possible to each of our businesses in order to implement the proper pricing strategy.

While there can be delays in matching cost to price increases, we are pleased with our price performance in the quarter which is what we predicted in the last quarter’s conference call. Like you’re hearing from others right now, given the increases in commodities the industry is facing, we expect volumes to fluctuate. However, Ralcorp expects to improve in this area in back half of fiscal 2012 as net selling prices and commodities become better aligned. We would note however that our cost inflation will reach its peak in our second quarter where we expect segment margins to be the lowest of the year. However, as we continue through the fiscal year, we expect margins to improve sequentially.

I would also like to spend a moment on the acquisition pipeline. We are currently evaluating a number of interesting opportunities in several of our four segments. As you all probably know, Ralcorp has completed almost $2 billion of acquisitions in the last two years. While we’ll always remain financially disciplined, we have a proven successful track record of buying private brand businesses, integrating them effectively, capturing synergies and creating value for our shareholders.

I would also like to reiterate the significant financial flexibility that the Post spin-off has provided us. The $900 million in proceeds from the spin-off, our 20% stake in Post, the strong free cash profile of our business and our investment grade ratings will allow us to continue our growth through acquisition strategy.

We will also continue to evaluate returning capital to shareholders through share repurchases. We feel that our strong balance sheet and investment grade ratings are competitive advantages that lower our cost of capital. This financial flexibility combined with our smaller size makes acquisitions more impactful to our earnings.

Finally, I want to thank our departing directors for their hard work and dedication to Ralcorp, especially over the past several months. All of them have made contributions to the business and we wish them well as they take on the new challenge of overseeing Post as an independent company.

Bill Stiritz’s vision created Ralcorp and as our Chairman since that time, his leadership and contributions were a key element in our growth and success. While he will certainly be missed, we can think of no better person to lead Post going forward.

We welcome our former Vice Chairman, Pat Mulcahy, as our new Chairman of the Board. Pat has been a Director on our Board since 2007 and has provided valuable counsel and leadership. We look forward to looking working with Pat in the future.

I would also like to welcome our two new directors, Barry Beracha and Pat Moore, both of whom bring a wealth of experience and impressive accomplishments to our board. With the separation complete, we look forward to working with the board as Ralcorp begins a new chapter.

We have a clear strategic plan to grow the company and believe we can enhance value for our shareholders. We will continue to execute diligently on our priorities and look forward to an exciting future.

Now, let’s open the call to your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Andrew Lazar of Barclays Capital.

Andrew Lazar - Barclays Capital

I have two questions if I could. The first one would be just to discuss Bloomfield a little bit more. Certainly understand that co-packing can have some value around fixed cost absorption but can be more volatile and obviously the need to be sort of vigilant around the margin, the minimum margins that you need. If we think about the amount of sales that will be phasing out over the course of the year, around 4% of Ralcorp’s overall sales base, I guess, if I compare it to kind of what that business did, I guess when you bought it in ‘07, it’s pretty similar. So, I guess I’m trying to get a sense of what’s changed so dramatically there that what seems like the bulk of the sales that you bought in ‘07 are going to be going away? And the reason I ask is obviously more about the go forward, getting at your ability to do acquisitions that have staying power rather than those that are just accretive for a year or two. That’s the first question.

Scott Monette

Andrew, this is Scott. Let me deal with that one and then we can move on to your second question. I think in terms of the sales profile of the business, Bloomfield represented about 37% of the Other Cereal sales at the end of our fiscal year in September. So that would have meant that we virtually doubled the business over that period of time. So I would also say that we’re clearly exiting the business that does not meet our margin requirements as you noted. The contract that we had in place with this customer made it difficult to sell to others. So we expect an even better opportunity to expand to new customers. And again, we would reiterate that we are re-scaling the Bloomfield business, we’re bringing in several new customers, closing a production facility at the end of this month, and we think those efforts will result in us being able to achieve an operating profit at least equal to our 2011 level in spite of this loss. And to put a finer point on the growth outside of this contract customer, the volume growth in the quarter in our other nutritional bars customers is up 40%. So it’s not that we hope to replace the customer, we’re doing a very good job of replacing that customer already.

Andrew Lazar - Barclays Capital

Great. That’s helpful to get a little bit more color on that, and again particularly as it relates to sort of the deals going forward and their value at the organization. The second one would be, certainly understand the pressure on the fiscal first half around somewhat of a mismatch in the second quarter, let’s say between pricing costs. We’re certainly seeing that play out in the gross margins for a lot of the food companies in this space. It does put obviously a lot more onus on your back half of the year to sort of get where you want to be sort of for the full year. I guess to the extent that you are able to share a little bit more around perhaps quantifying what starts to change year-over-year for the better in the fiscal second half, so if you expect inflation of however much million in, let’s say the first half, how much different does that look in the fiscal second half? And obviously assuming you still have a lot of the pricing flowing through and if there’s any other flow of year-over-year things that change in the second half, whether it’s the flow of cost saves or other things that we may not be aware of, just to give us some visibility or confidence that you can get where you need to be in the second half.

Scott Monette

Sure. Andrew, this is Scott. Let me start and then I’ll turn it over to Kevin. I really do think you hit the nail on the head when you talk about better alignment of pricing and costs in the back half of the year. As you note, in the first quarter of the year we had over $100 million of raw material inflation broadly defined. That will increase into the second quarter, but then we start to see those cost profiles fall in the third and in the fourth quarter materially. So I think what it comes back to is the alignment of pricing and cost as we see the cost profile change in the back half of the year.

Andrew Lazar - Barclays Capital

And so you did take some pricing I think additionally even in the fiscal first quarter, right, so you’re leaving some incremental from that going forward too that we didn’t see necessary in the quarter?

Scott Monette

Absolutely, yes, and thank you for clarifying that, Andrew. That’s what I meant in terms of the better alignment in the back half of the year. The fact of rollover pricing that is not showing up in this quarter in addition to rollover pricing that we didn’t have in the back half of last year too.

Kevin Hunt

Andrew, its Kevin. The only thing that I would add to Scott’s comments are in our view given the volatility in the commodities and all the pricing over the past 18 months, it’s important to look at it and I know you get this as kind of on a longer-term basis and we are trying to provide some direction as to how the rest of the fiscal year will flow out. But we feel pretty good about our, we’ve proven we can get the pricing. But we feel like this thing will come back into some equilibrium in the second half.

Operator

Your next question comes from Jonathan Feeney of Janney Capital Markets.

Jonathan Feeney - Janney Montgomery Scott

Just detailed question, I thought of following up on Andrew. Did that contract you just terminated that was below your expectation, can you tell us whether that predated the Bloomfield acquisition?

Scott Monette

It did.

Jonathan Feeney - Janney Montgomery Scott

Or was that business you got worked out yourself?

Scott Monette

No, it predated the acquisition, Jon. This is Scott.

Jonathan Feeney - Janney Montgomery Scott

Thank you. I guess another just quick follow-up. I guess that sort of pace that you’re nicely replacing customers, but you also talked specifically about cost savings opportunities, retrenching things at Bloomfield. And could you maybe, it seems like on the second half of the year, you hope to have replaced the lion’s share of that profit you had coming from that less profitable customer. Can you tell us how much of that will be new business, and how much of that will be cost savings, just kind of order of magnitude?

Kevin Hunt

Jon, it’s Kevin. I don’t know whether we would want to really get into sort of divvying that up. But I will say I think one thing to keep in mind which might not have been clear is we’re shutting one plant down, they only have two plants. So, we are basically consolidating that plant into the second plant. And so the proportionate cost savings are pretty significant. As Scott mentioned, we’re already on a good path here with a 40% jump in year-over-year sales with other customers beyond cliff, beyond that contact customer. But we’ve just had a review with the Bloomfield folks and there is a lot of progress and a lot of opportunity out there in terms of replacing that business.

Jonathan Feeney - Janney Montgomery Scott

Great. Thank you, Kevin. And another detailed question, I guess for Scott. Can you tell us what finance rate you’re using with that $0.30 GAAP accretion, I mean, for Sara Lee, Refrigerated Dough? Because the way I look at it kind of ballpark it where costs were in your other core businesses, you are like way, way, way ahead of that pace from and I would be suggestive of a number a lot higher than $0.30 for the year. And I realize some of that’s seasonal, but if you tell me the finance rate, you’re using and maybe correct my thinking a little bit on that.

Scott Monette

Yes, Jon. I do want to point out, I mean, you raised the issue of seasonality and that is really the most important issue here. Because of the winter holidays, because of the baking season, this is a heavily frontend loaded accretion profile. So, we’re assuming about a 5% interest rate. And as you would know that can certainly be variable over time but that’s what we’re using at this point for that acquisition. And again, it is not going to flow as you would maybe think about externally because of the seasonality of the sales profile.

Jonathan Feeney - Janney Montgomery Scott

Can you tell us roughly what percent of volumes or sales, whichever you’re comfortable with, sit in this fiscal quarter just for that business, not for your segment, but for that business?

Scott Monette

What percentage of sales, I’m sorry, Jon. I don’t understand the question.

Jonathan Feeney - Janney Montgomery Scott

The Sara Lee, Refrigerated Dough business in totality, just looking at that, not the segment Frozen Bakery it’s in but just that business, what percent of its sales occur in this holiday quarter?

Scott Monette

Well I’m not sure we want to get into that level of detail, Jon, but it’s going to be well north of 50% in the next two quarters.

Jonathan Feeney - Janney Montgomery Scott

Next two quarters. Okay. Good to know. And finally just a question for Kevin, if you wouldn’t mind. Do you worry at all that I mean, it seems like a great environment setting up for store brands right now where you guys have volume growth, the branded guys don’t, people are pantry deloading, but your trends are a lot better than the branded guys. I mean sitting here as an outsider, it seems a little bit bizarre to me that the brands are willing to kind of sit here as people eat less and less of their products and are doing so in some cases on terrible comps and that’s been going on for three years. And I know that’s their earnings algorithm, but do you worry at all that price discipline in some of your 22 categories breaks as brands kind of say, hey, thus far and no further. And have you heard any signs in the industry that just with these visible cost declines, buyers are encouraging brands to reduce prices or encouraging you to reduce prices in any of your categories? Thanks.

Kevin Hunt

Yes, Jon, I’d make a couple comments. I think that we are seeing the large number of categories decline in volume. And while we have some of our categories where private label is up, the fact is, is that private label volume is also declining but at somewhat of a lesser rate. And I mean that’s improved somewhat as we have gone through the fiscal year and as we have kind of gotten through all of the branded end and private brand pricing. So, I just want to make that point. We do view the private brand environment particularly on a long-term basis as a very favorable environment.

Commenting on, when I look over the last three years and if you look at, let’s call it, 2010 after we came off the big ramp up in costs in, let’s call it, late 2007, 2008, into 2009, a lot of pricing went in and then the recession hit, the commodities dropped precipitously and particularly, when I think of late 2009 and 2010, we had a significant trade, heavy-duty trade promotion environment. And honestly, our view is that we saw very little unit growth overall in the categories. Again, my opinion, it didn’t really work well from a profit standpoint for either the food industry as manufacturers or frankly I don’t think retailers got much out of it. So now, we are seeing that heavy-duty promotion ebb, volumes have suffered as a result. And I mean, I guess where I’m going with this is, this is a kind of a ditch-to-ditch kind of thing. We’re kind of swerving.

And what I’m viewing or at least reading what’s going on out there with some of the other companies, the branded companies is that I think that’s understood. We see a trend towards more direct support against the consumer. Our opinion of the innovation that’s going on out there is there’s a lot more going on around it, and it looks like it’s better. So I mean, I see the industry taken more of a leadership position in supporting their businesses against the consumer, driving more innovation and I would just assume that no one is going to want to dive into that 2010 pool, particularly if there is reason to believe that focusing on the consumer and innovation is going to be a better strategy.

So, you’re always going to see some back and forth here and there. We’re not seeing anything, the specific question you asked, we are not seeing anything dramatic right now in any of the categories that would suggest that that is beginning to happen, but I’m sure that we’ll see again, within what you might expect, category-by-category, brands are going to be promoting and things of that sort. But again, our view is that the overall sort of learning from all of this is, go back after the consumer, innovate and try to get growth back. And I think we learned in 2010 that you don’t necessarily get that with just heavy-duty price-oriented dealing. At least that’s my opinion.

Operator

Your next question comes from Chris Growe of Stifel Nicolaus.

Chris Growe - Stifel Nicolaus

Hi. Just I want to ask a question, I guess, similar to Jon’s question about but in a little bit different way, around the consumer. And I just want to get your impression of kind of where the consumer stands today. Do you believe you gained share or I should say, the private label gain share in your categories or was it more about your performance against private label in your categories? And then I’d be curious alongside that just if obviously, TreeHouse has some things to say about their quarter. Just if there was any kind of mix degradation that occurred in your category that you could really call out where you see consumers actually taking a step down in terms of the product they’re buying?

Kevin Hunt

Chris, I think, overall, given the long-term trends, we do have consumer data that indicates that you’ve got, particularly in the last couple of years, more and more consumers demonstrating a stronger purchase intent for private brand. And it’s very clearly improving on that, sort of, let’s call it the attitudinal front. And we are seeing an improvement in our guests and a slight improvement on a sequential basis on our share in the last quarter of 2011, but I wouldn’t call it dramatic. We are, I should mention, I mean, our sales in the sort of the alternate channels are doing well overall, which is again those are very oriented towards private label. I am talking about the limited assortment stores, some of the mass merchandisers, dollar stores. So we have seen proportionally better results there. But I think that overall the attitude towards private brand is that it is very much a viable quality alternative. In some of our categories, it’s actually rated better, and we see retailers putting more and more emphasis on it. So I would say that in general you’ve got to say that the consumer universe out there is much more receptive.

Chris Growe - Stifel Nicolaus

But it doesn’t sound like much change in the quarter though for you? No real shift in trend in the quarter?

Kevin Hunt

No, I would say that what happened in the quarter is that there was more brand pricing that came into place. Our guests got better. And if you look at private label share across our 22 categories in the quarter versus the full year 2011, we had a sequential improvement there.

Chris Growe - Stifel Nicolaus

Okay. And then I just had a question back to the Bloomfield business. Given the speed at which you’re getting rid of the facility or closing the facility, is there a quarter where, say, the volume really falls off, but the costs haven’t come out completely yet? It sounds like that will not be the case given the speed at which you’re closing the plant. But I want to understand, was there anything unique to the way that business phases down over the next 12 months?

Scott Monette

Chris, this is Scott. I don’t think there’s anything that’s unique there.

Operator

Your next question comes from Eric Serotta of Wells Fargo.

Eric Serotta - Wells Fargo

Thanks for taking the question. Just wanted to go into the question of channel mix in a little bit more detail. You, like a number of your peers, mentioned the shift to alternative channels. That seems to have been a bit stronger in the fourth quarter or that calendar fourth quarter than it had been in previous quarters. Just wondering about your margin structure and how it varies by channel, are you guys relatively agnostic to the channel in which your sales take place? Or is your margin structure considerably lower in some of these alternative channels?

Kevin Hunt

Eric, this is Kevin. First of all, just in general, we view these channels as opportunities, particularly given the fact that they are so largely oriented towards private brand. We’ve been doing business in these areas for a long time. Regarding the margin, it’s somewhat of a dichotomy here in terms of operating within this environment, and we have been very public about this. As we have had to take pricing this time around and even three or four years ago the last time through, where we could not get adequate margins we have surrendered the business or a portion of the business and that has happened in this most recent ramp-up of commodities and pricing. So, we definitely feel that it’s a very strong channel that we want to compete in. It has its volatility because it can be a very price competitive environment, but generally, we don’t operate there unless we can get adequate margins.

Eric Serotta - Wells Fargo

Okay.

Kevin Hunt

Not just generally, we don’t operate there unless we can get adequate margins.

Eric Serotta - Wells Fargo

Are you generally able to offer sort of a multi-tiered product offering in these channels? Or is your business more suited towards opening price points in these channels?

Kevin Hunt

Again, talking about limited assortment and talking about dollar, it’s really a one-tier and it is oriented towards a low price point. So we don’t really see sort of the multi-tiering that you might see in a traditional retailer.

Operator

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

Heather Jones - BB&T Capital Markets

On the Post earnings for the rest of the year, so it’s all going to be discontinued ops, there won’t be an equity in earnings of affiliate’s line for that 20% interest you’re going to retain?

Scott Monette

Heather, this is Scott. That’s absolutely correct. It will be at the bottom of the income statement. Everything including the four months of Post performance that we will have four-plus months and the first few days of February will be reflected in discontinued ops at the bottom of the statement.

Matt Pudlowski

Heather, this is Matt. The 20% will be on the balance sheet. And then when we dispose of that, it will then run through the income statement.

Heather Jones - BB&T Capital Markets

Okay. I wanted to go back to the private label cereal, the Other Cereal business, and your comment about 2012 EBIT being at least as good as 2011. Your Q1 results were very strong there. And if you take that your statement would imply that Q2 through Q4 earnings for that business could be down pretty significantly from the comparable periods in 2011. Am I understanding it correctly there?

Scott Monette

Yes. I think if you just look at what our expectations are, I think that’s a fair statement.

Heather Jones - BB&T Capital Markets

Okay. And, in Q1, your margins were very strong there as well. Is this one of those rare instances where you were able to price ahead of costs and costs are going to catch up in coming periods? Or how should I be thinking about that?

Scott Monette

Well, I mean, we certainly had a very positive product mix in the quarter in terms of ready-to-eat cereal volume being very strong. That’s a very good business for us. So that is certainly a driver in the earnings profile too for the quarter.

Heather Jones - BB&T Capital Markets

Once you phase out all of this contract business, I mean, how should we thinking about on a “normalized” basis, how should we thinking about the margin profile for the total Other Cereal business going forward, again, once you’ve phased out this contract business?

Scott Monette

Well, I want to emphasize again that as we phase out of this contract, we’re building the existing business on a rapid level, again, to reiterate the 40% volume growth outside of the existing contract business. So that’s really rescaling the business and the opportunity for refilling the capacity I think is really the most important takeaways for the Bloomfield business specifically as we look forward.

Heather Jones - BB&T Capital Markets

So, I mean, are we looking at on normalized basis margins and the EBIT margins in the 11% and 12% range? Or how should we be thinking about that?

Scott Monette

Yes. Heather, I don’t know if we want to get into the specifics around margin for a division. So, I think we’ll have to probably leave it with the comments we’ve made there.

Heather Jones - BB&T Capital Markets

Okay. And moving on to your COGS outlook statements, you’ve talked about durum inflation and you mentioned being locked in for six to nine months. Some industry pieces we’ve seen suggest that some in the industry may not have locked in that much for calendar Q2 and very little for calendar Q3. And just wondering do you believe there is a risk of given what durum prices have done, do you believe there’s a risk that your branded competitors could step up promotional activity in response to lower costs? Or how are you all thinking about that?

Kevin Hunt

Again, we don’t want to get too specific about a particular commodity. We don’t think we’re too out of whack here with what’s going on in the overall business. But, obviously, if you go back as we go in through 2011, I mean given some of the issues around durum, there was a period there in the middle of the year where there was some question that there was a concern about getting durum given the flooding in the North Dakota area and the U.S. crop. But to answer your question, again, we don’t feel that we’re significantly different than the remainder of the universe as it relates to durum.

Matt Pudlowski

Heather, this is Matt. I would point out that as we noted cost of goods inflation of 10 to 12%, however, excluding durum and snack nuts, your 5% to 6%, which I don’t think is really out of line versus what others have talked about.

Heather Jones - BB&T Capital Markets

Yes. I was thinking about durum specifically given the huge change we’ve seen in durum prices. I was wanted to focus on that one specifically. Okay. Well, thank you very much for your comments.

Scott Monette

Thank you, Heather.

Operator

Your next question comes from David Palmer of UBS.

David Palmer - UBS

Hey, just a couple of questions. First, now that you no longer own a branded cereal business, do you think you might get bigger again in the business of co-manufacturing cereal for other branded companies? It was my perception that you used to do a little bit more of that and maybe that went away a little bit when you owned Post. Is that a potential area of upside?

Kevin Hunt

I would say we certainly view that as a potential opportunity. We do co-pack, you are correct, in our Cereal business, have done over the history of the company, and we do it in some of our other segments. We’ve always viewed the private brand obviously as our primary avenue and we’ve looked at co-pack as something that we are happy to participate in when we have the capacity and capability available and we frequently do. We are seeing more co-pack opportunities and some of them are a little bit more permanent than, say, one of the brands closing down a plant and we’re going to fill in for a few months. So, we certainly see co-pack as an opportunity for us.

David Palmer - UBS

Thanks. And separately, you mentioned that you’re evaluating potential deals. Obviously you just took on the Refrigerated Dough business. Is there a point when you think that integration of multiple deals at one time starts to become a challenge, even before you think about things like balance sheet constraints? How do you think about that?

Kevin Hunt

Well, that’s a fair question and given the number of acquisitions that we’ve done, we’ve had to answer that question before. So the way I would characterize it, David, is we have four business units that are actively involved in finding acquisitions, doing the diligence on the acquisitions, they stand up in front of our board if we’re going to make the acquisition, talk about the business, talk about synergies, and frankly commit themselves to that. So, we’ve got the four business units and obviously corporately we are also looking at acquisitions.

So, my view is that we have the organizational wherewithal to handle the acquisitions. We can handle multiple acquisitions. Now, if four of them came in one business segment, we have to think about that. But, we typically have not seen that. And we did, with AIPC, we did three other acquisitions. We did four acquisitions and those were spread between three different business units. So that’s really how we would view that and we actually kind of view that as kind of advantageous. We’re out there in 22 different categories and we know who the players are, so we have a wide umbrella to be able to source these acquisitions.

David Palmer - UBS

And if I can squeeze one more in, we know that ConAgra obviously wanted to buy Ralcorp and they recently bought a private label pretzel business. Does it feel like those guys are meaningfully, are they a meaningful competitive bid such that the cash accretion on deals is not going to be what it was? Or is there such an abundance of deals out there that frankly there’s enough of a kingdom to be carved up and it’s not like having another shark in the waters is that big of a deal to you in terms of your value creation opportunity?

Kevin Hunt

Yes, I think you sort of hit part of that, which is, it is a big universe. It’s a $100 billion universe and if you look at the larger consolidators out there like us or TreeHouse or Dean Foods, I mean we don’t have a huge share of the business. So there are ample opportunities. I would also point out, David, that we’ve had other bidders as we’ve gone through acquisitions. We’ve had strategic other bidders as well as private equity and again, there’s going to be competition out there. But, we certainly have read what they have been saying about private brand and of course the peanut business was clearly a private brand acquisition for them. But, again, we don’t look at this as a significant change in the competitive environment.

Operator

That concludes the Q&A portion of the call. At this time, I’d like to turn the call back over to management for concluding remarks.

Kevin Hunt

Okay. I’d like to note that as we said on our last earnings call, we will continue to hold quarterly earnings calls moving forward. We are also planning to present at the CAGNY Conference later this month. So we look forward to updating you on our business at that time. Thanks to all of you for joining our call today.

Operator

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

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