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Ralcorp Holdings, Inc. (NYSE:RAH)

Q2 2012 Earnings Conference Call

May 23, 2012 8:00 am ET

Executives

Matt Pudlowski – Director, Business Development

Kevin J. Hunt – President and Chief Executive Officer

Scott Monette – Corporate Vice President and Chief Financial Officer

Analysts

Andrew Lazar – Barclays Capital

Jonathan Feeney – Janney Capital Markets

Robert Moskow – Credit Suisse

Alexia Howard – Sanford Bernstein

Amit Sharma – BMO Capital Markets

David Palmer – UBS

Operator

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Ralcorp Holdings second 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 Business Development of 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 second quarter. Also 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’d 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 statements whether as a result of new information, future events or otherwise.

Forward-looking statements and these remarks should be evaluated together with the many 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 J. Hunt

Thank you Matt and good morning everyone. We’ll do a few things on the call this morning. First, I’ll provide an overview of our performance for the quarter and an update on our recent acquisitions, including our acquisition of the Petri cookie company, which we announced this morning. Then I’ll turn to category dynamics to offer some context before Scott reviews financial information and results for our segments. Lastly, I’ll provide you with our outlook for the remainder of the year before we take your questions.

Starting with our performance, Ralcorp’s adjusted second quarter fully diluted earnings per share were $0.72 versus $0.75 last year, or a 4% decrease. Earnings per share were adjusted for a number of items that were highlighted in the press release last night. The primary factors in the EPS short fall were in our Pasta and Frozen Bakery Product segments.

Past segment profit reflects sharply higher cost for durum wheat that could not be fully offset by pricing actions. In Frozen Bakery, our base business operating performance was negatively impacted by lower volumes in some key categories, higher input costs and increased trade spending. These declines were somewhat offsets by a favorable tax adjustment and the benefit of the Refrigerated Dough acquisition. On a consolidated basis, Ralcorp’s segment operating profit decreased 9%, while adjusted EBITDA was down 4%.

Our total revenue for the quarter was up 16% to $1.1 billion. The increase was largely due to the acquisition of the Refrigerated Dough business. Base business revenue was up 7% due to higher net selling prices in response to significantly higher raw material and freight costs.

Volumes grew by 4% in the quarter as a result of the Refrigerated Dough and Annoni acquisitions. However base business volumes declined 4% in the quarter, as consumers reduced purchases and we exited businesses that did not meet our margin requirements.

Now let me give you a little more color on our performance. Overall, we had a mix performance in the quarter, in a challenging operating environment. On the positive front was our price mix realization. As we stated over the last couple of quarters, our price mix matched our input cost inflation in the second quarter. As you may recall, we stated that our second quarter input cost inflation would be the highest of the year and it came in at $95 million. We were able to match this significant inflation with pricing and mix.

Also on the positive side were acquisitions. Let me share some more information on our latest acquisition, Petri Baking Products, which we announced this morning. With annual sales exceeding $50 million, Petri Cookie Company is a leading private-brand supplier of high quality private-brand and value brand cookies that maintain a homemade look, feel and taste. Through their unique manufacturing process, the company produces both soft style and crunchy wire-cut cookies for customers in a variety of retail channels, including alternative channels at opening price points.

We expect to take advantage of operational synergies, which will be delivered over three years with the majority of these benefits occurring by the end of the second year of ownership while we have yet to complete the intangible valuation analysis, which could impact accretion. Ralcorp anticipates the transaction will deliver five sense of GAAP accretion and eight sense of cash accretion to adjusted diluted earnings per share in the first year of ownership, excluding one-time cost.

This strategic acquisition of the cookie category will expand Ralcorp’s product offerings and customer base in private-brand cookies. Petri Baking products will maintain its operations in the Silver Creek, New York, and we will be reported in our Snacks, Sauces, and Spreads segment. Additionally the integration in performance of our Refrigerated Dough acquisition, which contributed $0.08 of accretion in the quarter, was a positive.

For the first half of this fiscal year accretion from this acquisition totaled $0.22 per share. As a result, we are raising our GAAP accretion guidance from $0.30 to between $0.34 and $0.36 per share for our 2012 fiscal year and raising our cash accretion guidance from $0.50 to between $0.54 and $0.56 per share. As we discussed on our quarter one call, I’d like remind everyone that the Refrigerated Dough business is seasonal and we expect quarters one and two, which occurred during the colder weather and holiday months, to be the strongest of the year with performance at the back half of the year leveling out but still inline with our expectations.

We have completed the carve out transition of the Refrigerated Dough business from Sara Lee and with operational on this on April 2nd. This was a complex process that involved not just the integration of the sales, marketing and operations teams into our frozen unit, but also required delinking from Sara Lee’s SAP enterprise system and transitioning the business on to our ERP system in a very short window of time. The cutover has gone very well and synergies are being realized more quickly than planned, an excellent job by the transition team.

As these two acquisitions highlight, our growth through acquisition strategy is working well for Ralcorp. During the past 15 years, Ralcorp has completed 29 acquisitions that have added more than $2.8 billion in annual sales. We remain very confident in our ability to continue to execute on this strategy. In addition to our recent acquisitions, we also completed the spin off of the Post brand cereal business in a tax free transaction that provided approximately $900 million in cash and we retained an approximate 20% equity ownership stake in Post.

We were able to complete this transaction in 6.5 months from the announcement of this spin in July of last year. We continue to provide limited support to Post through a transition services agreement, which is expect to last no more than 24 months from the time of the spin with certain services terminating it phases as Post transitions to operating independently of Ralcorp support.

Now, I’ll cover a few things that challenged us this quarter beginning with volume. Our volume was up 4% in the quarter, however without the benefit of acquisitions base business volume was down 4%. A few key factors drill this. First our price and mix benefit in the second quarter was a strong 11%, or $95 million. However, price increases of this scale ended up impacting volume negatively. To give you an idea of the scale of these increases, I’ll highlight two categories where we saw significant volatility in the quarter and those are peanut butter and snack nuts.

A significant share of the input cost in these two areas was driven by peanut inflation. We took significant pricing in the quarter as a result as did all of our competitors. This came after substantial pricing taken by us and the category in the previous six to nine months, again driven by the dramatic run up in nut costs. The impact of this on retail prices really hit in the 12 week period ending March 18 as reported by IRI. In snack nuts, category pricing was up 15% and private-brand was up 17%. In peanut butter, category pricing was up 37% and private-brand increased 43%. This caused significant volume declines in these categories including private-brand.

For us, the combination of these trends and some surrender business resulted in year-over-year volume declines in these two categories of 24%, which accounted for almost 50% of our total company volume decline in the quarter. Overall, the 4% decline for the company reduce segment operating profit by $10 million for the quarter.

While we were pleased that our pricing mix matched our input cost inflation in the quarter, price realization did not fully meet our expectations. This was driven by our customers’ anticipation as well as ours that input cost inflation will moderate during the back half of the year. Based on our forecast for the fiscal year, it appears we’ve seen our worse periods of inflation in the first and second quarters. We expect inflation to moderate sequentially as we move through third and fourth quarters of fiscal year 2012 and we would expect that moderation to continue into 2013.

I’ll comment further on our raw material outlook at the end of the call. We also faced higher than expected manufacturing costs in our Bloomfield operation, which is part of our Cereal Products segment. We closed the manufacturing facility in February and condense those operations into our remaining plant. The startup cost of relocating and rescaling production to another Bloomfield facility created inefficient operations. Manufacturing issues at Bloomfield reduce segment profit by approximately $5 million in the quarter. Transitions always present their own set of unique challenges, but we were disappointed with our operational performance here. We know how to fix these issues and have inserted a supplemental operating team into the plant with a plan to correct those inefficiencies.

We talk about the category issues in snack nuts and peanut butter. Now let’s discussed overall dynamics in the categories where we participate. To understand our current competitive position, we regularly use SymphonyIRI data for the food, drug and mass merchandize channels with Wal-Mart panel data included in the total. We’ll share with you some insights from this information on our categories for the periods ending March 18, 2012.

Consistent with what you’ve been hearing across the industry right now, volumes are down in the food business, a trend which is accelerated in the past quarter. In the 22 categories we compete in, total category volume declined in 20 of these. The rate of decline was also significant, the highest in the last six quarters for the categories and for both national brands and private-brand. We believe a large part of that declines attributable to significantly higher selling prices. On a weighted average basis for the 22 categories, year-over-year price increases were the highest in the last six quarters with private-brand pricing up approximately 9% for the quarter.

For Ralcorp specifically our price mix, which includes down sizing, grows approximately 11% for the quarter, which helps to explain our volume performance. This category and inflation data is important to keep in mind as we review our segment performance results. Much of the volume decline and high price realization can be attributed to the fact that the national brands were still promoting heavily in the same period last year. But it is clear across the industry that the consumer is reacting negatively to these price increases at least in the short-term.

To recap, we’ve been focused on running the business, integrating acquisitions and managing volumes and pricing initiatives alongside inflation. We are not happy with our mix performance this quarter, but we expect to improve them in the balance of the fiscal year.

Now, Scott will review the financial results in more detail. Scott?

Scott Monette

Thanks Kevin and good morning. I’ll start with segment performance, beginning with our Snacks, Sauces & Spreads segment. Net sales grew 7%, a strong price realization and a positive sales mix, including both customer and product were partially offset by a 7% decline in volume. The level of selling price increase is driven by the need to offset almost $50 million in the higher input costs experienced in the quarter, most notably in snack nuts and peanut butter. These significantly higher prices had a direct impact on volumes in our snack nut and peanut butter product lines. These two items account for two thirds of the segment’s volume decline. Volume performance was mixed as cookies and cracker volume rose 6% during the quarter, which is more than offset by volume declines in Snack Nuts and Sauces & Spreads. Cracker volume was higher primarily due to co-manufacturing volumes.

Snack nuts volume declines were across all major categories of nuts with peanut, cashews and tree nuts. These volume declines were a combination of resign business, downsizing efforts and slower consumer takeaway. Sauces & Spreads volumes were down in peanuts butter and preserves and jellies. Category volume weakness driven by a significantly higher prices combined with downsizing and resign business were the primary drivers for the volume reduction.

Segment profit declined 2% as the benefits of pricing and mix were offset by lower volumes and the higher input costs, primarily in peanut, oil, cashews, packaging, freight and the higher selling costs. To be noted that on an annualized basis, this segment has taken over $200 million in price. In our Frozen Bakery Products segment, net sales were up 43% with volumes up 33%, primarily due to incremental sales from the Refrigerated Dough acquisition. Excluding results from this acquisition, base business net sales were up 2%, driven by increased selling prices in response to rising commodity costs, partially offset by a 5% decline in base business volumes.

Volume decline was a result of lower bread sales in both the in-store bakery and retail channels and lower griddle sales in retail channel. Retail griddle sales has declined for the past three quarters as a result of the leading brands return to shelf with significant promotional spending after a significant absence a year-ago. Volumes did benefit from a new product for our major restaurant chain in the foodservice channel.

Segment operating profit for Frozen Bakery Products was up 17% due to the acquisition of Refrigerated Dough. Excluding this acquisition, segment operating profit decreased 29%, driven by lower volumes in the retail and in-store bakery channels, higher input costs primarily flour, oil, freight, higher research and development expenses related to new product initiatives and unfavorable foreign exchange rates, which were only partially offset by improved selling prices.

The segment profit contribution from Refrigerated Dough acquisition totaled more than $10 million for the quarter and $26 million for the first half of the year. We’ve been very pleased with the performance of this acquisition today. As we look through the back half of the year, several factors should drive sequential improvement in the segments profit performance. These factors include improved net selling prices, a continue decline in key input costs, new product launches in both the foodservice and retail channels.

Turning next to our Cereal Products segment. Net sales increased to 11%, driven by higher selling prices in volume growth. And with all of our segments, higher selling price that were taken in an effort to counteract the increases in input costs. In stark contrast, the Ralcorp’s other segments, overall volume increased 3% with solid performance in ready-to-eat cereal up 5% in volume with hot cereal and nutrition bars each up 6% in volume. These increases were the result of retailer’s strong promotional programs, expand the distribution attributable to our Bowl Full of Change initiative and new product sales. Segment operating profit for Cereal Products decreased 10%. As Kevin stated earlier, we experienced manufacturing inefficiencies at our Bloomfield facility, as the company rescaled its manufacturing operations.

During the quarter, we closed one facility as we opted to our relinquish business that did not meet our margin requirements. The remaining production was shifted to its second facility and we expect that facility’s operational metrics should improve in the fourth quarter. These inefficiencies were partially offsets by the impact of improved pricing in higher volumes, which were partially offset by higher input costs primarily oats, corn and wheat. While we fully expect to correct these operating issues, we are cautious about the timing of these improvements and anticipate that segment operating profit for the full fiscal year will be negatively affected by the manufacturing issues at Bloomfield.

Moving on to our Pasta segment, net sales were up 11%, volume fell 1%. Excluding the effect of the Annoni acquisition, we completed at the end of the last quarter, sales rose 9% due to higher net selling prices partially offset by 3% lower volumes. Volume declines were primarily driven by lower ingredient sales then private-brand volume also declined.

Segment operating profit for the base business decreased 31% due to significantly higher input cost and the impact of lower volumes, which were partially offset by increased selling prices. We utilize durum and semolina wheat inventory that were purchased on forward contracts in late 2011 at prices that are significantly higher than current market levels. Domestic durum wheat production in 2011 was the lowest in 20 years and we entered in the forward contract to ensure sufficient inventory to meet customer commitments. As these higher cost inventories are exhausted in the second half of 2012, the Pasta segment should return to historical operating profit margins.

Now, I’d like to discuss some Ralcorp’s financial information at the consolidated level. Adjusted gross profit margin decreased from 22.9% to 20.7% due to the following factors. First, the increased pricing that we’ve implemented during the quarter only cover the absolute dollar amount of the input cost inflation does driving down the gross margin percentage by 200 basis points. Secondly, gross margins were also reduced by 100 basis points due to manufacturing inefficiencies and fixed cost absorption caused by lower volume. Finally, these declines were partially offset by 100 basis point improvement due to the positive impact at a higher margin, Refrigerated Dough product.

Shifting to selling, general and administrative expenses, SG&A rose as a percentage of net sales from 10.3% to 10.9%. However, the increase in SG&A is overstated because of the Post transition services agreement costs that are recorded in SG&A but the billings for those costs are recorded in other operating expenses, net. SG&A is also being negatively impacted by higher divisional and corporate expenses.

Our accelerated cost reduction program, or ACR, remains on track producing additional $80 million to $100 million of operating profit over the fiscal year 2012 to 2014 with most of the savings expected in 2014 and continued savings thereafter. Capital expenditures continue to be forecasted at between $115 million and $135 million of capital over the next two to three years to complete the project associated with the ACR program. We’ve already approved several significant capital project and we remain optimistic about our plan. Our financial flexibility remains strong. As you know, we’ve received approximately $900 million in cash in the spin-off of Post, of which $815 million was used to pay down debt. Ralcorp has no debt pre-payable at par after receipt of these proceeds from the separation of Post.

With the spin-off of Post, we now report Post as a one line item entitled Discontinued Operations on our income statement. Second quarter results include the full ownership of Post through February 3rd and will include our approximate 20% ownership after that date until the remaining stock is liquidated. Current market value of our 20% ownership stake in Post common stock has a market value of approximately $200 million. We intend to monetize that equity holding in a tax efficient manner and we’ll continue to evaluate the best ways to deploy capital, including the use of these proceeds to aggressively pursue private-brand acquisitions and repurchase additional shares under the company’s remaining 5 million share repurchase authorization. We believe these uses of cash are in good way to continue to deliver value back to our shareholder.

Now let me comment briefly on the restatement. We continue work on completing our review in conjunction with our external auditors. There were also amending guarantor’s financial statement footnote as a result of our review. We would expect to file our amended financial statements within the next one to two weeks. Finally, we have taken actions to strengthen our internal controls to ensure that this issue did not recur.

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

Kevin J. 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. Our outlook for cost inflation has moderated a bit from last quarter, when we share that we expected inflation to be in the 10% to 12% range for fiscal year 2012. Now with lower volumes and the resulting lower usage, the absolute dollar inflation is expected to be at the low end of our range.

In dollars, we estimate this to be about $320 million in ingredients, packaging and freight. The largest components of these higher costs continue to be driven by snack nuts and durum wheat, which represented more than half of that inflation estimate. Excluding those commodities, we expect cost inflation to be approximately 5% for the year. To put this in perspective in quarters one and two, our inflation costs were around $200 million though we’ve incurred nearly two thirds of that inflation already. The balance of the inflation will begin to decrease in quarter three and then step down further in quarter four.

As a reminder, our policy calls for six to nine months of forward coverage in our major commodities in order to meet volume and customer requirements. While spot prices may already have receded, we are cycling through contracted inventory after which we will be able to get into our more recent lower cost contracts in the back half of the year.

As we look to 2013, we expect the moderation in the input cost inflation to continue to accelerate as we go through the year. This is particularly true as we look at durum and snack nuts. Overall, this should result in our ability to get our pricing and input cost equation back into equilibrium and that improved margins versus what we experienced in the second quarter of this year.

Volumes are likely to remain challenge in the short-term for both the industry and for our business. However, we would expect this to moderate as we get into fiscal year 2013 for few reasons. One, the sticker shock of higher retail prices experienced so far this year should we see it as we fully left the high promotion periods that took place in calendar 2011. Two, with input cost moderating on a sequential basis, so should retail prices which should help volume overall and for us provides stable pricing in private-brand and in our price gaps. We also expect to see continued migration of volume into alternative channels, which is a net positive for us, even our strong representation in these channels. This will be enhanced in our cookie business with the acquisition of the Petri Cookie Company.

Finally and very importantly as things stabilized on the pricing cost front, the industry can return fully to programs that stimulate growth, particularly with new products by both national brands and private-brand. New products and innovation continue to be a focus in Ralcorp. And in 2012 we have launched for our launching a number of initiatives across our business. Let me call out an example of this in each of our four operating units. In our Cereal Products segment, we are implementing a comprehensive restage of our ready-to-eat cereal line based on improved health and wellness which we call Bowl Full of Change. In Frozen Bakery, we’ve developed the unique toaster strudel line that began shipping in April and it is the only private-brand offering of this type. Our Snacks, Sauces & Spreads unit is in the process of rolling out a new corn based salty snack product for dipping, which is again the only private-brand item out there.

An AIPC introduced a 100% Whole Grain Pasta line in its regional brand portfolio this year and we’ll be rolling this out to private-brand customers in fiscal year 2013.

All have been well received and are great examples of Ralcorp’s commitment to working with our customers and growing private-brand. It’s hard to predict when this volume situation will get better for sure, but there is certainly a case for improvement here as prices and input cost moderate over the next year and the industry can focus on business building programs like the ones I just talked about.

Now, let me shift to a discussion of cost reduction programs, which are centered on three important elements. First, correcting the operational issues we have had at Bloomfield as a top priority. We have the resources in place to make that happen. Second, we will continue to focus on achieving synergies from acquisitions. Fiscal year 2013, we’ll see a full year of synergies from the Refrigerated Dough acquisition. And although we expect to see most of the Petri acquisition synergies in year two of ownership, we should begin to see some of those late in 2013.

Third, our accelerated cost reduction program is in full swing. As you have seen, we have closed our Oklahoma cracker facility, which we expect to generate between $10 and $12 million in the savings annually and this transition is going smoothly. And as Scott mentioned, we continue to expect savings from our ACR projects into 2014 and beyond. I should also mention that we view the ACR process as a continuous one and are actively developing cost reduction measures of this type.

Finally, we are confident and very enthusiastic about our long-term growth strategy and the private-brand opportunity. Private-brand continues to be a great place to be. It’s a $100 billion industry that has grown steadily over the years, but still remains fragmented. This presents significant opportunity for further consolidation and acquisition roll up.

We have a strong and disciplined track record of finding and integrating private-brand acquisitions and this continues to be a major focus for us throughout the company. We participate in multiple categories and channels and therefore have a wide umbrella of potential acquisitions to evaluate. And we continue to see an active pipeline of transactions across our businesses. Like the Petri Baking acquisition, bolt-on acquisitions are the most active ones we’re seeing in the near term and these tend to be smaller but with high relative synergies, but we’re also looking at other opportunities.

You can never guarantee if and when acquisitions will happen, but they are out there and so are we. Ralcorp is uniquely positioned to benefit from the secular growth of private brands with the largest player in private brand food overall and in most of our individual categories. The dynamics supporting private-brand growth, consumer preference, high quality products, increased importance of private-brands to retailers and retailer consolidation continue to represent a major opportunity for Ralcorp. These will be bumps along the road, this is true of any business but over the long-term Ralcorp’s fundamental growth strategy is the right now and we have the capability to make it happen.

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

Question-and-Answer Session

Operator

The call is now open for questions. (Operator Instructions). Your first question comes from the line of Andrew Lazar with Barclays.

Andrew Lazar – Barclays Capital

Good morning everyone.

Kevin J. Hunt

Good morning, Andrew.

Andrew Lazar – Barclays Capital

I guess I start off, it seems this quarter they’re certainly was one where there was I guess sort of maximum pain on a number of fronts including weaker volumes, peak input costs, not being able to get through as much as prices you would have like and certainly executional issues on top of everything else that you talked about. And I realize some of this clearly believed into the fiscal second half as well. So I guess what would be very helpful to me and you covered a little bit of this in your prepared remarks with, would you really trying to quantify some of these key discrete items that hurt you this year that a go away next year.

Really trying to get a better handle on numbers for ‘13 from an EPS perspective and maybe a starting point would be some of the discrete costs on a more angular basis that you talked about in terms of inefficiencies and what not they’d go away. Based on spot prices today, where would you anticipate costs would be for 2013? Even if it’s just directionally up, down, magnitude kind of percentage wise range would be helpful.

And then maybe your view of all the sort of accretion and potential for even an accelerated, I guess, accelerated cost production program specifically for ’13 because there’s a lot of moving pieces I realize and I want to try and get them all together on my head to get a sense of whether well numbers have to come down fairly dramatically for ‘12. It doesn’t seem like that would be the case for ‘13, but I want to get a sense if I’m on the right track. That’s a lot.

Scott Monette

Yeah, that’s a big question Andrew, this is Scott. Let me start and then Kevin can jump in. So I guess if you dissect the quarter, volume was clearly the biggest driver in the process change that had a $10 million impact, so that’s the starting point. I think the second item to highlight is manufacturing inefficiencies. $7 million is what we saw in total, of that $5 million was specifically related to Bloomfield. So I think those are the two most important changes quarter-over-quarter that that negatively impacted segment operating profit. And I guess if we look at the commodity environment, I’ll highlight several of these. As we noted in the script, peanuts and durum wheat represented approximately half of our overall inflation for the period. Durum had a peak of $18.50 a bushel now it’s about $10 of bushel.

Peanuts had a peak of about a $1.20 a pound, now it’s a $0.90 a pound and falling. Wheat is down 15% to 25% year-over-year depending on what class of wheat you’re looking at. So there is a very clear pathway based on at least those three which are large for us, inputs to see improvement into our team. So I would say we would focus first on correcting the Bloomfield situation. Obviously as Kevin noted, we have the resources in place, we have an operating team in place to make sure that happens. We have done that before. We successfully executed the Poteau Plant closure. I would also note that we’ll see a four year synergies in the Refrigerated Dough acquisition and we will see most of the synergies in the Petri acquisition also slow in year two.

I would also note as you noted as well, the accelerated cost reduction program which we remain confident around. As Kevin noted, there is the Poteau, Oklahoma cracker facility that we closed in which will generate between $10 million and $12 million a year in annual savings. And as part of our ACR program, so we always look for additional costs and that is our history. So hopefully that gives you the background.

Andrew Lazar – Barclays Capital

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

Kevin J. Hunt

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

Andrew Lazar – Barclays Capital

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

Kevin J. Hunt

Well…

Andrew Lazar – Barclays Capital

I’m trying here.

Kevin J. Hunt

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

Andrew Lazar – Barclays Capital

Thanks so much for your answers.

Kevin J. Hunt

Okay.

Scott Monette

Thank you, Andrew.

Operator

Your next question comes from the line Jon Feeney with Janney.

Jonathan Feeney – Janney Capital Markets

Good morning guys. Thank you.

Kevin J. Hunt

Good morning, Jon

Scott Monette

Good morning Jon

Jonathan Feeney – Janney Capital Markets

Just a couple questions. First, in terms of this, it seems like the brands may be gained a little bit of share back by lagging prices as you mentioned. It seems like private-label pricing might have been a little bit more pronounced this quarter. And I wonder between measured, non-measured, I guess more stuffs getting measured these days, but is there any trend in channel performance for private-label relative to brands across your 22 category? Much differential for like you know good in clubs, bad in traditional retail, et cetera. I think you called out some strength in, what appears to be traditional retail around Bowl Full of Change. But is there any specifics you give us in channel, relative performance between measured and what’s historically been described as non-measured that would be helpful?

Kevin J. Hunt

Yeah again I would say in measured channels, Jon, which would include our mass merch here, if you look at out on our 52 week basis, private-label share is pretty much flat. I mean again this is just looking at it over the last 52 weeks. And you have to bear in mind that private label did take, in general, more quicker pricing as we looked at this commodity run up in ‘11. And it has taken on a percentage basis more, but overall for that period we’re looking at a pretty flat share situation. As it relates to non-measures and again in this case I would be talking about the limited assortment environment as well as dollar stores. They are as you know predominately private brand, we as a supplier will have our ups and downs with them because they would bid a division out here and there, but generally it is a positive trend. They are growing they are predominately private brand and there is definitely grows there.

Jonathan Feeney – Janney Capital Markets

Okay

Scott Monette

This is Scott, I just add couple of things here. If we look over the last six, 13 week period private label has gained share in four of those six periods. So I think it is a recent trend that we certainly saw in the last quarter and we also sawed in last summers 13 week period, but I don’t think to Kevin’s point I don’t think there is anything that’s sustained I think just the opposite is happening really that the private label has grown share during most of these periods.

Jonathan Feeney – Janney Capital Markets

Good to hear, thank you. And just secondly Scott you mentioned in your portion of the prepared remarks that how you expect improvement in the pasta business with the normalization in some of the – I guess getting cost but more towards spot durum. But I look back over the long sweeper history, what gives you so much confidence that pasta business can improve margin, because if you go back to the late 90s in this business this type of margin was maybe more typical. We covered some of this in that time of the acquisition but, do you have any – what gives you so much confidence that the structure of the business is really did change so much in the past couple of years that can sustain that your 20, 20 plus type margins that has largely sustained since you’ve bought it, I mean what gives you that confidence?

Scott Monette

Sure. John, this is Scott. So let me start here, so I would highlight that the first part of your question, which is we are, we were concerned going into the year, about the supply of durum. As I noted the lowest inventory in 20 years, so we wanted to make sure, we had a sufficient supply of durum. So in contrast to our normal process, we extend the coverage to protect our supply commitment and obviously during this most recent period durum prices on the stock market have fallen. So that presents a significant difference between our current cost of durum and the stock markets, that will resolve itself as we move through the rest of 2012, so we are very comfortable that the cost of business and gets back on more normalized margin structure as we move through the rest of the year.

In terms of the sustainable margin, you’re right I will highlight, I will highlight one thing that it’s certainly a lot different from the time period you specifically referenced, which is industry capacity. We did a lot of work around during our due diligence around capacity within the industry. And we have seen a significant reduction in the capacity in the industry. So that is the fundamental change, I would also highlight the various entry in this business are significant, there are enormous amount of capital that goes into these production facilities and production lines. So I would highlight those two items as important factors in terms of the sustainable margin being more in the 25% low-to-mid 20, EBITDA margin, that we focused on when we made the acquisition probably expect.

Kevin J. Hunt

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

Jonathan Feeney – Janney Capital Markets

Very well, thank you very much.

Kevin J. Hunt

Okay John.

Scott Monette

Thank you, John.

Operator

Your next question comes from the line of Robert Moskow with Credit Suisse.

Kevin J. Hunt

Hi Robert

Robert Moskow – Credit Suisse

Hi, how are you doing?

Scott Monette

Good morning, Bob.

Robert Moskow – Credit Suisse

I think when your comments was that, that retailers were also anticipating that commodity cost or kind of rolling over here and that hindered the ability, the ability I think to get full pricing. So if they're already anticipating the roll over in commodity prices, how quickly do you think, you and other manufacturers are going to start having to do that for them I understand that this going to past us seems to have some unique competitive advantages for you but there is a lot of other categories here so, when should we expect your pricing to start to turn negative again.

Kevin J. Hunt

Rob, its Kevin I think again there would be hard to predict that exactly but I think in general there is no question that we have this big run up in ’11 lots of pricing win in both all sides of the equation there and people know that we are at least off of those highs, we are seeing a moderate commodity environment. So we’re basically as we go through the typical private brand things like bids and things of that sort. We have our point of view on what that cost basket is going to look like in the out quarters and into our best assumptions on 2013 and we are pricing accordingly.

I reference 2007 through 2009 and even into '10 when we, there were some differences, it was a more dramatic run up then an a much more dramatic deflation there, but we as an industry as we kind of as that as we came out of that run up and then came into the deflationary period. There were pricing was reduced, but it was more than offset with the decline in the commodity. So it’s a case by case basis, doesn’t all happen overnight but we have a view towards what the out quarters and the year '13 looks like and that’s how we are basing this.

Robert Moskow – Credit Suisse

Kevin, do you think a lot of this depends on what the brands decide to do with their pricing?

Kevin J. Hunt

I think certainly what brands decide to do with pricing can have a major effect and I would go back to sort of that 2010 into '11 period, when we really saw, what was a very aggressive branded sort of more or less across the spectrum. I don’t think that worked, I don’t think that was a good experience it didn’t do a whole lot for the tonnage within the categories. And nobody made a whole lot of money on this, and I would point out, that includes customers. I've had many, many customers as we talked about this whole situation, who they didn’t make any money on all of this very aggressive promotions either.

So this time around, we’re not seeing the same kind of very dramatic deflation, we’re not seeing at least at this point, we’re always see in promotions out there in the categories. But we’re not seeing the deep, deep, deep kinds of things that we saw back in that period. So we just don’t see at this point that there would be a return to promotional levels and frankly a return to a program that really did not in our opinion work well.

Robert Moskow – Credit Suisse

Okay. Let me ask one more question, do you guys provided a very helpful bridge to 2013 explaining why profits can rise I think pretty dramatically I am getting like mid teams operating income growth for '13. I wanted to know about ACR, you announced about a year ago $80 million to $100 million of savings, but most of it in fiscal '14. Is there anything you can do to speedup that program, you’ve been working on it for a year so far you’ve just mentioned this Oklahoma plan is there anything else that you might be able to go forward?

Scott Monette

Rob. Hi, this is Scott, I would highlight the Oklahoma facility that’s a big change from our standpoint and as Kevin noted, we will deliver between $10 million and $12 million a year in annual saving. So that’s a meaningful amount of money that we’ve been able to accelerate. I would also highlight the synergies that we will continue to achieve from the Refrigerated Dough a full year of synergies and increased synergies primarily driven by our move, as Kevin noted, off of the transition services agreement with Sara Lee in our second year which would obviously be fiscal ’13. We also have additional synergies from the Petri acquisition that will occur in our fiscal ’13. So we are constantly looking for more opportunities for cost improvement as Kevin said, the culture here is cost reduction and that is our history. So we will continue to look and try to accelerate where possible.

Kevin J. Hunt

Well, Rob just one thing I’d add to that just real quickly, I will use the cracker situation, and – this gets to be a sensitive area, but quite a bit of the ACR thing revolves around reconfiguring our operating infrastructure and plan structure and these things frequently involve a lot of dominos that you shut a line down here and there so. Again we are – it’s a good point, I mean, we are trying to pull these up as quickly as we can, but you sort of get into this what you have to. You don’t want to it’s kind of a very detailed timetable.

Robert Moskow – Credit Suisse

I understand.

Kevin J. Hunt

Yeah.

Robert Moskow – Credit Suisse

May be Scott could you quantify for us what the savings are going to be in ’12, ’13 and ’14 so we can kind of model in the incremental impact?

Scott Monette

Rob, this is Scott. We are not prepared to do that at this point in time.

Robert Moskow – Credit Suisse

Okay, all right. Thank you very much.

Scott Monette

Thank you.

Operator

Your next question comes from the line of Alexia Howard of Sanford Bernstein.

Alexia Howard – Sanford Bernstein

Good morning everyone.

Kevin J. Hunt

Hi Alexia.

Scott Monette

Good morning.

Alexia Howard – Sanford Bernstein

Two questions, firstly, you have mentioned dollar stores a couple of times on the call so far, I’m curious about what percentage of your products overall are going through dollar stores and which product they are doing particularly well in that, it is a snack bar thing, it is a cereal thing, where you get, where you pushing that opportunity?

Scott Monette

Alexia, this is Scott. I would say that, I not sure we’re willing to highlight dollar stores by themselves, but alternative channel stores would be approximately a third of our total business. So that has been as Kevin noted a real driver of growth and dollar stores have certainly been highlighted that as well.

Alexia Howard – Sanford Bernstein

And which product if you could focus on the dollar stores without giving numbers, it was in the dollar stores segment which types of product they’re doing the best? Is it cookies and smaller…

Scott Monette

Actually, yeah, I would say cookies and crackers are probably, we have a more developed presence within dollar stores within that particular segment. We’ve got our presence in almost all of our categories and but that one would be probably the most noteworthy.

Alexia Howard – Sanford Bernstein

Great and then just as a follow-up, you have talked earlier about general weakness in volumes in the cereal category, when you take into account measured and non-measured channels obviously your own volumes are doing quite well in that. Can you speculate us to what might be going on in the cereal category? Is it simply a matter of price elasticity? Or is there a migration, is it something going on with where consumers going elsewhere I’m just curious.

Kevin J. Hunt

Well, specifically, we I think our RTE cereal performance is a good story, our volume when the quarter was up 5%, and if you look at the IRI information, it’s been a good story around private brand. I would attribute a big part of that to our Bowl Full of Change which is again it was a comprehensive restage of the entire product line and what that has done for us is that it’s done really two things one is we’ve gotten a lot more promotional support from our retail partners because this is a chance for them to sort of push their retail brand with very good news around health and wellness. And it’s also allowed us to fill out our distribution voids. So I would say it’s been a good story and one that that sort of stands out in the quarter.

Alexia Howard – Sanford Bernstein

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

Kevin J. Hunt

Okay, thanks Alexia.

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 J. Hunt

Hi, Amit.

Scott Monette

Hi, Amit.

Amit Sharma – BMO Capital Markets

Scott, you mentioned $7 million of operating or manufacturing efficiency impact. Is that all one-time and gone or should we expect some of that lingering effect in the third quarter and fourth quarter as well?

Kevin J. Hunt

Right, so Amit of the $7 million, $5 million is specifically related to Bloomfield and then we do see that continuing into our third quarter and should be more effectively resolved in the fourth quarter of our fiscal year.

Amit Sharma – BMO Capital Markets

Got it. And the Frozen Bakery, the base business profitability, profit down 29%. Can you just help us to understand how much of that is commodity pricing, mismatch and how much of that is just deleveraging from lower volume?

Kevin J. Hunt

Yeah, Amit this is Kevin, the frozen business really sort of went through the same, was effected by the same kinds of factors I would say in general that we saw throughout the business. They evolved around very, very high year-over-year cost in the quarter resulting some short falls and then our difficulty getting prices and in some cases in our in-store bakery part of that business just having to do more trade dealing which is effectively a pricing action. Again, as we are looking at Frozen as well as the general situation, we expect that to improve as costs moderate and we like this business a lot. There is a lot of really good innovation. One of the things that stung us a little bit in the quarters, we had high R&D costs I would say our foodservice business is really kind of turned around there. We’ve got a little bit better trend in foodservice, but a lot of good new product work there particularly in the quick serve area. So we still very much like where the business is headed but I would say the answer to your question, they were affected in the quarter very similarly to what the rest of the business was.

Amit Sharma – BMO Capital Markets

Great. And one final question, Kevin, the Oklahoma cracker plant, I mean that’s a good example, but the other segment that I was looking for some sort of rationalization is Snacks, Sauces and Snack Nut business. And that’s a business where traditionally commodities have had a greater impact and you’ve had difficult time matching in the segment. Is that a focus of some sort of capacity rationalization or a decision to maybe exit some of the categories where margins are not good and you always have trouble with pricing?

Kevin J. Hunt

Yeah, let me just talk about snack nuts a bit, I mean again clearly, you’re right I mean the commodity run up has affected us and the industry. We still look favorably on the snack nut business for a couple of sort of longer term macro reasons. Number one although volumes are down in the last year, we attribute that to the run up in retails. It’s on the right side of the health and wellness trend as a category. Two, again similar to the Pasta business that private brand has a very high percentage of the business. I mean, this can change every now and then but we are probably number one in general or have been overtime. And then we have a very strong position within that private brand universe, we are the number one private brand supplier. And we have rationalized facilities again if this goes back a while, but we actually had three facilities and we closed one in Georgia, closed one in Massachusetts, consolidated that into a quite a large plant in Dothan, Alabama, which is where obviously peanut source is now. We still operate a second facility in El Paso Texas, which was part of the…

Scott Monette

Harvest Manor…

Kevin J. Hunt

Our Harvest Manor acquisition that we did a couple of years ago. But I think it’s a fair point we’re constantly looking at ways to optimize production around that business. But in general, if there is no question, there is volatility within the commodity piece there but we still think it’s a good business.

Amit Sharma – BMO Capital Markets

Great, I appreciate it. Thank you very much.

Kevin J. Hunt

Thank you, Amit.

Operator

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

David Palmer – UBS

Good morning guys.

Kevin J. Hunt

Hi, David

Scott Monette

Good morning, David.

David Palmer – UBS

Good morning. Kevin, you mentioned and there’s been talk and just call about volume trends and how that’s worse for Ralcorp and also for the industry. People have to eat out there, I’m wondering do you have any thoughts about why this cycle seems to be a little bit different than the ‘08, ‘09 in that people haven’t seemingly traded down to private label as much. What are your thoughts about that?

Kevin J. Hunt

Well, again, I think I don’t think we’re really alarmed that maybe it isn’t quite as dramatic as maybe in the ’08 or ’09 period. I think the one thing I would say David is that, and particularly over the last couple of quarters. The amount of private brand pricing that has, that has gone in has been significant. In some cases, that has affected the gaps, although that usually even just way out and brands have also taken pricing. So I, we if you look at sort of our consumer and even national brands rely on sort of a franchise, if you will, or heavy users, and when people see that the prices go up like they have. We could – we’re going to see some, some pantry de-loading just like any, any other brand would. So I think that’s, that’s been a factor but again as we’ve said, the cost moderating and things get back into equilibrium, we would expect this to get to a more normalized level.

David Palmer – UBS

I guess relatively, we’re beginning to see at least it looks like in the data broadly across the industry that the promotions are going up for the branded guys. Maybe not to the degree that they did last time in the second half of ’09, you saw those promotions go up as a way to dial back the prices, or rollback the prices more immediately as the input cost relief was happening. It doesn’t seem like the volume is improving, for those branded players yet, but do you see a risk of that price GAAP to branded maybe narrowing here in the second half. And is that something of a mitigating factor as you look into potential margin relief in the second half?

Kevin J. Hunt

Well, we certainly – they are certainly still promotions out there and, we’re seeing as we always do that to be the case across the categories. But as you said, we’re just not seeing that really dramatic level of promotion that we saw a couple of three years ago. We gets again overtime tend to get back into equilibrium, you will see differences from quarter-to-quarter as pricing goes in on private brand or differences in timing. But, I’m not seeing anything out there that would tell me that gaps specifically would be a problem in the second half. Now if they would have people get really, really, really crazy aggressive that could change. But at this point, we don’t really see that.

David Palmer – UBS

Great, thanks guys.

Kevin J. Hunt

Sure.

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 remarks.

Kevin J. Hunt

Okay. Well thank you everyone for joining on our call today. And we look forward to update you on our business and after the next quarter. Thanks again.

Scott Monette

Thank you.

Operator

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

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