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Ralcorp Holdings, Inc. (NYSE:RAH)

F3Q12 Earnings Call

August 8, 2012, 8:00 a.m. ET

Executives

Matt Pudlowski – Director, Business Development

Kevin J. Hunt – President and CEO

Scott Monette – Corporate VP, CFO

Analysts

David Palmer – UBS

Christopher Growe – Stifel Nicolaus

Robert Moskow – Credit Suisse

Alton Stump – Longbow Research

David Palmer – UBS

Heather Jones – BB&T Capital Markets

Bill Chappell – Suntrust

Amit Sharma – BMO Capital Markets

Operator

Operator

Good morning, ladies and gentlemen. Welcome to the Ralcorp Holdings third quarter fiscal year 2012 earnings conference call and webcast. (Operator Instructions).

I would now like to turn the call over to Matt Pudlowski, Director of Business Development at Ralcorp Holdings. Please go ahead.

Matt Pudlowski

Thank you, Jackie, and good morning everyone. Welcome to today's conference call to discuss Ralcorp's financial results for the third quarter.

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 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. While Ralcorp takes no obligation to publicly update any forward-looking statement, whether as a result of new information, future events, or otherwise, forward-looking statements in these remarks should be evaluated together with the many risks and uncertainties that affect Ralcorp's business, particularly those mentioned in a cautionary statement in today's earnings press release and the period reports filed by Ralcorp at the Securities and Exchange Commission.

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

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

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

Kevin Hunt

Thank you, Matt. And good morning everyone.

I'll start the call with a brief review of our quarterly results and provide some color on buying trends we are seeing internally and in the industry. I will then discuss a significant organizational change we are making here at Ralcorp as well as Bloomfield's performance. Scott will follow with a detailed review of our segment performance. And I'll close with our outlook for the remainder of fiscal 2012 and fiscal 2013 as well as a few general points about the business.

Starting with our performance, Ralcorp's third quarter adjusted diluted earnings per share from continuing operations was $.60 versus $.51 per share last year or an 18% increase. Earnings per share were adjusted for a number of items that were highlighted in the press release this morning. For the second straight quarter, we were able to offset raw material inflation with a benefit of pricing and mix. Our performance was also driven by a combination of acquisitions, lower corporate expenses, and lower interest expense.

The acquisitions of refrigerated dough and Petri added $.03 of accretion in the quarter. The four acquisitions, Refrigerated Dough, Annoni, Petri, and Gelit, we have completed our all on track to reach or exceed their accretion targets for the year.

The largest of these acquisitions, Refrigerated Dough, is highly seasonal and the third quarter is historically the troth in the cycle that consumers do less at home baking during the warmer months. We still expect Refrigerated Dough to generate between $.34 and $36 cents of GAAP accretion. And between $.54 and $.56 of cash accretion for the fiscal year.

We are very pleased that our growth through acquisition strategy has continued to deliver positive results for us this year. The process of finding, acquiring, and integrating acquisitions is complex; through I'm proud of what we've accomplished in this area.

Excluding the impact of acquisitions, adjusted segment profit totaled $89 million for the third quarter of fiscal 2012 compared to $97.7 million for the same quarter in fiscal 2011, which is a decline of $8.7 million. The primary factor contributing to this decline was a negative performance at our Bloomfield Bakers operations, which accounted for $8.2 million of the year-over-year change in the quarter. I'll discuss our strategy with Bloomfield later in the call.

Now let me make a couple comments on volume both for us and for the industry. Volumes grew by 2% in the quarter as a result of the Refrigerated Dough and Petri acquisitions. Because of timing, Annoni and Gelit had a minimal impact on year-over-year results. Our base business volume is down 6% this quarter compared to the same period last year driven primarily by the loss of the [inaudible] at Bloomfield and sharp decreases in consumer purchases of peanut butter and snack nut products due to the price inflation. To give you a better feel for how the base business is performing, if we exclude those specific factors, base business line was down 2%.

For the food industry as a whole, the overarching theme that we continue to see is volume softness across the board driven by significant year-over-year price increases. To that point, for our 22 categories in the 12 week period ending July 15th for all outlets, overall category volume is down 4%. And private brand volume is off 7%. The key driver in these declines continues to be the overall increase in pricing for the categories in total for private brand in particular. However, private brand dollar share was even compared to the same quarter last year. As we left price increases from last year, we would expect to see these volume trends improve.

Before turning this over to Scott, I'd like to cover two additional subjects, the strategic restructuring which we announced last week and the Bloomfield remediation plan.

First let me turn me turn to our strategic restructuring. Ralcorp's dry grocery re-private brand business is currently composed of three operating units. Ralcorp's cereal products is our legacy private brand ready-to-eat and hot cereal business. This business had been linked operationally with the Post branded cereal business under Ralcorp's ownership of Post. With the spinoff of Post, this again became a separate business.

Our second dry grocery business is the snack, sauces, and spreads unit, which is the result of 16 acquisitions and integrations. Ralcorp's snacks, sauces, and spreads competes in 14 dry grocery categories. In the fall of 2011, this division completed a consolidation of five different sub-segment headquarters into out St. Louis headquarters. Ralcorp's snacks, sauces, and spreads now operates with a single central sales, marketing, operations, and finance team.

Finally, our pasta business that we acquired in July, 2010, has continued to operate as a stand-alone business headquartered in Kansas City.

Effective October 1st of this year, we will consolidate these three business units into a single center store private brand food business. This unit will be led by Rich Koulouris, currently Corporate Vice President and President of Ralcorp's snacks, sauces, and spreads. Rich successfully led the consolidation project in snacks, sauces, and spreads. So he and his management team are experienced in these efforts. The business will be headquartered in St. Louis. And the Kansas City office will be closed at the end of the calendar year. The management team of this new business will include key leaders from across the cereal, snacks, sauces, and spreads, and pasta operating units.

Let me take a step back and explain the strategic rationale for this change and the benefits we will gain as a result. As you know, Ralcorp is the largest private brand food manufacturer in North America. We compete in 22 categories. And have the number one or number two share in 18 of these. The dry grocery private brand business will have $3 billion in sales with superior scale capability. We possess significant category knowledge and value added capabilities. And will effectively manage the category management tools and consumer insights data that are critical to helping our customers grow. We will also have an unmatched private brand national supply chain.

This new organization will allow us to take full advantage of our scale resulting in a leaner organization that will have one set of processes across all functions including sales, marketing, customer service, research and development, logistics, and operations. This streamlined structure is intended to enable the new segment to operate effectively and efficiently. And provide the highest level of quality customer satisfaction and service. We believe this new structure will enhance working relationships with our customers. And create a more focused approach to the marketplace.

We are instituting a national account structure whereby we will form regionally based customer sales teams that will call on buyers of their products within a company eliminating overlapping sales calls to the same buyer. This will allow us to create simpler standardized internal processes and make it easier for our customers to do business with us.

Further, we plan to provide more resources where needed, be more responsive to our strategic customers, and easily assimilate new product offerings and acquisitions in the future.

In addition to the strategic advantages of this new organization, we will also realize significant cost savings. The new organizational structure is expected to result in savings of between $26 and $31 million in fiscal 2013. We are also expecting incremental savings from the restructuring that will flow in fiscal year 2014.

This initiative is incremental to our ongoing accelerated cost reduction program. And the restructuring is expected to result in a one-time expense of between $17 and $22 million consisting of employee separation and related expenses. Half of which we expect to record in fiscal 2012 with the other half in fiscal 2013.

Now let me turn to Bloomfield. Since the end of last quarter, the new team we have inserted into Bloomfield has made progress in identifying and resolving operational issues. And we are confident that they will continue to make headway here. From previous experience, a turnaround of this type can take anywhere from six to eight months to show improvement. We are currently four months into this turnaround. As part of the improvement plan, the team is simplifying the product complexity by shifting certain production to our other operating facilities, rescaling the business by eliminating low volume SKU's, and improving the production flow to increase throughput.

While we expect year-over-year performance will improve in the fourth quarter, we have not yet resolved this issue. We are confident that we have the right team in place. And they are executing against a comprehensive and complete plan. We still believe the growth within the nutritional bar category provides a long-term opportunity for us and one that we will be able to execute against.

With that, I'll turn it over to Scott to discuss the financial results in more detail.

Scott Monette

Thanks, Kevin, and good morning.

As Kevin stated, our adjusted EPS for continued operations increased 18% for the quarter with the gain coming from pricing and offset raw material inflation, and a combination of accretion form acquisitions, and expense control.

Our total revenue for the quarter was up 11% to $1 billion. The increase was largely due to the four acquisitions completed earlier this year. Base business revenue was up 2% due to higher selling prices. Adjusted EBITDA grew 11%.

During the first half of our fiscal year, we experienced significant raw material inflation totally approximately $200 million. For the full fiscal year, we expect raw material inflation to be $320 million or almost 10% of cost of goods sold. As we expected, cost inflation moderated during the second half of the year totally $68 million this quarter.

The most significant drivers of this cost inflation were snack nuts and durum wheat. As Kevin noted, this is the second straight quarter where pricing and mix completely offset raw material inflation, which is a significant accomplishment given the high level of inflation.

Our snacks, sauces, and spreads segment had an excellent quarter. Net sales grew 11% as improved net pricing and product mix along with the impact of the Petri acquisition more than offset a 4% decline in volume. Excluding the impact of the Petri acquisition, net sales grew 9%, which were partially offset by a 6% decline in volumes.

As we saw in the second quarter, the key drivers in this segment volume decline were snack nuts and peanut butter, which accounted for three-quarters of the segment's volume decline as a result of significant price increases.

Excluding nut based products, base business volumes were down 2% for the second quarter as strong volume growth in cookies and crackers of 9% was offset by declines in our sauces and spreads volumes.

Segment profit increased 27%, which included the impact of the Petri acquisition. Base snack, sauces, and spreads segment profit was $31.3 million, which was up $5.8 million or 20% over last year. The benefit of pricing and mix including higher sales of cookies and crackers and lower manufacturing costs more than offset lower volumes and higher input costs.

In our frozen bakery product segment, net sales were up 35% with volumes up 29% 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 3% decline in base business volumes. The volume decline was a result of aggressive competitive actions in griddle products and the weakness in the in-store baking sector, which were only partially offset by new products in our food service business.

Segment operating profit for frozen bakery products was flat for the quarter. Excluding the Refrigerated Dough acquisition, segment profit decreased 19%. Lower volumes in the retail and in-store bakery channels, negative product mix, and higher input costs offset the benefit of higher realized pricing and improved manufacturing costs.

Turning next to cereal product segments, net sales decreased 10% as volumes declined 12%. The primary driver of the decline in volume is related to the exit of a co-pack customer in our Bloomfield Bakers business. Excluding the impact of this exit, sales grew 7%.

Volumes in our retail ready-to-eat and hot cereal categories grew by 1% driven by continued support from retailer promotional programs and expanded distribution of nutritionally improved products.

Segment operating profit for cereal products decreased 36% or $8.4 million, all of the negative operating product variances attributable to the Bloomfield inefficiencies. As with snacks, sauces, and spreads, pricing and mix more than offset the effects of lower volumes and higher input costs.

Moving onto our pasta segment, net sales were up 7% and volumes down 1%. Including the effect of the Annoni acquisition that we completed in late December, sales rose 4% due to higher net selling prices partially offset by 3% lower volumes. Significant volume declines in our ingredient business and a modest decline in our private brand pasta business were essentially offset by volume increases in our U.S. branded products and our European operations.

Operating profit for the segment decreased 5% due to significantly higher input costs and the impact of lower volumes, which were partially offset by increased selling prices.

The adverse effect of above-market durum wheat contracts, and we discussed in the second quarter, also negatively impacted us this quarter. These contracts will continue to impact our results into the first quarter of fiscal year 2013.

Now I'd like to discuss some of Ralcorp's financial information at the consolidated level. Adjusted gross profit margins declined from 20.6% a year ago to 19.6% for the 2012 quarter. Margins declined in the quarter as our pricing and mix benefit only covered the dollar amount of raw material inflation.

Shifting to selling general administrative expenses, SG&A as a percentage of net sales decreased by 40 basis points from year ago quarter. Expense controls and favorable foreign exchange rates generated 50 basis points of improvement, which were slightly offset by emerging integration costs in the quarter.

Keeping with our culture of strong expense control, our accelerated cost reduction program or ACR remains on track to produce $80 to $100 million of lower operating expense over the next three years with most of the savings expected in 2014 and continuing thereafter. Capital expenditures continued to be forecasted as between $115 and $135 million in the next two to three years to complete these projects associated with the ACR program.

Our first ACR project is a closure of the Oklahoma cracker facility, which we completed at the end of the third quarter. We expect that closure to generate between $10 to $12 million of annual savings.

Our financial flexibility remains strong. As you know, we received $900 million in cash from the spinoff of Post of which $815 million was used to pay down debt. Ralcorp has no debt pre-payable at par after the receipt of these proceeds from the separation.

Our 20% ownership stake in Post common stock has a current market value of approximately $200 million. We intend to monetize that equity holding in a tax sufficient 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 or repurchase additional shares under the company's remaining five million share authorization.

Our business also generates a significant amount of free cash flow annually that provides additional flexibility. And we have $300 million in low cost committed financing available to us to help execute our strategy.

I'll close with an update on the restatement of our financials. As previously discussed, the areas of review relate to the non-cash goodwill impairment charge recorded at the end of the last fiscal year related to the Post cereal business and the guarantor footnote. Additionally, we are completing the financial statement reporting related to our discontinued operations.

Our internal financial reporting team has completed almost all of the evaluation in the past three years' financial statements. The remaining issues are of a very narrow and technical major and relate to the guarantor footnote. We continue to believe that these issues will be resolved. And the restatement will be completed in the near future. I would remind everyone that these issues are all non-cash in nature.

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

Kevin Hunt

Thanks, Scott.

Before we head into the Q&A, I'd like to take a moment to discuss our outlook for the fourth quarter for fiscal 2013 and then to recap some key investment considerations for Ralcorp.

Regarding cost inflation in fiscal 2012, we expect year-over-year input cost increases of approximately $52 million in the fourth quarter, which will bring total fiscal 2012 input cost increases over fiscal 2011 to $32 million. It's safe to say that we've had to overcome a significant amount of raw material inflation this year and we have accomplished that goal.

As far as 2013 is concerned, we provide the guidance in early July that positive results would be driven by the elimination of Bloomfield inefficiencies, our ACR initiatives, Refrigerated Dough synergies, and accretion from all of our fiscal 2012 acquisitions. At the same time, we will face headwinds from pricing fluctuations, volume loss from our Bloomfield customer and other low margin customers, and a higher tax rate.

For fiscal 2013, we provided guidance that we expect input costs to be lower than fiscal 2012 by 1.5% to 2.5%. However, the extremely hot summer and drought in the Corn Belt has resulted in a dramatic run up in corn prices in the past several weeks. Since early July, corn prices are up 23% and up over 45% since early summer. More importantly, corn is also the driver for a larger complex of key food stuff, crops such as wheat, rice, and soybeans. Wheat, which is the second largest commodity that we purchase, has risen by 17% since early July.

We continue to follow our policy, which is to remain hedged for six to nine months on all of these key commodities. The severe drought conditions have created significant volatility in the grain complex making a longer-term forecast very challenging.

At this time, we expect to have a significantly smaller benefit than we originally forecast. We are monitoring the commodity landscape closely. And we'll provide a more comprehensive outlook during our November conference call.

Now I would like to discuss our three core strategic areas of focus, sales growth, cost reduction, and capital allocation.

We have two core strategies at Ralcorp to grow sales and volumes, accretive acquisitions and organic growth. In the ten year period from 2001 to 2011, we have grown net sales from $1.2 billion to $3.8 billion, a compound annual growth rate of 12%. Fiscal 2012 net sales are projected to be $4.3 billion, an increase of 14% versus 2011.

Acquisitions have been a key contributor to this growth. During the past 15 years, Ralcorp has completed 30 acquisitions that have added more than $3.3 billion in annual sales. This strategy made sense in 1997 and it makes sense today. Private brands are a $100 billion industry. And our approximately 6% share shows how much opportunity is out there. More than half of our transactions have come through relationships in the industry. And we have a solid reputation as a good partner. That gives me confidence that our long term acquisition strategy is sustainable.

Organic growth has also been an important sales driver for us. In the same ten year period from 2001 to 2011, Ralcorp's organic net sales grew at a compound annual rate of 3.6%. There are a number of ways we drive organic sales growth. We are continually developing and introducing new products across our categories. In addition, we invest in and use syndicated data to conduct category management reviews with our customers to evaluate assortment, price gaps, and merchandizing events. The bowlful of change restage of our entire ready-to-eat cereal line is a recent example of this, which has resulted in increased distribution and improved merchandizing. The results have been strong here. Our ready-to-eat sales volume is up 3% for the nine months ended June 30th, which strongly outpaces the category.

Finally, we have generated organic growth by utilizing our sales and marketing capabilities to broaden product distribution for companies we have acquired. A recent example of this is our latest acquisition of Italian pasta maker, Gelit. This company produces a broad line of high quality frozen ready-to-eat pasta meals made from authentic recipes. These products are popular in Italy. But to date, have had a limited presence in the North America. Our objective with Gelit is to expand its North American footprint particularly in alternative channels as we expand these convenient and value priced pasta meals. This is also our first effort out of just the dry pasta segments into the much larger mega-pasta category, which we estimate is at over $7 billion in sales annually.

The second strategic area of focus is cost reduction. An important cost savings opportunity for Ralcorp is of course generating cost synergies from acquisitions. We've been very successful with our 30 acquisitions in identifying those synergies as part of the due diligence process and then delivering on them. The most recent example of this is our acquisition of the Refrigerated Dough business in October of 2011. The integration of that business into our frozen bakery unit was completed in March of this year ahead of schedule, which facilitates to realization of between $6 to $8 million in synergies in fiscal 2013.

Beyond acquisitions, we are on track to realize savings from our ACR project. And finally, we are in the process of restructuring our three dry grocery private brand businesses into a larger center store by unit. As we mentioned earlier, the annualized savings is expected to be between $26 and $31 million largely in SG&A. And that excludes one-time costs.

And the final strategic area of focus is around how can we best allocate our capital. As Scott mentioned earlier, with our cash balance, our Post stake, our free cash flow, and our borrowing capacity, we have significant firepower. We continue to focus on deploying capital for strategic acquisitions. In fiscal 2012, we completed four. The Petri and Gelit acquisitions will bring $.10 per share in accretion during the first year of ownership with greater accretion as we deliver on our synergy plan. We maintain an active pipeline of opportunities with a number of projects under evaluation across the business.

Our other priority for returning capital is through stock repurchases, which we view as a very effective and tax efficient way to return cash to our shareholders. We currently have 5 million shares authorized for repurchase. And we will continue to evaluate this as an option to deploy cash.

In summary, while there certainly have been short term challenges, we remain confident that Ralcorp is uniquely positioned. We have made significant changes to better position our business. And we will remain very enthusiastic about our long term growth strategy and the private brand opportunity.

That concludes our prepared remarks. Operator, would you please open the line for the Q&A session?

Question-and-Answer Session

Operator

(Operator instructions). Your first question comes from the line of David Palmer with UBS. David you’re line is open.

Kevin Hunt

Hello. David?

Operator

His question has been withdrawn. Your next question comes from the line of Chris Growe with Stifel Nicolaus.

Chris Growe – Stifel Nicolaus

Good Morning.

Kevin Hunt

Hey, Chris.

Chris Growe – Stifel Nicolaus

Hi, I wanted to ask you first of all, if I could, with regard to volume – obviously the underlying volumes of – for your business were better than your categories, but the categories themselves were quite a bit worse than the brands – if I’m saying it the right way. I just want to get a sense of, I think – do you tribute most of that to pricing, and I’m just trying to get a better sense of if you lapped the price increases from a year ago, and I have it in my modeling, at least some of that, or a good bit of that occurring in Q4. Would you expect kind of a commensurate improvement in volumes of where that occurs? Is that the way to kind of build in the model going forward?

Kevin Hunt

Yes – hey, Chris, it’s Kevin. I would say that, just a couple of points, two of our segments as we repeatedly talked about, are down significantly within – if you look at Neilson, and you look at the private plan, and that is in peanut butter and in snack nuts. But in general, we are seeing volume declines across the board as well as in categories, and we still have got significant pricing that at least this quarter at a year-over-year basis, you know, is – has gone in. We would expect to see, over all – you know, and again, it’s a bit of a wild card now, is the whole crop situation, but we would expect those price increases to even out, and to, you know, lap the price increases, and see an improved volume. But as I said, the wild card at this point is the corn belt situation.

Scott Monette

Chris, just one thing to add to that – this is Scott – if we look at price mix over the last couple of quarters, you know, that’s been in the 10 -11% range, this quarter was 8%. So, if you strip out, as Kevin said, the impact of nut based products, and the co-manufacturing, you know, we saw base volume than [inaudible] in the negative 2% range, which is compared to -4% in last quarter. So, I think we’re seeing it in our own result, the impact, as we continue to lap pricing, and that price mix benefit comes down, we would expect to see volumes improve. But, you know, as Kevin said, that is yet to be established.

Chris Growe – Stifel Nicolaus

Sure, thanks for the color there. I had one other question, which is in relation to 2013, you’ve outlined a number of very strong positives, and – you know, I know in that presentation that was on the website, you also indicated some headwinds, there’s always going to be headwinds of course, but I guess, I’m trying to understand, for next year, is something you still expect cost to be down, at least a little bit, maybe less than a four. And then with all of these benefits coming through, what are the headwinds that we should be cognoscente of – are there any reinvestments, or cost with the combination of the divisions? I think that we need to be, you know, aware of our modeling for ’13, because obviously there’s a pretty strong benefit coming through.

Kevin Hunt

Well, as we said, clearly, volume would be, you know, would be a, sort of, number one headwind that we’re going to have to be aware of here, and that is both for the industry depending on what happens with commodities, price increases, as well as with us – you know, we are going to be running the full year of loss of the Bloomfield customer – you know, as we have said many times, we will take a volume hit as we take pricing up to maintain our margins, and that could be a factor as well. Our tax rate is up, I think, marginally, which we have mentioned, and then I – you know, the only other thing I would say is, Chris, you know, I think we are being repetitive here, and that is where do these commodities really go – I mean, we, you know, we got – we still have what I would characterize as an unknown situation, particularly, for the back half of fiscal ’13.

Chris Growe – Stifel Nicolaus

Yes, okay. That is helpful, thank you.

Kevin Hunt

Sure.

Chris Growe – Stifel Nicolaus

Thank you.

Operator

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

Robert Moskow – Credit Suisse

Hey, thank you.

Kevin Hunt

Good morning, Rob.

Robert Moskow – Credit Suisse

Good morning, and you know, I appreciate that that there’s a lot of uncertainty here about where commodities go, but, you know, using the term, you know, unknown situation for fiscal ’13, and what is going to happen in the back half of ’13 – I mean, you can see where commodity prices are, and no one expects much improvement in the corn crop, it’s just not possible. So, how quickly can you start getting in front of your customers so that you can prepare them for, inevitably, probably some higher prices in fiscal ’13, so we don’t have this lag that we’ve always had in private label. Thanks.

Kevin Hunt

Yes, I – well, that’s a good question, Rob, and I mean, the answer is now. You know, we certainly, we need to be talking to our customers about, you know, what the overall outlook is, and we are – we are doing that. So, the intent is to minimize the lag, if it becomes necessary to take further pricing actions. Obviously, we look more toward cost, and things of that, sort as the first steps, but I think that the intent is to, you know, again, we’ve got certain positions that are meant to take some of the volatility out of the cost situation, but then to be out front, and up front with our customers if pricing becomes necessary.

Robert Moskow – Credit Suisse

Okay, is there any chance, since we’ve seen this movie so many times before, that this time around, you know, the lag might be shorter in terms of just being able to execute the pricing that is necessary?

Kevin Hunt

You know, again, that is hard to predict, that is the intent though, we would obviously like to be able to do it that way. We have been effected in some cases by extremely – you know, last year, Rob, with, you know, the run up in peanut cost, where we had dramatic – you know, a dramatic situation there in terms of supply, you know, and cost increases, but I think in general, the intent is to try to stay at least even with this, let’s say.

Scott Monette

Scott – Rob, this is Scott, just – you know, I think I it’s important to reiterate some of the things that we mentioned in this script, that, you know, the restructure that we’ve got in place, we think will facilitate this on a more regular basis in addition to providing very strong cost benefits of 36 to – $26 to $31 million in the quarter. You know, I would also reiterate other items within – they will provide us some flexibility to closure of the Oklahoma facility – there’s our first project, and our ACR program that’s $10 to $12 million – you know, as Kevin mentioned, we have the accretion from the two acquisitions that will total 10 cents. We’ve got the additional synergies from the refrigerated [inaudible] acquisition, which will be between $6 to $8 million, so we do have some flexibility within our income statement, again, where we’re not expecting all of that to fall to the bottom line. But none the less, it does give us some flexibility, and that was really one of the big benefits that we see in terms of the restructure is a simplified approach with our customers.

Robert Moskow – Credit Suisse

Okay – I agree, I think the consolidation is the right idea, and so, my last question is related to that. What are you doing to, you know, prepare the organization for this? Have you got lines of reporting all the way down defined? I think that, you know, the faster you communicate, you know, who – if there’s job cuts to be made, the faster you communicate it, the better, so there’s less uncertainty internally – what have you done to facilitate that?

Kevin J. Hunt

Yes, Rob, it’s Kevin. We actually finalized the key leadership structure about a month, a month-and-a-half ago, and in terms of down through the organization, all of those positions that remain in that, are being eliminated were announced last week. So, the [inaudible] organizational structure is out there and has been announced internally.

Robert Moskow – Credit Suisse

That’s great. Thank you very much.

Kevin Hunt

Thanks, Rob.

Operator

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

Alton Stump - Longbow Research

Good morning.

Kevin Hunt

Good morning, Alton.

Alton Stump - Longbow Research

Just to clarify that you guys are still looking for cost to decline slightly year over year, is that right for full year ’13? Or just not as much as your prior guidance?

Scott Monette

I think that’s a fair characterization Alton. You know, just given what we’ve seen over the last several weeks, you know, in terms of dramatic run up in corn and the impact that’s had on the other primary ingredients. And just to put some framework around that, you know, if you think about our basket of ingredients, nuts broadly defined, nuts would obviously include peanuts, cashews, almonds, etcetera and wheat, and that would include all classes of wheat including durum are about 50%, a little over 50% of our total purchases. So corn is significantly lower on that list, but the sympathy effect that it’s had with a lot of these crops, particularly in the grain complex, has been significant. So as we mentioned in the script we’ll continue to provide updated information, but at this point we see a significantly lower benefit than we talked about in early July as a result of these crop changes.

Alton Stump - Longbow Research

Okay, thanks Scott. Just one quick follow up to that is we’re hearing a lot of chatter in the retail channel that all the major brands do plan to take pricing at the first of next year given the fact that we’ve haven’t seen costs spike here on a spot basis the last two weeks, if that happens would there be interest on your end to take pricing early next year even though your cost for the full year might be down?

Scott Monette

Well it is going to be done by a commodity basis, but that’s just the way we always do this. So, you know, it’s helpful to look at it in total, but we also have to manage the business on segment basis and look at this by commodity.

Alton Stump - Longbow Research

Got you, thank you.

Scott Monette

Thank you, Alton.

Operator

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

David Palmer - UBS

Hey guys, I wanted to ask a question and obviously this is a bit of a touchy question because you’re not the board. But if we go back in time, less than a year ago, there was the bidding for the company and that bid was $94 for the combined entity, if you could kind of sum up what sort of value at the time the company believed was under appreciated by the market and by that strategic acquirer. And then thinking now, obviously crops aside what do you think the market still appreciates about the value, the underlying value of the private label co of Ralcorp? Thanks.

Kevin Hunt

Well David, obviously the board made it’s decision not on a short-term basis, not relative to a few quarters, it was a long-term decision, and that long-term decision was that we felt by separating the post business from the private brand business we could create significant shareholder value. As it relates to the private brand business, we continue to believe that our growth through acquisition strategy is still a fundamentally valid strategy, it’s a fractured industry, we’ve done a lot of this, we have a core competency here. We have a lot of projects in the hopper. And I think, maybe most importantly is the cash generation opportunity of this company applied to acquisitions over time apply to other means of returning capital to shareholders over time is going to create significant shareholder value. That was assessment of the board at that time and that continues to be the assessment.

David Palmer - UBS

I guess the thing that the only thing the market will have to determine is when is that finish line of long-term. You know, if that bid was 94 in paper, maybe could have been higher. Of course, we have to subtract out the post part of that, but obviously there’s going to be crop cycles. You know, and you have some ones that are going against the corn ones. You have nuts and durum, but the point is getting past some of these plant issues as you execute these integrations and then the future acquisitions that you’ll presumably have, there should be some scorecard if you will. Obviously you had one when you bought the post business, you had a sort of two or three year scorecard internally, but do you have any sort of targets about when you would get to that theoretical stock price finish line? I mean, how many years will this take to get back to that level?

Scott Monette

You know David, we just can’t put a firm time table out here. Again, it is a longer-term view of the business. It’s been a creator of value over the long-term if you look in the backward and that’s fundamentally how we view the business. It’s just impossible to put a firm timeframe on that.

Kevin Hunt

Yes, and David just to echo that point, I mean, and really to emphasize the point, if you look at five years, you look at ten years in terms of our shareholder value creation, it’s clearly there versus our peer group, versus the broad market. To Kevin’s point we have a sustainable, durable business model that we have executed over 30 transactions. Again, it’s added $3 billion of additional capacity. We continue to believe that private brand market, the $100 billion highly fractured market, we represent 6% of still affords us a significant amount of opportunity. So those options still exist to us are pretty unique versus our peer group. We have an acquisition opportunity that I think a lot of other companies would really kill for. So we still feel very comfortable with the strategy and the long-term value we’ve created over time, which we think can be replicated in the future.

David Palmer - UBS

Thanks guys.

Kevin Hunt

Thank you, David.

Operator

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

Heather Jones - BB&T Capital Markets

Good morning.

Kevin Hunt

Hi Heather.

Heather Jones - BB&T Capital Markets

Hi. I wonder if we could dig a little deeper on the input cost side. If I remember correctly you buy six to nine months, but it’s generally on a 2/3 to a 100% of the coverage, so I’m wondering should we think of you guys as fully covered six to nine months in your exposure for fiscal ’13 as more in those later quarters? Or just if you could give us more color as far as that goes.

Scott Monette

Sure. Heather this is Scott. Yes, that has been our policy of six to nine months of coverage. And we have historically tried to operate with that. Clearly we’ve noted in the script that we had gone longer than that on our durum wheat exposure based on our concerns over the overall crop at roughly this time last year. But we try to stay pretty disciplined around the six to nine month basis. That being said, you know, we still are in evaluating additional coverage, but we are in line with that six to nine months across our major commodity. As I noted, nuts and wheat are a lot of what we’re talking about here in terms of total coverage. And we remain comfortable where we are from a coverage standpoint. Obviously in hindsight we wish we had put on more coverage earlier, but if we could master that we wouldn’t be doing what we’re doing. It is fundamentally a risk management function for us to cover commodities. You know, we try to have enough coverage in place to allow us time to implement pricing. You know, the pricing lag historically has been at 60 to 120 days, so that is really the driver of how we look at and how we manage our commodity function. It is not a profit center, it is purely a risk management function.

Heather Jones - BB&T Capital Markets

Right, right. Now you mentioned going into Q1 you’re going to still have some above market durum contracts, but when do you expect overall cost relief to kick in because peanut prices have come down pretty dramatically and have been down for some time now. So when should we expect the year on year relief on your total commodity basket?

Kevin Hunt

Yes Heather, I’m not sure we’re comfortable giving individual commodity coverages just from an obviously competitive standpoint, but we anticipate Q4 to be $52 million higher year over year. And we expect that to continue to fall, so I don’t think we’re prepared to say which quarter it will turn positive, you know, particularly in light of some of the recent price moves. But we have seen it come from $100 million to $68 million to $52 million, so the trajectory is obviously in the right direction. So we would begin to see some benefit into ’13. When, I think is still a question.

Scott Monette

But I want to just say, you know, it is still unknown where this whole thing is going Heather. You understand that right?

Heather Jones - BB&T Capital Markets

Oh, I do. And I don’t know if I heard you correctly, but I thought you said something about the savings related to the Oklahoma closure, this new restructuring plan, so I thought you said something about not all of that’s going to fall to the bottom line. And so just was curious on you have been passing on the dollar increase in commodity costs, but not necessarily the percentage margins. Given this kind of volume deterioration that you as well as the industry has seen this past year, do you have any intention of potentially reinvesting some of these other savings and maybe not, if you have any input cost increases in fiscal ’13, possibly not passing it all along to protect volumes. Just wondering if you could talk about that.

Kevin J. Hunt

Yes Heather, it’s Kevin. You know, I would say that clearly the intent of this is to reduce costs and optimize profit, but I think it’s also intent or intended to give us flexibility if we need as we look at some of these input cost increases or potential input cost increases. So it’s really kind of both. And the idea is to really minimize cost, hopefully that drops to the bottom line, but it also gives us flexibility to deal within the marketplace.

Scott Monette

You know, one other – this is Scott, is if we look at volume impact on our 3rd quarter results that was negative $10 million so there is certainly a very powerful impact that we had in terms of volume in the 3rd and that’s been similar to what we’ve seen throughout the year. So there is a good economic rationale for making sure our volume is in balance as well.

Heather Jones - BB&T Capital Markets

Okay, that makes sense. Thank you.

Kevin Hunt

Thank you, Heather.

Operator

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

Bill Chappell – Suntrust

Good morning.

Kevin Hunt

Good morning Bill

Bill Chappell – Suntrust

Just kind of want to follow-up on the volume and pricing. You seem more and more certain that kind of what seen in vibes over the past nine months, has to do with the higher price points. Now it looks like from what we’ve heard today that there’s another round of pricing coming for the whole industry by the time we get to January. Do you think that keeps volumes at the same level? Does it actually worsen things, or do consumers start to get used to where we are and do you actually benefit as they trade down more to private label?

Kevin Hunt

Obviously we were looking for things to get more into equilibrium if the entire complex had at least stayed even or come down. So, the extent to which it get into equilibrium, I would characterized as being somewhat at risk if the industry has to take more pricing. I think that’s fairly obvious. We have to take pricing as to brands. The (inaudible) in general have remained pretty stable on an absolute penny or dollar basis, though we would expect that to continue. But, I would have to say that given what we’ve experience this year – Now these were dramatic price increases that were taken in 2012 within the industry, but I certainly would have to say that bouncing back from that might be compromised if we as an industry have to go back out there with pricing.

Bill Chappell – Suntrust

Okay. Just kind of switching gears on the acquisition front. I mean, in terms of priorities or what you’re seeing in the market, I mean with a couple of rounds of restructuring, are you looking at many smaller deals right now versus bigger ones as you try to get everything in order, and then conversely are you seeing more deals kind of pop-up as possibly the tax changes could happen by year-end or early next year?

Kevin Hunt

You know, I’d say in general we’re not seeing a sort of a dramatic increase as it relates to the whole tax question, which frankly is a little bit surprising. But we are seeing a pretty steady flow of things coming across the desk here, or as we talk throughout the industry. They are a little bit more oriented towards smaller (inaudible) kind or witness our last couple of like I consider Gillette to be more of a small platform. But there are some large ones out there as well Bill, so it’s mixed. But, I’d say we’re seeing kind of a consistent flow with what we’ve seen in the past.

Scott Monette

Bill, this is Scott. You know, we have completed full acquisition during the last year. So, we think it validates our growth through acquisition strategy, and we’re excited about the opportunity that we’re continuing to look at. I think importantly we’ve been able to integrate these business effectively and raise the guidance that we’ve provided for (Chretien) for refrigerated dough, which their second largest product brand acquisition. So, we do have, and I think this year has shown, we have unique opportunities that really not a lot of companies have in terms of the acquisition pipeline and our sourcing, which is certainly unique in terms of relational sorts of deals that we do obviously participate in auction. But those relationships are very important in sourcing transactions for us.

Bill Chappell – Suntrust

Okay, thanks for taking my call.

Kevin Hunt

Thanks Bill

Operator

Your final question comes for the line of Amit Sharma – BMO Capital Markets.

Amit Sharma – BMO Capital Markets

Hi, good morning everyone.

Kevin Hunt

Good morning Amit.

Amit Sharma – BMO Capital Markets

Kevin, I just wanted to focus on the new structure, the combined entity. When you look at it, you know, six months, nine months, a year down the line, you know, clearly maybe well declined benefits. But what are the challenges of combined - I mean, you’re combining a substantial part of your business. What are some of the challenges in terms of, maybe R&D, maybe (inaudible), or anything thing else that you can think of?

Kevin Hunt

Well, you know, again I would remind folks that – and this is a big restructuring. I don’t want to minimize it at all. But, if you look at our Snacks, Sauces, and Spreads business, we have really combined as we mentioned in the script, five sub-segments into that unit, and come out of there with a centralized sales marketing finance operational infrastructure. And that has gone quite well for us. The risks are that we still need to be category experts. We still need to be the private brand partner with our customers by category, because they look to us for that expertise. And we have it. So, I think that’s the real trick in terms of the go-to-market strategy. What this provides us, is an opportunity to maintain that category expertise, but also be able to take a broader look at the whole private brand world, and come to the table with that perspective as well.

Amit Sharma – BMO Capital Markets

Just as a follow-up. How does this impact your ability to acquire companies or squeeze more revenues (inaudible) out of them (inaudible) . Does it have any impact on that?

Kevin Hunt

Yes, actually, you know, I think I think it’s going to net-net enhance our integration capabilities. First of all, you know, as we mentioned the key leader from all three business units are part of this new structure, and they have a lot of experience within the whole acquisition realm. Still very well connected within their industries, and we are going to want them to continue to do that. But, I do think the merge of the business units, moving to common business processes, will actually allow us to more quickly and more effectively integrate acquisitions. So, I’m actually looking at it as an enhancement to the integration process.

Amit Sharma – BMO Capital Markets

That’s all I have, thank you very much.

Kevin Hunt

Okay. Well thank you all for participating in Ralcorp’s third quarter conference call. We’ll look forward to updating you on our fourth quarter results in November. Thanks again.

Operator

Thank you. This concludes todays’ conference call. You may now disconnect.

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