Ralcorp Holdings (RAH, Financial), the leading producer of private brand foods in North America, held a conference call with investors on Thursday to discuss third quarter 2011 results.
The company has been a serial acquirer in the past (due to fragmentation in the private-brand food industry), picking up 20 companies since 1997. Some of the bigger acquisitions in the recent past include Post Cereals (for $2.8 billion in 2008), Harvest Manor Farms (a snack company in 2009), and JT Bakeries, North American Baking, Sepp’s Gourmet Foods and American Italian Pasta Company in 2010. Not one to slow down, Ralcorp announced today that they are acquiring the North American private-brand refrigerated dough business from Sara Lee, along with details on previously announced plans to spin off Post Foods to Ralcorp shareholders (more on this below).
Here are some of the highlights from the Q&A and major developments that are occurring at Ralcorp:
Net sales in the quarter grew 22% over the prior-year third quarter, driven primarily by the American Italian Pasta Company acquisition completed in July 2010. Base business net sales, which back out the impact of the four acquisitions completed in 2010, increased 5% over the same period (up 3% through the first nine months of the year), driven by the Private Brand and Food Services businesses, along with pricing, which offset a 2% decline in volumes YTD. On the earnings picture, management reaffirmed their guidance of $5.20-$5.35 per share in adjusted diluted EPS for 2011.
According to industry data, private brand food in measured channels has annual sales of nearly $89 billion and continues to grow more quickly than branded foods; in this economic environment, consumers can’t pass up what the Private Label Manufacturers’ Association estimates is an average 33% in savings compared to branded products.
In regards to the Sara Lee dough business acquisition, management said they “could not be more excited about this opportunity,” and paid roughly $445 million (after backing out $100 million of tax benefits), which will be funded with short term debt until repaid with the proceeds from the Post Foods separation. The business is a leader in the private brand category of refrigerated dough products, a $1.8 billion category at retail (divided between 70% share for the category leader, 10% for the number two brand, and the remainder held by private label; with over $300 million in annual sales, Ralcorp now holds a dominant position of that final 20%). Management expects that the acquisition will be accretive to the bottom line, adding $0.30 in the first year (after including synergy and backing out one-time transaction costs) on a GAAP basis, and $0.50 on a cash basis (which will not be affected by amortization).
With the separation, Post Foods will issue $1.1 billion - $1.2 billion of debt, with the proceeds (approximately $1 billion) going to Ralcorp; this cash will be used to reduce net debt, continue to repurchase shares, and pursue further private brand acquisitions (they expect industry consolidation to continue).
At this time, management is still in the process of identifying potential CEOs; as a standalone company, Post Foods will be the third largest ready-to-eat cereal manufacturer in the U.S. (behind General Mills and Kellogg’s).
It’s interesting to hear management say that “Post Food’s go-forward strategic plan will focus on growing its most important brands”; as those who follow the category know, it has been ravished by promotional spend, partly due to pressure from being undercut by (none other than) private-label pricing. For example, Post fought the trend this quarter and reduced promotional spend, leading a 14% year-over-year decrease in volume in the Q (and 12% YTD), which will happen when the shelves are covered with buy-one-get-one type promotions. As a company with (what I consider to be) sub-par brand equity in comparison to its key competitors, it will be interesting to see how Post can perform as a standalone entity, especially as they shift away from promotional spend and focus on advertising and product innovation.
The company has been a serial acquirer in the past (due to fragmentation in the private-brand food industry), picking up 20 companies since 1997. Some of the bigger acquisitions in the recent past include Post Cereals (for $2.8 billion in 2008), Harvest Manor Farms (a snack company in 2009), and JT Bakeries, North American Baking, Sepp’s Gourmet Foods and American Italian Pasta Company in 2010. Not one to slow down, Ralcorp announced today that they are acquiring the North American private-brand refrigerated dough business from Sara Lee, along with details on previously announced plans to spin off Post Foods to Ralcorp shareholders (more on this below).
Here are some of the highlights from the Q&A and major developments that are occurring at Ralcorp:
Net sales in the quarter grew 22% over the prior-year third quarter, driven primarily by the American Italian Pasta Company acquisition completed in July 2010. Base business net sales, which back out the impact of the four acquisitions completed in 2010, increased 5% over the same period (up 3% through the first nine months of the year), driven by the Private Brand and Food Services businesses, along with pricing, which offset a 2% decline in volumes YTD. On the earnings picture, management reaffirmed their guidance of $5.20-$5.35 per share in adjusted diluted EPS for 2011.
According to industry data, private brand food in measured channels has annual sales of nearly $89 billion and continues to grow more quickly than branded foods; in this economic environment, consumers can’t pass up what the Private Label Manufacturers’ Association estimates is an average 33% in savings compared to branded products.
In regards to the Sara Lee dough business acquisition, management said they “could not be more excited about this opportunity,” and paid roughly $445 million (after backing out $100 million of tax benefits), which will be funded with short term debt until repaid with the proceeds from the Post Foods separation. The business is a leader in the private brand category of refrigerated dough products, a $1.8 billion category at retail (divided between 70% share for the category leader, 10% for the number two brand, and the remainder held by private label; with over $300 million in annual sales, Ralcorp now holds a dominant position of that final 20%). Management expects that the acquisition will be accretive to the bottom line, adding $0.30 in the first year (after including synergy and backing out one-time transaction costs) on a GAAP basis, and $0.50 on a cash basis (which will not be affected by amortization).
With the separation, Post Foods will issue $1.1 billion - $1.2 billion of debt, with the proceeds (approximately $1 billion) going to Ralcorp; this cash will be used to reduce net debt, continue to repurchase shares, and pursue further private brand acquisitions (they expect industry consolidation to continue).
At this time, management is still in the process of identifying potential CEOs; as a standalone company, Post Foods will be the third largest ready-to-eat cereal manufacturer in the U.S. (behind General Mills and Kellogg’s).
It’s interesting to hear management say that “Post Food’s go-forward strategic plan will focus on growing its most important brands”; as those who follow the category know, it has been ravished by promotional spend, partly due to pressure from being undercut by (none other than) private-label pricing. For example, Post fought the trend this quarter and reduced promotional spend, leading a 14% year-over-year decrease in volume in the Q (and 12% YTD), which will happen when the shelves are covered with buy-one-get-one type promotions. As a company with (what I consider to be) sub-par brand equity in comparison to its key competitors, it will be interesting to see how Post can perform as a standalone entity, especially as they shift away from promotional spend and focus on advertising and product innovation.
