Ralcorp earnings ease 22% behind loss in forward sales contract

by Eric Schroeder
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ST. LOUIS — A $17.9 million non-cash loss on forward sales contracts related to its shares of Vail Resorts, Inc. led to a 22% decline in first-quarter earnings at Ralcorp Holdings, Inc.

Net income of Ralcorp Holdings in the first quarter ended Dec. 31 was $7.6 million, equal to 28c per share on the common stock, down from $9.7 million, or 33c per share, in the first quarter of 2006.

Net sales for the quarter were $522.7 million, up 13% from $464 million last year. Ralcorp said approximately 71% of the $58.7 million in sales growth was attributable to the timing of recent acquisitions in the Frozen Bakery Products segment. The remaining growth was attributed to price increases implemented during the past year in response to rapidly rising costs.

Net sales for Ralcorp’s Cereals, Crackers and Cookies segment were $199.1 million, up 2% from $196.1 million in the same year-ago quarter. The improvement was driven by an increase at the Ralston Foods cereal and snacks division, which was partially offset by a decrease at the Bremner cracker and cookie division.

Net sales in Ralston Foods grew 7% to $120.3 million, up from $112.7 million in the same period a year ago. Sales volume in the division rose 1% overall, with 17% growth in snacks, 7% growth in hot cereal, and a 47% increase in co-manufacturing sales, partially offset by a 6% decline in the larger ready-to-eat (R.-T.-E.) cereal category.

"The decrease in R.-T.-E., which is net of incremental volume from new product introductions, is up against 5% growth a year ago when Ralston Foods enjoyed record volumes," the company said. "Since that time, the modest growth of the overall cereal category has been driven by the mass merchandise channel, while cereal in the grocery channel has shown declines. The majority of our store brand cereal is sold through this grocery channel, and Ralston Foods is the sole supplier to certain grocery chains that have been negatively impacted in the near term by retail consolidation and retrenching, which in turn has affected our R.-T.-E. volume."

In addition to the slight overall volume increase, Ralcorp said Ralston Foods’ net sales were helped by higher overall selling prices, which have been raised in an effort to cover increasing input costs.

Sales in the Bremner cracker and cookie division, on the other hand, fell $4.6 million, or 6%.

"Bremner’s first-quarter sales volume dropped 11% overall, with declines in crackers and cookies of 13% and 6%, respectively, along with a 16% decline in co-manufacturing sales," Ralcorp said. "The declines in private label crackers and cookies are attributable to increased promotional activity by branded competitors, which reduced consumer price gaps between our products and those of our branded competitors. The effects of these shortfalls were partially offset by price increases executed in the second quarter of last year and a favorable product mix."

The Cereal, Crackers & Cookies segment posted profit contribution of $19.9 million, up 11% from $18 million in the same period a year ago. According to Ralcorp, the profit contribution for the first quarter was the result of several significant factors, including the price increases, sales volume declines, raw material cost increases, higher production costs, and lower freight and energy costs.

"Higher raw material unit costs reduced profit by approximately $3.8 million (principally oats, corn-based and wheat-based products, sugar, and rice), while freight and energy costs were each about $900,000 less than a year ago as a result of lower fuel costs and corporate-wide initiatives," Ralcorp said.

Profit contribution in the Frozen Bakery Products segment was $19.7 million, up 50% from the same period a year ago. Total net sales of the Frozen Bakery Products segment were $148.5 million, up 51%, with incremental sales from the recently-acquired Western Waffles, Parco, and Cottage Bakery businesses accounting for most of the increase in year-over-year net sales in the segment. Ralcorp said its base business grew $8.4 million due to higher volumes and some improved pricing.

Ralcorp added that growth in its base business was driven primarily by an 8% increase in the food service channel, a 9% increase in the in-store bakery channel, and increases in co-manufacturing volume through its branded retail channel. Food service had strong sales of biscuits and specialty items, while in-store bakery saw strong volume gains in both bread and cookies, the company said.

Net sales of Dressing, Syrups, Jellies & Sauces, also known as Carriage House, rose 8% to $100.7 million, while profit contribution rose to $4.5 million after sustaining a loss of $1.3 million in the first quarter of fiscal 2006.

First-quarter net sales grew as a result of both higher volume and improved pricing. Sales volume rose more than 4% over last year’s first quarter, with significant growth in preserves and jellies (9%), Mexican sauces (18%) and spaghetti sauce (21%). In addition, price increases were implemented during the past 12 months in response to rapidly rising costs.

Profit contribution in the Snack Nuts & Candy segment, also known as Nutcracker Brands, rose 49% to $8.2 million despite a 2% decline in sales during the quarter. The lower first-quarter sales were primarily the result of a 3% decline in sales volume and some price concessions, partially offset by a favorable product mix, Ralcorp said. This year’s sales shifted away from peanuts toward cashews and tree nuts, reversing the product mix change that occurred in last year’s first quarter.

For the quarter, Ralcorp said reduced freight and energy costs helped offset overall ingredient and packaging costs of approximately $2.5 million.

"The costs of certain of our key ingredients are expected to continue to rise, with a greater impact on profitability in the second half of fiscal 2007, as lower-priced forward commodity contracts and hedge positions expire," Ralcorp said.

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