This summary is based on the first quarter fiscal 2008 earnings call conducted by Del Monte Foods Company (DLM) on August 30, 2007.
Chairman and CEO: Rick Wolford
VP-Finance, Investor Relations: Larry Bodner
CFO: Dave Meyers
Key Investors Issues
- EPS were 2 cents per share compared to 3 cents per share last year.
- Net income fell to $3.5 million from $6.2 million a year earlier.
- Sales rose 11.8% to $753.5 million.
First Quarter Highlights
Net sales were above expected range.
Consumer Products net sales were greater than expected, largely driven by plastic cup fruit market share gains in new Chillers and no-sugar-added products, as well as base plastic cup line. The company delivered higher non-retail, lower-margin vegetable sales.
- The company drove greater-than-expected volume, combined with delayed timing of consumer marketing expenses, which were partially offset by unfavorable mix. Fish costs exceeded expectations, but were offset by incremental cost savings.
- Gross margin was 24.6%, an increase of 20 basis points versus last year. Pricing contributed 0.9 points, while mix drove a 0.7 point improvement, due primarily to the acquisitions.
- Conversely, cost increases for grains, fats and oils, driven by demand for alternative fuels, coupled with higher fish costs and partially offset by the absence of purchase accounting, impacted gross margin negatively 1.4 points.
- Operating income increased 7.8%, with operating margins decreasing 20 basis points.
- Higher gross profit was partially offset by higher SG&A, which increased by 14.3%.
- The $18 million SG&A increase was primarily driven by the absence of the $10 million S&W perpetual license sale, which occurred in the year-ago period, and higher marketing expenses, largely in pet, as well as higher customer delivery costs related to the increased volume, partially offset by the absence of purchase accounting and integration expense and lower transformation expense.
Interest expense increased $8 million, primarily due to higher debt levels related to the acquisitions.
- GAAP EPS of 2 cents per share included 1 cent per share of transformation, compared to GAAP EPS of 4 cents per share a year ago, which included 5 cents per share of integration, transformation and purchase accounting.
- Positive impact from the top-line covered higher costs and increased marketing investment in the business. However, EPS was also negatively impacted by the fact that the company had a gain on the sale of S&W beans a year ago and higher interest expense.
- The company spent $23 million on capital projects, versus $16 million a year ago.
- The company incurred $26 million in depreciation and amortization costs, which included $1 million of fee amortization included in interest expense.
- Total debt net of cash on the balance sheet was $2.045 billion, $80 million lower than the $2.125 billion debt net of cash at the end of the first quarter fiscal 2007, primarily driven by operating cash, reducing the revolver balance, as well as the scheduled debt reduction.
- On a year-to-date basis, the company generated operating cash flow of -$26 million, versus $2 million a year ago.
- The decrease in operating cash flow is primarily driven by an increase in inventory, reflecting a normal peach yield, relative to abnormally low yields last year, as well as an earlier tomato and vegetable harvest versus last year.
Increased cost pressures from fish, as well as grains, fats and oils, did impact operating income results.
- Pet Products business generated 22% higher revenue, enabled by volume growth, primarily from Meow Mix and Milk-Bone, as well as new products, while also delivering operating income growth.
- Consumer Products delivered solid top-line growth, driven largely by strong fruit performance, with lower operating income impacted primarily by the anticipated absence of the gain on the sale of S&W beans business a year ago, as well as being impacted by some higher costs.
Del Monte continued to execute against key objectives, which are portfolio optimization, new product growth, cost reduction, and transformation initiatives.
- The company continued to optimize portfolio and grow strategic higher-margin, higher-growth businesses.
- Meow Mix and Milk-Bone, now fully integrated, represent about 40% of the pet portfolio on a net sales basis. They have strengthened overall competitive position in pet, improved profitability with their greater than 35% gross margins, and have enhanced growth potential. These businesses are out-performing the prior year, and further, the company expects to capture the targeted $6 million of incremental Meow Mix synergies this fiscal year.
- In consumer business, the company saw positive portfolio trends, particularly in fruit, as evidenced by the fact that it drove a solid 7 grocery share gain in single-serve fruit cup segment.
New products were an important contributor to top-line, with strong performance coming from both consumer and pet segments.
New products, including Del Monte Fruit Chillers and no-sugar-added fruit, as well as Meow Mix Market Select Cups, 9Lives Daily Essentials, and Kibbles N' Bits Brushing Bites, are resonating with consumers and pets, and are targeting faster-growing, higher-margin categories.
Eliminating costs and streamlining operating structure is a core commitment, particularly in light of the cost pressures, which do represent a challenge in fiscal 2008.
The company remains committed to relentless pursuit of removing costs from organization. In addition to already delivering $110 million in cost savings one year ahead of schedule in fiscal 2007, the company expects to achieve another $70 million in cost savings by the end of fiscal 2008, $10 million higher than originally forecasted.
- Efficiencies were achieved through aggressively pursuing CapEx projects, as well as through structural lean initiatives, including streamlining existing pet production lines, procurement initiatives and waste reduction efforts.
- The company continued to execute against transformation plan. All four initiatives of the transformation plan are on schedule to drive the $40 million in run rate transformation savings that are expected by the end of fiscal 2008. $110 million investment is also in line with expectations.
- The company made progress particularly in dry pet manufacturing matrix, which is a major initiative and is targeted to eliminate 5 million miles from transportation network by fiscal 2009. The construction portion of this project is now completed and production has begun in all locations.
- The quarter benefited from the positive impact of pricing actions, primarily in fruit.
- The company announced price increases in tuna and pet.
