This summary is based on the first quarter fiscal 2008 earnings call conducted by Del Monte Foods Company (DLM: chart) on August 30, 2007.
Management:
Chairman and CEO: Rick Wolford
Chief Financial Officer: Dave Meyers
VP-Finance, Investor Relations: Larry Bodner
Key Investors Issues
- Transformation plans on schedule.
- Sales growth guidance of 5% to 7% maintained.
- Debt reduction exercise well on course.
First Quarter Fiscal 2008 Highlights
The company delivered strong revenue growth of 11.8% to $753 million from $674 million in the prior year, with excellent results from both pet and consumer products despite increased cost pressures from fish, grains, fats and oils.
Volume growth in new products, particularly in fruit and pet, and price increases contributed 4.2 and 2.2 points, respectively, which was partially offset by 2.3 points of pricing-related volume elasticity.
Gross margin for the quarter 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.
- Interest expense increased $8 million due to higher debt levels related to the acquisitions.
- Capital expenditure amounted to $23 million, up 44% from $16 million a year ago while total debt net of cash was $2 billion, $80 million lower than the $2.125 billion debt in the prior year driven by operating cash, reducing the revolver balance, as well as the scheduled debt reduction.
Net income was down to $3.5 million or 2 cents a share from $7.4 million or 4 cents a share in the previous year despite strong revenue performance.
Decline in net income was attributable to cost increases facing the business particularly in fish, as well as in grains, fats and oils, due to increased demand for alternative fuels.
The management reiterated commitment to combating these cost increases through optimizing an improved portfolio and executing transformation initiatives and cost reduction programs.
Cost streamlining is on course with $110 million in cost savings already realised one year ahead of schedule in fiscal 2007.
The firm 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.
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. In addition, the $110 million investment is also in line with expectations.
Portfolio Performance Highlights
Consumer Products Business
The net sales were up 5.7% to $444.6 million fueled by fruit, largely driven by new products and pricing and partially offset by a moderate decline in seafood. Despite the strong top-line, operating income declined 46%. The absence of the gain on the sale of S&W beans, as forecasted, was the primary driver of the decline, as were higher costs and incremental marketing expense to support new product introductions.
