康尼格拉食品 (CAG) 2002 Q4 法說會逐字稿

Good morning.

My name is Annisa and I will be your facilitator today.

At this time, I would like to welcome everyone to the ConAgra Foods fourth quarter management discussion.

All lines have been placed on mute to prevent any background noise.

At this time, we will begin the discussion.

Hello, and welcome to ConAgra Foods discussion of fourth-quarter and fiscal 2002 results.

I'm Chris Kleinfelter, vice president of investor relations.

With me are our chairman and chief executive officer, Bruce Rohde, and our CFO and executive vice president, Jim O'Donnell.

This morning, we leased our earnings showing EPS of $1.47 for our fiscal year which we just completed.

We also reported 36 cents EPS for our fiscal fourth quarter.

That's a very strong wrap-up to our year but we scheduled ourselves for a strong second half and we even finished a little bit ahead of where we thought we would, not only in earnings but also in operating cash flow and in operating margins as well.

We're certainly pleased and will say more about this in a minute. the details of our financial performance are contained in our release and in the question and answer document that we have posted on our website so we will not dwell on them in any details, but we will touch on some of the highlights.

Over the next few minutes, Bruce Rohde will share his thoughts on our company's overall direction and the types of actions you can expect to see from us.

And then Jim O'Donnell and I will say a few words of specific financial performance.

Before we get started, we'll be making some forward-looking statements and although we're making those statements in good faith, and we're pleased with our performance and direction, you know we don't have any guarantees about the results that we'll achieve, so if you'd like to read more about the risks and factors which can influence and affect our business, I'd refer you to the documents that we file with the SEC.

Having said that, we'll get started with our comments right now and I'll turn it over to Bruce.

Okay, Chris.

I'm pleased with the quarter and with the year.

We're developing some momentum in our most profitable businesses.

Our earnings are ahead of our original expectations with which I'm pleased, but I'd also like to mention that I am just as pleased with the quality of the earnings this year as I am the quantity.

Operating cash flow grew substantially, and margins expanded, which is exactly what we wanted out of this year's performance mandates.

When I look at the year in total, I see that a lot of strength was built.

No doubt we benefitted from year-over-year comparisons because we had a strong year which followed a relatively weaker previous year.

But I don't want to take away from this year's important progress either, because even taking those comps into account, we made significant progress this year.

We had four performance mandates for the year.

Three of these were more sharply focused toward our packaged food operations.

The first mandate was quality sales growth, and the packaged food group did very well on that front. the second mandate was improved execution and coordination of manufacturing, marketing, and sales, and again, the packaged foods group really made progress here and that's helping profitability.

the third mandate was team selling, and we made real progress, establishing team selling and menu selling.

The payoff is out front when we get better at this in fiscal '03.

And the fourth mandate is one that I had in mind for the entire company, and that was debt reduction.

And Jim can speak more to that later, but there's huge progress here. 1.2 billion of progress.

So we finished a strong year and we expect another strong one in fiscal 2003 because of our attention to strengthening our fundamentals, so I really want to spend my time today talking about the opportunities that are now possible due to the progress that we've made to date.

I want to start by saying that while I like our very recent progress, meaning the earnings growth, operating cash growth, and improved margins for fiscal 2002, I'm not yet very happy with our overall margins or our returns on invested capital.

I think we can do a lot more for our investors and that's precisely what's on our agenda.

Around our company, we say that our agenda is building a richer business model and it involves changing a few key areas in our company.

We mentioned these before but since this is an ongoing process that's under way, I'm going to mention those four main cornerstones again. the first Cornerstone is portfolio.

We have a specific acquisition and divestiture strategy to concentrate our capital in branded and value-added food products.

Last month, we announced a transaction by which we're going to divest most of our fresh meat assets.

That particular deal is part of the strategy that I'm talking about.

You should look for us to make more portfolio changes, either through acquisitions or divestitures as opportunities present themselves, so that we can better align our resources and our capabilities.

the second Cornerstone is mixed management.

This encompasses such things as improving consumer connections by developing products that satisfy consumers changing needs.

For example, pioneering a category that satisfies the need for a midweek meal that provides meat, vegetables, starch, like home style bakes, or providing some innovative snacks that are portable afternoon satisfying like squeeze and go portable puddings.

We've also established customer selling teams.

These are teams that are organized around specific customers to serve their needs.

These are just basic things that set the stage to improve gross margins as we move forward.

the third Cornerstone is strengthening marketplace capabilities, from information systems to logistics.

We've been progressively building the foundation to better interface with our customers, and we're glad we began making these moves when we did, because in order for us to insert ourselves into our customer's supply chain and to be meaningful and strong suppliers, this was an absolute must, and we're getting the job done. the fourth Cornerstone is resource deployment, which really means how do we deploy our earnings and our capital.

That means keeping the proper discipline around capital spending and working capital retention in the business.

It also means finding the right balance of dividends versus acquisitions versus share repurchase versus paying down debt with the free cash that we generate.

It also means setting the right criteria for acquisitions, with some discipline, which really boils down to strategic fit and financial return standards.

So those are the areas that we're focused on to build shareholder value.

This is really a work in progress.

We're probably a little more than halfway through this agenda with these items, which is good progress, but there's much more to do.

We're on a journey to become America's favorite food company and our team is dedicated to making it happen.

We're not there yet but we're getting closer every day.

We think this is a very exciting time for our shareholders and for our employees, and I'd like to take this opportunity to thank and congratulate the men and women across ConAgra Foods for a job well done in meeting and exceeding their goals this year.

I also want to thank all of our shareholders for their interest, encouragement, and support as we've been transforming ConAgra Foods and I look forward to reporting on our further progress.

With that, I'm going to turn this over to Jim O'Donnell.

Okay, Bruce.

As shareholders, we should all be very pleased with the earnings growth, the operating cash flow and margin expansion that we saw this year.

As Bruce mentioned, we established at the beginning of this fiscal year some performance mandates, and let me briefly review how those mandates showed up in our fiscal 2002 financials.

First, we had a mandate for quality sales growth.

Did we achieve it?

You bet.

Our packaged food segment had organic sales growth of 5%, and nominal growth of 9%, along with significantly improved margins.

5% organic growth for packaged foods is extremely strong.

Especially considering that we had margin expansion along with the sales growth.

We know that we can't post this type of growth every year, but we do expect a low to mid-single digit rate of sales growth on the horizon for the packaged foods segment, provided, of course, that there are no acquisitions or divestitures that significantly skew the growth rate.

We also had a mandate for improved execution.

This mandate is directed towards optimal coordination of our sales, marketing, and manufacturing functions.

We performed well this year in that regard, and this is evident with our improved product sales mix and in well-managed operating costs, both of which helped to expand the margins in packaged foods.

We also had a mandate for team and menu selling.

For example, we bundle products around focused themes for customers, such as back-to-school, holidays, summertime events and so forth.

We repeated all of these programs again this year with success, and of course this was part of the strong growth that we posted in packaged foods this year.

Last, but certainly not least, was our mandate for debt reduction.

We had an intense focus on this goal, and we are excited to report that we've reduced debt and preferred securities by over $1.2 billion compared to last year's ending balances.

We did this by generating strong profits and by better managing trade working capital.

Trade working capital is type of mind on all of our operating managers, and it's certainly showed this year, because we improved trade working capital by over $860 million.

We had a two-year goal to reduce debt by $1 billion.

We established a strong institutional discipline and focus, and as we closed out our first year, we finished ahead of our initial $1 billion goal.

More improvement may come.

We will also realize some improvements from the cash proceeds that we receive from the pending meat transaction.

This transaction should provide us with an additional $800 million to be applied towards debt.

Our operating cash flow grew to over 2.3 billion because of this focus and discipline, and we're very proud of that.

So, I'm very encouraged as we move into fiscal 2003, and I look forward to reporting on our progress in regards to our mandates and initiatives.

Chris now has some comments to make about the segments in the quarter.

Okay, Jim.

I'm going to briefly touch on some other financial highlights.

Let me start with some overall results.

Sales for the quarter were $6.4 billion, equal to last year.

Operating profit grew 27% to $513 million, while operating margins improved 170 basis points.

Diluted EPS grew 57% to 36 cents.

This makes the year's earnings per share of $1.47, which is 19% above last year's earnings per share of $1.24.

Yearly sales were 27.6 billion, up 2%, and yearly operating profit was up 11% to $2.1 billion.

The year's operating margins expanded by 50 basis points.

Moving on to our segment discussion, on packaged foods, as far as our segments go, most of the quarters and the year's improvement came from the packaged food segment which is the segment with most of our branded and value-added retail food service products.

Packaged food segment sales were up 6% for the quarter. 5% came from organic growth and 1% came from acquisitions.

We saw growth from a wide variety of brands, due to the initiatives and - that have progressively been in place for the past couple years.

Over the last two fiscal years, we've improved product quality, stepped up our introduction of new items, and increased our marketing investment.

And the benefits of those efforts are showing up in our numbers.

Most of our largest brands posted sales gains for the quarter, and we've listed the major brands showing the largest increases in both our press release and in the Q and A document that we posted on our website.

Profit gains were strong for the quarter, up 42% for the segment, and that's a function of volume growth, improved mix, aggressive cost management, and better operations.

Operating margins expanded to over 14% of sales, a significant increase over last year, and all the major product types showed profit gains.

It was a solid quarter all around for the segment.

We've got plans in place to continue expanding margins in this segment through a combination of brand building and productivity initiatives, many improving the product mix, introducing new items, targeting the right consumers, while aggressively managing our per unit costs to make, market, and sell our products.

We think we can progressively improve the packaged food margins. for the year, packaged food sales grew 9% in total. 5% of which was organic growth, and sales reached 12.4 billion.

Operating profits grew 15% to 1 point 6 billion and operating margins expanded to 13% for the full fiscal year.

Food ingredient sales were off 5% for the quarter to $396 million, but congratulate for the year.

The quarter's sales decline was mostly due to lower blends - operating profit declined substantially to $27 million due to product cost as well as lower values.

Margins for flower milling improved but wore more than offset by lower

the year's sales were flat at $1.7 billion and yearly operating profits were down 8%.

Moving on to the meat processing segment, this segment should look substantially different by August because we're planning to close the transaction for the sale of the meat processing operations to a venture with outside investors.

We announced that transaction last month.

But meat processing sales were down 4% to $2.5 billion for the quarter, reflecting market changes and selling prices keyed off of lower input costs.

However, the business is operating well and operating profits grew 8% to $65 million for the quarter, with pork and poultry showing profit gains, due in part to operating margins.

These margins declined during the quarter due to market dynamics but we're seeing that come back strong again.

This year's sales were down 4% to $10 billion.

This reduction, again, is due to the changing selling prices I mentioned a minute ago, as well as lower volumes due to our beef plant fire last fiscal year.

There's also some effect of a planned changes in customer mix.

The operating profit for the year grew 49% to $269 million.

The meat transaction is proceeding as planned and we expect to close the deal in August.

At that time, we will provide more detail about how that transaction will shape the company's financial statements.

Moving on to the agricultural products segment, that segment sales were down 12% for the quarter to $424 million, reflecting difficult market conditions.

This segment lost $21 million, more than it did during the same quarter last year, and it's largely due to weak market and customer credit conditions at United Agri Products, which is our subsidiary that distributes crops inputs like seed, chemicals and fertilizer to growers.

We have an improved focus on fundamentals, like customer credit, product mix, and operating costs, for this business, but it's tough to predict when that focus will help the numbers because of the difficult economic environment.

We'll comment more on united agriproducts as the year progresses.

That business has a good market position but the economic environment is key to its short-term prospects.

Our merchandising operations made money in the quarter but as expected, not as much as last year, due to relative market dynamics.

For the year, the agricultural products segment posted sales of $3.6 billion, down 2%, and operating profits were $19 million, which is down substantially from last year.

To recap what we have said in the press release about fiscal 2003 earnings, we think that will be in the range of $1.60 for diluted earnings per share, with our first quarter showing a comparatively lighter rate of growth due to transaction costs associated with the pending meat deal but overall, we're optimistic about fiscal 2003, and we look forward to reporting on our progress.

This is a reminder these remarks will be archived at 1-800-642-1687 for domestic callers and 1-706-645-9291 for international callers.

The pass code is 4381397.

The call will also be archived on the web at www.videonewswire.com/conagriculture food/on 62702 as well as at WW dot ConAgra Foods.com/investors.

That address is also the one where you can find the question and answer document relating to this release.

As always, we are available for discussions at 402-595-4684.

This concludes our remarks, and thank you again for your interest in ConAgra Foods.

This concludes the management discussion.