康尼格拉食品 (CAG) 2003 Q2 法說會逐字稿

Hello and welcome to ConAgra Foods discussion of second quarter and the first half of fiscal 2003 results.

I'm Chris Klinefelter, Vice President of Investor Relations.

With me are CEO, Bruce Rohde and our CFO, Jim O'Donnell.

This morning we announced earnings showing reported EPS of 44 cents per share for the quarter that we just completed.

And that includes 3 cents worth of deal costs that we incurred when we completed the Swift & Company transaction this quarter.

So our EPS before these deal costs is 47 cents.

There are also a couple of other items that would normally affect comparability.

Those are the favorable impact of no longer amortizing goodwill.

And that's offset by our reduction of our earnings base due to selling our meat business.

As I mentioned, these two items essentially offset each other.

And as we've detailed in the Q & A document that we posted on our website, on a net basis, they don't affect comparability.

Net/net we're in line and on target with where we thought we would be for the first half of our fiscal year, which is June through November.

And our earnings reflect good results for our packaged foods and agricultural product segments and they also reflect good expense control and sound balance sheet management efforts.

I should also point out that we also made a minor change to our segment reporting to help clarify our joint venture results.

And we'll say more about this and a few other financial housekeeping matters in just a moment.

The details of our financial performance are contained in our release and in the question and answer document that we posted on our website.

So we will not dwell on all the details of that, but we will hit the highlights and if you have not yet visited our Q&A on our website, we'd recommend it to you because it provides some detail that will help you with your financial models.

Over the next few minutes, Bruce Rohde will provide his thoughts on where we are as a company, and then Jim O'Donnell and then I will comment on some of the details.

Also, before we get started, I want to mention that during this discussion, we will be making some forward-looking statements.

And although we're making those statements in good faith and we're confident about our direction, as you know, we don't have any guarantee about the results we'll achieve in the future.

So if you'd like to read more about the risks which can affect our business, I'll refer you to our documents that we filed with the S.E.C.

Having said that, we'll get started and I'll turn it over to Bruce.

Okay.

Thanks, Chris.

We just reported a very solid quarter and a very solid first half of our fiscal year, which was how we thought things would shape up.

And things are on track and where we wanted them to be.

During the most recent quarter, we completed what we consider to be a very important transaction for our company.

We completed our Swift & Company transaction with Hicks, Muse and that's now old news.

But the effects of that transaction are what are important.

We dramatically reduced our equity investment at [business and harvests] in cash and that fits with our strategic plans.

As you heard me say before, we want our capital concentrated in a branded and value added areas of the food business.

And the beef and pork transaction with Hicks, Muse is an example of acting on strategic plans and targeting our resources.

To address the obvious question that we get of, "Will there be more transactions that favorably alter our mix?", the answer is yes.

We're working toward that goal.

And as I said in my letter to shareholders a few months back, we certainly expect more transactions in due course.

Just a few words on the quarter we just completed.

Our most profitable business, package foods, was solid.

As overall unit volumes grew, costs were well controlled and mix improved and most importantly, margins expanded, and that too, is exactly what we wanted.

Our egg segment also posted some good numbers both for the quarter and for the first half and I won't go into any specifics at the moment, but Jim or Chris will do that later.

I will say that the team that we have in place there is certainly making a positive difference.

And it's good to see them post an up quarter given the difficulties that segment's been coping with.

Our other two segments, ingredients and meat processing, were down, as we expected them to be, for the reasons already mentioned in our earnings announcement.

And you'll hear more about that in a few minutes, too.

So all in all, we're where we thought we would be for the half year and that's a good way to head into the holiday season.

Our overall progress to date gives me confidence in our earlier judgments and forecast.

So we're maintaining our target for the year in the range of $1.60 reported EPS, which includes 3 cents worth of expense for the deal fees we already discussed.

Just a quick comment on that to put it in crystal clear context, we originally thought that we would take those deal expense charges in the first quarter, which is when we originally targeted the close of the Swift transaction, but we were delayed about three weeks, so we ended up taking them this quarter when we actually closed the transaction.

We mentioned this timing difference last quarter, so I don't expect that surprises anybody, but it's just one more item you need for the big picture to put the numbers in context for the quarter.

Looking at the year in total, I expect this year’s results to be largely driven by strong execution in terms connecting with consumers and customers, in terms of manufacturing and operational cost progress, in terms of solid and disciplined management of the assets and liabilities on our balance sheet.

While we're seeing some volume growth and some mixed improvement, I don't expect our top line to be the driver of this year's results.

And that's just being realistic, not only about the economy but also about our customers who, amongst other things, are reducing inventory levels.

So, we have important work going on in terms of new items, product quality, marketing, consumer communications and other things that help drive the top line, so that we get our fair share and ideal even more over time by focusing on market driven improvements and mixed revenue improvements as much as volume growth.

So, while we have some solid plans for the long term, we're not dependent on them to make this fiscal year.

With reference to things that are more long term in nature, our progress demonstrates that we're doing the right things to put this company where it needs to be.

We're moving forward with our agenda to build a richer operating model, measured by improved margins and returns, and that comes from a wide variety of changes that we have been making across our operations, across our portfolio, with our brand focus, our collective selling and buying abilities, how we deploy shareholders' capital, and of course, our business culture.

So, while we've got more to do, I also want to acknowledge we're making some important headway.

Our numbers show it.

And I want to congratulate our team on their achievements, and I look forward to discussing our ongoing progress with you in the future.

I want to thank all of you for your interest in our company.

And wish you a happy and safe holiday season.

And now, here's our CFO, Jim O'Donnell, who has some additional details.

Thanks, Bruce.

We posted some solid results for the quarter, which I'll say more about in just a minute, but I'll start by recapping some final details on the red meat transaction.

As far as the financial details of the red meat transaction, the sale price was at book value, and we obtained a minority interest in the venture.

As a result of this transaction, we reduced our equity participation in this business from over $1 billion to around $150 million and we're providing some financing.

There are plans to phase out most of this financing over the next several quarters so that we'll reduce our total capital investment in the business even further.

After that financing is reduced, our total invested capital in that business will be around $300 million, which is less than 3% of our total invested capital.

This transaction netted us over $600 million in cash and we use this cash to pay down debt, which has given us even greater balance sheet strength.

As I said before, many of you know that one of our main areas of focus has been debt repayment, largely through better working capital management.

We had a very solid quarter in terms of trade working capital, which for us includes accounts receivable, plus inventories less short-term trade liabilities including accounts payable accrued expenses and advances on sales.

Improvement, by the way, means improvement over the same quarter last year.

We were over $1 billion better this quarter in terms of trade working capital compared to the same quarter last year.

About 80% of that came from selling the red meat business and 20% came from other working capital initiatives that we have going on.

The combination of cash proceeds from the meat transaction and our working capital improvements have positioned us to pay down about $1.4 billion in debt and subsidiary preferred securities, compared to last year.

We're pleased with the results, and we feel that we have more opportunities for continued working capital improvement.

Turning to interest expense, our net interest expense came in at about $70 million for the quarter, which is better than $100 million in last year's second quarter.

Obviously, we benefited from paying down debt, lower interest rates and receiving interest income associated with financing that we're providing to Swift & Company.

For the year, we think that overall net interest expense will be in the $320 to $330 million range.

Turning to CAP-X, I think CAP-X will be in the neighborhood of about $450 million for the year and depreciation will be in the same range.

Our focus on capital discipline, and specifically in working capital management, capital expenditures, and debt balances, is a key part of our plan to boost returns on invested capital.

We expect to continue to show steady improvement.

This year, we expect our return on invested capital to move up from last year and be in the low, double-digit range, which is exactly on track with our target for this year.

Chris has some comments about the segments in the quarter and some other housekeeping matters.

So I'll turn it back over to him.

Okay, Jim.

I'm going to highlight the segments.

The performance numbers are in the release.

Some of the brand details are in our Q&A document on our website, so I'm not going to dwell on those, but I will comment on some added items.

As far as overall trends for the year, as we've said before, we expect most of the year's progress to be concentrated in the packaged foods and in the agricultural product segments.

Our meat processing group has changed by design, so the comparisons are against a much larger and completely different business a year ago.

So we all know that that won't be above last year.

And the situation with food ingredients is one of tough comparables.

We had some favorable spice product costs last year that are not repeating this year.

So we don't see the ingredients profits being up for the rest of the year as well.

Packaged food posted operating profit growth at 10%.

We had 2% unit volume growth.

And that's pretty good in today's environments.

As I mentioned, our brand details are out on our website, so I am not going to dwell on those, but I'll say that overall sales were equal to last year.

And that's largely the result of changes in prices for cheese and processed meats.

Those are below last year due to lower input cost and that lowered the segment sales.

But certainly not the profits.

So in summary, we have volume gains and improved profits on unchanged sales and that spells mixed improvement and margin expansion.

You've heard us say before that our plans are to continuously improve the margins of our packaged foods business.

That's been our focus on several different items like target marketing to consumers, more efficient operations, a better mix, new products, organic growth, and improving brand strength.

We're also making progress using our collective service abilities for large customers, and bundling products around themes that create consumer interest.

We're seeing some solid results.

For example, this quarter's holiday programs did well, and of course, that program is continued into December, which falls into our third quarter.

The last several quarters have shown some progress moving our packaged food margins up, that's exactly what we're after.

I also wanted to say that we did increase advertising and promotion during the quarter.

And we'll increase this investment as necessary and do what we think we need to do to position our products to fuel profitable future sales and margin expansion.

As far as our commentary about the other segments.

In food ingredients, sales were up.

Prices and profits for flour milling are better.

But the overall segment profits are down and that's mostly due to increased product costs and lower volumes for some of our spice items.

That's the same situation we've seen for a couple of quarters now and we don't think that that's going be any better for the rest of the fiscal year.

For the meat processing segment, we're now dealing with a whole different segment than what we've been talking about in the past.

We sold Swift & Company and now we hold the minority interest.

That has significantly altered our segment because that transaction removed the beef and pork operating profits from our earnings base.

So that definitely affects the comparability of the current quarter's results and the results of the same quarter last year.

Because we got rid of those earnings at the beginning of the second quarter, our fresh red meat related earnings in the second quarter of last year were about 7 cents higher -- that's per share -- than in the current quarter.

And that's even after we adjust after for our portion of the ventures after tax earnings and the interest costs we saved by retiring debt from the proceeds of the deal.

What's left in that segment now that we've divested our beef and pork operations is our chicken processing business.

I'll note that the current markets for fresh chicken are very difficult and the earnings from chicken are down this quarter, even though we are making operating improvements and improving our mix.

The agricultural product segment showed a nice increase in profits.

We had some benefit from the timing of our business.

Given that there was a longer planting season, we had some business for UAP that got pushed from our first quarter into our second quarter.

That made our first quarter a little light and the second quarter pretty strong.

And the numbers show it.

So for the first half of the year as a whole, we're where we hoped to be and that is above last year.

I'll remind our listeners that UAP is our crop inputs distribution business.

Our team there is executing well, with an agenda of reducing expenses, improving the customer mix, and other basic blocking and tackling like improving accounts receivable and inventory balances.

We think UAP will finish ahead of fiscal year last year, but we also want to say that they compete in a tough market.

So we'll just have to wait to see how the year unfolds.

Now I want to say just a few words about some housekeeping matters.

When we sold our fresh red meat business, we obtained a minority interest in Swift & Company.

And for this reason, we now have a line item on our P&L called Equity Method Investment Earnings Net of Tax.

And that captures, not only our earnings from the meat joint venture but all of our other joint venture earnings.

In prior quarters, those earnings would have been captured in the appropriate segment operating profit numbers.

But, now they have been moved to the equity method investment earnings lines.

That means that some of our historical operating profit numbers are changing a little bit.

And we've put the reclassified historical numbers out there on our website if you want them for your models.

Another housekeeping item is that we are completing our estimate of the benefit of SFAS 142 for the fiscal year.

Taking into account taxes, the SFAS 142 benefit amount should be about 22 cents per share for the full year, which equates to about 11 cents for the first half.

And that's exactly where we are.

For the remainder of the year, the quarterly benefit should be about 5 1/2 cents each quarter.

The important thing to note is that the estimate for SFAS 142 does not result in our changing or estimating any different earnings per share this year than we've already stated.

That's because we expect the 142 benefit to be essentially offset by other items.

We're facing some other tax adjustments that are unfavorable due to changes resulting from our meat deal.

In addition, as you can tell from the environment, some of the markets in which we compete are difficult and that adds for additional complexities when we think about our projections.

So, to that point, we're keeping our tax rate projection at 37% for the year.

That's unchanged from our previous numbers.

So, if and when there's any change to our EPS outlook, we'll let you know in the same way that we always do, with quarterly comments about our yearly expectations.

So just to repeat, we continue to expect the year’s earnings per share to be in the range of $1.60.

Just as a reminder, these remarks will be archived in 1-800-642-1687 for domestic callers, and 1-706-645-9291 for international callers.

The pass code is 5210924.

This call will also be archived on the web at www.conagrafoods.com in the section for investors, as well as, on the First Call website listed in today's release.

You'll also find a question and answer document relating to this release on our website.

And as always, we're available for discussions at 402-595-4684.

This concludes our remarks, and I want to thank you for your interest in ConAgra Foods.

This concludes today's management discussion.

You may now disconnect.