康尼格拉食品 (CAG) 2003 Q3 法說會逐字稿

Good morning.

My name is Rose (ph), and I will be your facilitator today.

At this time, I would like to welcome everyone to the ConAgra Foods third 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 third quarter fiscal 2003 results.

I'm Chris Klinefelter, company's investor relations contact.

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

As anticipated this morning, we announced earnings of 30 cents per diluted share for the quarter we just completed.

Our full year is tracking toward the $1.57 to $1.60 in earnings per share that we previously estimated, and that compares against the $1.47 that we earned last fiscal year.

Our third quarter is generally the smallest of our four quarters, and I want to point out there are two items that affect our quarter's earnings per share comparability with last year.

The first item had to do with the divestiture of our red meat business.

As most of you know, we completed that divestiture in our second quarter of this fiscal year.

There's about a penny per share less in net earnings from red meat in the quarter we just completed compared to the same quarter a year ago.

The other item that impacts comparability is FFAS 142, which added about 5 cents to the third quarter earnings per share compared to last year.

The quarter reflects profit improvement at Ag products and also reflects interest savings which have improved our bottom line.

For this quarter, three of our four segments are under last year in terms of operating profit.

We highlighted two of those segments in our release a couple weeks ago.

Those would be the chicken business and the ingredients business.

Those are some tough markets and we'll get into more of that in our segment discussion in a minute.

As we closed the packaged foods segment results for the quarter, we had increased marketing by $20m, that resulted in $416m of operating profit, which is $6m below last year's operating profit of $422m.

Although our packaged foods segment gross profit improved for the quarter, our operating profit was down slightly and it was a little lighter than what we had anticipated earlier.

That doesn't change the positive trend we have for that segment for the entire year.

We'll say more about that in a bit, but before I do, I have just a couple of more points to make before I turn it over to Bruce.

I want to say that the details on our financial performance are contained in our release and in the question and answer document that we have posted on our website.

So we're just going to touch on the major items today.

Over the next few minutes, Bruce is going to provide his comments on where we are as a company and then Jim O'Donnell and I will comment on some financial matters.

Before we get started, I need to mention that during this commentary, we're making some forward-looking statements.

Although we're making these statements in good faith and we're confident about our direction, as you know, we don't have any guarantee about the results that we'll achieve in the future, especially under the world circumstances at the moment, so we'll refer you to read the factors and the risks which can influence and affect our business as we describe them in the document that we filed with the SEC.

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

Okay, thanks, Chris.

Let me start by saying that our fiscal second half shows solid performance in terms of total reported earnings.

Our third quarter earnings trail our first half but that's not abnormal for this time of year, and it's not a predictor so we continue to expect a strong fourth quarter.

As we said before, second half earnings are going to be concentrated in the fourth quarter due to segment trends and also because of the normal patterns that we see each year and those trends tend to favor the fourth quarter over the third.

Jim and Chris will comment more on that in a little bit.

Right now the chicken markets, the ingredient markets and food service markets are tough, but the ebb and flow of these various businesses should not get in the way of posting solid improvement over the $1.47 that we posted last year and they won't get in the way of our long term agenda to become America's favorite food company.

There's a clear long-term plan that we're focused on and you've heard us say on many occasions that we're making some very important changes to our business to boost margins and returns.

The things that we've discussed include an impact across our entire portfolio.

It includes the efficiency and effectiveness of our supporting functions like customer service, it includes things like our sales and marketing skills, our deployment of resources and so forth.

We're making progress across the board, but we still have a ways to go.

We got a lot of opportunity to create shareholder value with these initiatives so they're top of mind for us.

Having said that, let's turn again to the current environment.

A weak food service environment following the holidays and in the middle of the winter is not a novel event, but it does mask some of the important progress that we've been making in our key packaged foods segment.

For example, we're making important progress retooling our logistics, but this takes time and resources.

We're also improving product quality and consumer satisfaction, and we're working on our mix and we're intent on a better cost management across the board.

At the same time, sales for several of our best known brands are showing positive trends and all of those things are good for the long term profitability prospects of the company.

To that point during the first half of the fiscal year, you saw clear indications that packaged foods profits were growing and margins were expanding.

We fully expect for that pattern to resume as we move forward.

Unfortunately, the progress in the third quarter was masked because profits were brought down by a weak food service environment.

The point here is that the third quarter by itself should not be considered representative of the year for packaged foods, or representative of our long-term opportunity either.

I want to re-emphasize that we're committed to growing our profits across the segment over both the short term and the long term.

In a nutshell, though, we got a couple of areas that are facing specific business environment challenges right now and these are food ingredients and to a lesser extent, foodservice.

But we're cognizant of some of the shorter-term aspects involved at the moment, so we remain confident that these businesses have very bright futures.

In fact, on a brighter note, the Ag business showed significant improvement, and you can see that progress in the quarter's results and we look for more of that trend in our fourth quarter.

We recruited a fairly new team in our Ag business.

They're very experienced, but they're relatively new to us and they've really made a positive difference with better execution and very strong fundamentals.

I have nothing but compliments for these folks and the job that they've done.

As I just mentioned, I expect the fourth quarter to continue to show profit growth for the Ag business as it stays focused on its proven agenda and attention to customer relationships.

Before I finish, I want to say that we have to think about the impact of the ongoing war.

Obviously its impact is going to be felt in many ways in this country and abroad.

As we've all seen, this is a very significant event.

If I confine myself for the moment simply to our business, it's way too early to predict how this might impact our operations and results, but using the recent past as a gauge, disruption of this type can favor the grocery trade as many people stay closer to home and follow the events on TV, but that's not necessarily helpful for the restaurant trade.

We don't pretend to know all the ways the war will impact consumer behavior or how it will impact the economy and eventually our company's earnings stream, but I must say that it adds to the uncertainty for any business like ours as it applies to both grocery and food service outlet.

Perhaps, though, we ought to be thankful because compared to many industries, the food business is a silver lining.

People have got to eat, and we can take some comfort in that.

Therefore, until we see indication that tells us otherwise, we stand by our earlier comment of EPS in the range of 40 to 43 cents in Q4, making for a solid second half.

As part of that strength, we anticipate the fourth quarter will continue to show a strong turnaround in our Ag business.

There are profit improvement initiatives bearing fruit in that business that should show up prominently in Q4.

I should also say that given the timing, which is the springtime of the year, overall the fourth quarter is typically a better one than the third quarter.

We're presently expecting our second half to be in the range of 70 to 73 cents, which makes for solid annual EPS in the range of $1.57 to $1.60, which compares to the $1.47 that we posted last year.

That, of course, assumes no war or economic developments that further disrupt the business in ways we haven't seen or anticipated.

With that I would like to thank everyone for their interest in ConAgra Foods.

And now I'll turn it over to Jim O'Donnell, our CFO.

Thanks, Bruce.

I'm going to say a few words about our capital and a couple other matters.

Year over year, our interest bearing debt and preferred securities are about $1b lower than last year.

We're at $6.2b as of the end of the quarter.

This $1b of less debt reflects about $800m of cash freed up from divesting the red meat business and the rest from cash flows and organic working capital improvement.

This debt reduction led the way of lowering our interest cost to $64m for the quarter, down from $94m in the same quarter a year ago.

I think we'll end the year with about $1b less of interest-bearing debt and preferred securities compared to the end of last fiscal year on a net basis when you adjust for cash on hand.

Shortly after the end of the third quarter, we funded our pension funds with an additional $220m contribution.

While our pension plans are solid, the additional investment strengthens our funded status.

Also the $220m does not significantly alter the short-term EPS performance.

Also at the end of the third quarter, we liquidated $120m of our investment in the Swift & Co. venture.

As many of you know, we are providing some financing for that venture, and we had agreed to hold a piece of this financing for six months.

That whole period expired and we liquidated $120m of that financing, and used the proceeds to pay off more of our short-term debt.

We anticipate phasing out over time more of the financing that we're providing the venture, thereby reducing our total capital investment in the business even further.

Eventually, after phasing out more of the financing that we are providing, we expect to have about $300m of total invested capital in that venture, which is less than 3% of our total invested capital as a corporation.

As I said before, our net interest cost came in at about $64m for the quarter, which compares to $94m on last year's third quarter.

Obviously we benefited from paying down debt, and receiving interest income associated with the financing we're providing for the venture.

For the year, we feel the overall net interest expense will be approximately $300m.

I think the capital expenditures and depreciation will marry up and both of them will be in the range of 425 to $450m.

Our attention to capital discipline is the key part of our plan to boost our returns on invested capital, which we expect to show steady improvement as we move forward.

This year we expect a return on invested capital to be in the low double digits area, with continued upside as we shape the businesses to become America's favorite food company.

Now I'll turn it back to Chris for some comments on the segments.

I'm going to briefly touch on some of the issues that relate to our segment performance, comment on the bigger issues since we have details posted in the release as well as the Q and A document we have on our website.

Starting first with packaged foods, packaged foods' operating profits were $460m, down by $6m versus last year, and it reflects a mixture of pluses and minuses.

Our retail volumes were flat and food service volumes were down.

Overall segment volumes were down about 1%.

The foodservice results reflect the economy and the difficulties of some of our major food service customers.

However, many well-known consumer brands posted sales growth.

They would include Act II, Healthy Choice, Marie Calendar's, Swiss Miss, Slim Jim, and several others that we have posted on our website.

It's also important to note that segment sales but not segment margins were negatively impacted by price declines for branded meat.

That price movement is based on input cost, and as you know, proteins are very cheap right now.

So the lower sales prices hurt our top line but not our bottom line because we experienced lower product costs along with the lower sales prices.

Also important to the packaged foods sales performance is that we're improving mix by selling less cheese.

We've closed some cheese operations this year, and that hurts the sales line, but it helps the margins given the low profitability of the cheese operation.

We were up in the gross profit line for the packaged foods segment for the quarter, even with the difficult food service environment.

That tells us that our mix improvement and our cost savings programs are working.

We also spent more on advertising and promotion, about $20m more or so in the quarter and that weighed observe on the quarter's profits, but that was necessary to build for the future.

So when we take into account the weak food service environment and the increased advertising and promotion, those factors combined drove the lower packaged foods profitability.

Operating profits were $460m, as I said before, down only $6m compared to the same quarter last year.

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

That's through a focus on several different items, like more efficient operations, a better mix, new product, 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 think we have a lot of opportunity to grow packaged foods markets over the long term and we don't consider the short term food service environment to be a significant setback to our goal of margin expansion.

And finally, we expect disruption in the food service environment to continue to be a challenge in the fourth quarter.

We think the cost saving progress we're making in our retail operations should offset most of the food service weakness.

That should help produce overall solid results for the fourth quarter in packaged foods.

As far as commentary about the other segments, our food ingredients as you saw, sales were up but profits were down.

Sales were up due to better prices for grain milling.

Profits were down considerably for several reasons.

We have lower overall volume and part of that is due to increased competition from foreign garlic.

And we also wrote off some garlic inventory during the quarter because the market value of the inventory was lower than what we had it on the books for.

The garlic environment is going to be tough for a while and we don't expect that business to show profit growth in the fourth quarter.

Grain milling profits were down compared to last year, but that decline was not as significant as the decline in the garlic business.

Our meat processing business, while having sold the Swift & Company business during the second quarter to a venture in which we hold a minority interest, that significantly altered our segment results because that divestiture removes the beef import operating profits from the segment earnings base, so that affects the comparability of the current year and the prior year.

What's left in the meat processing segment is our chicken processing business.

The markets for fresh chicken are very difficult and earnings from chicken are down significantly, even though we continue to focus on operating and mix improvement opportunities.

The market for fresh chicken is very difficult right now.

Some of that has to do with excess protein supplies in general.

Also we wrote off some inventory given changes in value.

Primarily for those reasons, chicken processing profits for the quarter were almost $35m, below last year's third quarter poultry profits.

Given the market, we don't expect profits for this segment to improve in the near term.

Moving on to our agricultural products segment, that segment showed a nice increase in profits for the quarter, that was driven mostly by our distribution business, UAP, which sells crop inputs to growers, and that is enjoying success with improvement initiatives that focus on customer and product mix, credit and collection policies, and expense management.

Quite frankly, there's been a lot of improvement to the blocking and tackling in that business.

There's a relatively new team out there, and they're making a big difference.

We think that UAP is in for a strong finish for the year, given the timing of their improvement initiatives.

Our merchandising operations also showed profit growth for the quarter.

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 packaged foods and in agricultural products along with lower interest expense and weaker results for chicken and ingredients.

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

We mentioned this last quarter but I'll mention it again -- when we sold our fresh red meat business, we sold it to a venture in which we have a minority interest.

For this reason, we now have a line item on the P&L called equity method investment earnings net of tax.

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've been moved to the equity method investment earnings line.

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 need them for your model.

That accompanies our earnings release for December 19, 2002.

And just as a reminder, these remarks will be archived at1-800-642-1687 for domestic callers, and at 1-706-645-9291 for international callers.

The pass code is 805-3891.

This call will also be archived on the web at www.conagrafoods.com in the section for investors.

There you'll find a question and answer document relating to this release.

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

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

At this time, this concludes the ConAgra Foods management discussion.

You may now disconnect.