康尼格拉食品 (CAG) 2003 Q4 法說會逐字稿

Good morning.

My name is Amy 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 2003 results.

I'm Chris Klinefelter, the Investor Relations contact for the company.

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

This morning we released earnings of 28 cents per share for the quarter.

That includes 14 cents of loss from discontinued chicken operations and we're classifying our chicken business as discontinued operations due to the deal that we announced on June 9th to sell that business to Pilgrim's Pride.

We earned $1.46 for the year and that includes 13 cents of loss from the discontinued chicken operations again to the Pilgrim's Pride deal.

Because of all the activity as we have significantly transformed our company, there are several items that affect the comparability of our EPS year-over-year.

We've detailed those in the Q&A document that's out on our website but the most significant one of them is the loss in discontinuing operations that I just mentioned.

Before we get started in the details, all in all, our year was pretty solid.

As a result of the chicken deal, it wasn't our best year in terms of EPS on a GAAP basis but it was very solid in terms of some other important items like margins, cash generated, and our leverage position.

And we accomplished all of that in the midst of making substantial changes to our business.

Bruce will get into those changes in a minute, but some interesting items we'll touch on include a significant profit improvement in our agricultural products business.

That business has really turned around nicely when you look at the annual profit improvement, as well as significantly lower interest expense and some income from settling an insurance claim that we mentioned in the release.

As usual, 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're going to discuss the more complex items that deserve some comments.

Over the next few minutes, Bruce Rohde will provide his comments and then Jim O'Donnell and I will fill in some financial details and highlights.

But before we get started, I need to mention that during this commentary we're 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 that we'll achieve in the future, so if you would like to know more about the risks and factors which can influence and affect our business, I'll refer you to the document that we filed with the SEC.

Having said that, I'll turn it over to Bruce.

Thanks, Chris.

I'll start by saying that we're pleased with the solid performance this year and by the volume and significance of the portfolio changes that we've accomplished.

I'm going to say more about those in a minute.

First, though, when I look at the margins, the cash generated, and our overall team, I see a lot of improvement.

However, I know we've still got more to do and that we can accomplish more.

Our overall operating results showed some of the same trends for most of the year.

Retail volumes were okay but they weren't great, but that's partly related to the environment.

Food service results were somewhat hurt by the economy.

Our Food Ingredients business had a deal with some intense foreign competition, but even though the economy was tough in rural America, the team out at UAP turned around that business, and they did that by focusing on the basics.

So net-net from the operating side, we've had some good pluses, we've had some minuses, but we met or exceeded all of our major goals for the year.

In my opinion the operating results, though, don't tell the main accomplishments for the year.

Our portfolio changes do that.

If you've been following us for a while, you know that we've communicated our strategic plans to favorably change our portfolio.

We started with a series of acquisitions and then we followed that up with a series of divestitures, and we've done exactly what we said we were going to do.

We reached some important milestones in this fiscal year and we succeeded in focusing our company on branded and value-added opportunities.

We divested our fresh beef and pork business last fall, we divested two in the last month, we divested our cheese processing operations and now we reached to divest our chicken business.

So in essence we divested or reached an agreement to divest all of our commodity proteins throughout year and that's a huge accomplishment when you think collectively all of those things together were close to $11 billion in sales and north of $2 billion in book value.

We expect we're probably going to make some more changes to the portfolio as we continue the path we started.

Our goal is to focus our resources on branded and value-added opportunities that can boost our margins and returns and lessen the volatility of our results.

This has been an evolving but a very intentional process and we made some very, very significant headway this year in terms of our publicly stated agenda.

While the divestitures are a very significant component of our progress and a big piece of the fiscal 2003 headlines, there's more to our agenda than that.

Most of you know that we're undertaking a series of changes that have been cutting across our operating capabilities, that have been impacting our sales and marketing approaches, and have also been impacting how we deploy our resources.

This is all part of our plan to improve our margins and returns.

By the way, we want our package foods operating margins to be 15% by the end of fiscal '05 as a short-term goal, and we could even be better than that a couple of years after that.

This year it was 13.4%, which is significantly higher than last year.

Now let me comment on fiscal '04.

Let me be very clear that we think fiscal '04 will be solid in terms of core operations.

However, let me briefly explain why we aren't providing any specific range or target.

The fact that we aren't giving specific EPS guidance doesn't have anything to do with any type of operating issue.

It has to do with some pending decisions about changes to our supply chain and the possibility for further portfolio changes, both of which can impact short-term earnings.

Having said that, I'll say that our expectations for most years, given what we're currently seeing for the economy and for the industry, is for operating earnings from businesses that we own all fiscal year -- let me repeat that -- it's for businesses that we own for all fiscal year is to grow at a mid to high single-digit rate.

In some years it may be better, in some years it may not, but that's the basic expectation.

One thing I can offer about the first quarter of fiscal '04 is that it should be below last year, largely reflecting changes in business mix.

In other words, the comps are going to change due to changes in the business mix, and we've laid that out in the press release.

So having said that, my message is that I'm optimistic about fiscal 2004.

It should be rewarding in terms of the richer business model that we've been building, and with that I'll turn it over to Jim.

As Bruce indicated, we are on target with our program to reshape our portfolio of businesses and we're pleased with our progress.

Our focus is to reduce earnings volatility which will enable us to get the appropriate multiple for our earnings strength.

We are also pleased with our progress in two other important measurements, meaning margins and cash generated.

To echo what Bruce said, overall operating margins increased from 7.6% to 9.7%.

That's an improvement of 28% during the last year.

Margins for the Packaged Foods segment, our most profitable area of business, posted another year of gain, increasing from 12.7% to 13.4%.

Things are definitely moving in the right direction.

We still had some upside in these performance metrics due to potential portfolio changes, our brand building efforts, mix improvement opportunities and cost savings initiatives.

All of this will help us achieve our goal to grow our Package Foods operating margins to at least 15% by the end of 2005.

During the year we also made some substantial progress in debt repayment.

At fiscal year end, our debt and preferred securities, as well as the asset securitization reduction, less cash on hand, were over $630 million less than the prior year.

This debt paydown was achieved even though we made a tax deductible contribution of around $220 million of cash to our pension funds.

As we closed this year, our capitalization ratio, and that's the amount of debt less cash and our total capital employed is 51%.

That's an improvement of 19% over the last 24 months.

Strengthening our balance sheet through debt reduction has been a priority for us, and we're real pleased with the strength of our free cash flows.

Interest expense came in at a very low number for the quarter and the year.

It was $59 million for the quarter and $276 million for the year.

These improvements reflect our strong cash flows, the progress we made on the balance sheet, and the positive effect of interest rate hedges that we had on the cost of money.

Let me move on to a few other points.

While I won't dwell on the specifics of capital expenditures and depreciation and amortization because we talk about these numbers and they are included in our Q&A document, I will say that we ended the year with capital expenditures being less than total depreciation and amortization.

CAPEX was $427 million and depreciation and amortization was $462 million.

That is a goal that we set internally for ourselves, which is to say that CAPEX should be less than D&A for most years.

Another thing I'll briefly touch on is the changes to our reporting segments.

Since we have committed to sell our chicken businesses, and we plan to close that transaction later this summer, it is now accounted for as discontinued operations.

So you won see that business, either currently or historically, in the meat processing segment.

Chicken sales and operating profits are now out of the meat processing business, and that has substantially changed the current and historical results for the segment.

Reclassified numbers are available at our website for those of you who want to adjust the historical numbers in your model.

Also, the commodity procurement in merchandising operations have been moved from the Agricultural Product segment to the Food Ingredients segment for reasons that we explained in the release.

We now call the sourcing and merchandising functions Basic Ingredients.

And as a result, the sole remaining operating company in the Agricultural segment is United Agri-Products, an agricultural distribution company.

The Food Ingredients segment includes the milling, spice, and the basic ingredients businesses.

Again, for those of you with models, the historical numbers are available at our website.

Also at the website are projections for fiscal 2004 covering various other items like interest expense, capital expenditures, and depreciation and amortization for the coming year.

So now I'll ask Chris to say some brief comments about the segments and other housekeeping matters.

As far as the segments go, I'm going to briefly touch on some of the highlights.

Most of these are in the release on the Q&A document of our website so I'll stick to some of the high level and more complex matters.

We're taking a look at the Packaged Foods sales, our overall sales were down about $80 million compared to last year.

Most of that came from divesting our K&C food business and also because some of the selling prices for some of our branded process meat items are lower and that's due to lower input cost.

Packaged Foods operating profits reached $419 million for the quarter.

That's about $19 million down compared to last year.

That's because we wrote down some of the inventory in our refrigerated foods service business and that was about $24 million worth of impact.

Segment volumes were down 1%.

That's mostly because of the food service environment.

Our consumer package volumes that we sell through the retail channel were close to where they were last year with some pluses and minuses in terms of the brands as we say in our release and in the Q&A document.

Some of our brands grew and some of the changes may have been impacted by timing and promotions.

We are investing more in consumer advising and promotions to strengthen our brands and to build for the future.

We're also doing a lot in terms of product quality, SKU reduction and packaging improvement that's all about increasing the consumer relevance of what we offer.

Food service volumes were down a little, reflecting a tough environment, but we did see some encouraging trends with some key product lines and we believe that that business could be headed for a more normal performance in fiscal 2004 compared to the last couple of years.

The same initiatives we've talked about before are still in place for our Packaged Foods segment, brand building, product mix improvement, cost savings, and customer service improvement.

We've got a lot of potential for margin expansion with these, and Bruce mentioned that a minute ago.

But also we have some increased strategic marketing spending planned for the first quarter, and that's going to affect the comparison with the first quarter of fiscal 2003 results.

As far as commentary regarding the other segments, in Food Ingredients, sales were up, the profits were down.

Sales were up due to better prices for milled products and commodity merchandising.

Profits were down because of lower margins and lower volumes for garlic.

The garlic situation is mostly due to heavy foreign competition, it has to do with large quantities of foreign garlic entering the U.S.

We saw those patterns for most of the year, and that segment ended about where we thought it would.

For the Meat Processing segment, and for all practical services, there's not going to be any more Meat Processing segment.

The chicken results which were previously in this segment are now discontinued operations.

We did have some profits relating to an, settling an insurance claim during the quarter that had to do with a beef plant fire a couple of years ago.

Those proceeds resulted in a gain, and that gain comprised all of the segment's operating profit this quarter.

The amount shown for the prior year are the beef and pork profits that we had when we still owned the business last year.

Agricultural Products showed a nice profit increase.

It's a very strong turnaround.

We ended the year up with over an $80 million improvement compared to last year.

Given the reclass of our commodity procurement and merchandising functions into the Food Ingredients segment as Jim was talking about, what's left in the Agricultural Products segment is our distribution business known as UAP, and that sells crop input to growers.

The new team there has really turned things around by improving the basics, meaning customer and product mix, credit and collection policies, and expense management.

They have come a long way and they had a lot of improvement to their basic blocking and tackling.

We have plans for all of our segments except meat processing for reasons that I just described, to post an operating profit growth in fiscal 2004.

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

These are on the Q&A document but I'll repeat them anyway because some of them are confusing.

Reclassifying the chicken business into discontinued operations alters historical segment numbers because it completely removes everything associated with that business, meaning the sale, the cost of the product, the SG&A costs, et cetera, from the segment into discontinued operations.

So prior year segment sales and profits will change as a result of the chicken business becoming reclassified as discontinued operations.

In addition, you'll notice that the loss from discontinued operations is 14 cents for the fourth quarter and 13 cents for the year.

Amounts shown for discontinued operations for the quarter include the 13 cent writedown of assets related to the deal.

That's how we described them in the release that we had on June 9th about the agreement to sell that business.

But the quarter results also include a penny of regular loss from operations of that business.

In terms of the year, the loss from discontinued operations was only 13 cents, reflecting that 13 cent writedown and a breakeven at the operating level.

So to be clear, for those of you who are trying to reconcile for items affecting the comparability in the fourth quarter, I suggest you use 13 cents since it relates to the writedown of the assets.

The other penny of loss from discontinued operations reflects normal losses from the business, and I wouldn't consider that to be a reconciling item.

In addition, you'll notice that the amount we have cited for the benefit of FAS 142 for the quarter is 6 cents.

For the past two quarters that's been 5 cents.

The difference for this quarter has to do with rounding.

Also we had an effective tax rate of close to 31% for the quarter.

That is unusually low, and it reflects the impact of some items relating to the divestitures that we have done this year.

But that rate should not be used as the tax rate going forward.

We comment on our suggestion for that in our Q&A.

This concludes our remarks.

Just as 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 for the archived call is 9851129.

They will also be archived on our web at www.ConAgrafoods.com in the section for investors.

You'll also find a question and answer document relating to this release on our website as we've mentioned before.

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

That concludes our remarks and thank you for your interest in our company.

Thank you for participating in today's ConAgra Foods fourth quarter management discussion.

You may now disconnect.