康尼格拉食品 (CAG) 2004 Q1 法說會逐字稿

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

At this time I would like to welcome everyone to the ConAgra Foods first 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 fiscal 2004 first quarter results.

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

With us are the CEO Bruce Rohde, and CFO Jim O'Donnell.

This morning we released earnings of 37 cents per share.

Our first quarter is usually one of our lightest in the year because our second and fourth are usually the most significant.

In taking that into account we are actually ahead of where we planned to be after the first quarter and the second quarter is off to a good start and that is in line with our expectations as well.

Having said that I should point out for the same quarter last year we earned 43 cents and last year that included about four cents per share of earnings from businesses that we have since divested in beef, pork, tuna, and cheese.

As well as another peppy of earnings due to changes we paid as a result of new accounting rules.

As I mentioned, because of our divestiture program and the timing of a number of new activities we planned for this quarter to be below last year, so the quarter overall direction was in line with general expectations.

Now we're into the selling period of the second quarter.

It is a big time for us because it is when we do most of our holiday business.

Year over year we posted operating growth in the Ag products business.

We improved our interest cost management we lowered our debt working capital is lower cash flow is strong and we have mixed results in the packaged ingredients segment in the first quarter with a number of products being up and some down.

This quarter was one with a number of things were dealt with.

The 37 cents of earns per share include the net effect of litigation cost of [Inaudible] the impact of adopting new accounting rule and some tax benefits brought about by our interest rate hedging strategies that we had in place and we'll say more about that in a minute.

Overall we have five items that make this comparison difficult that does not make the communication of all the moving pieces easy so I'll recap it this way.

We have three items in the current quarter to understand.

Taxes, legal matters, and accounting rules.

And we have two items from last year.

Divested businesses and accounting rules which total up to five items which effect the year-over-year EPS comparability.

We detailed the impact of those in the release and summarize them again in the Q&A document and I'll refer you to the Q&A document if you'd like to know more about those details.

With that being said we will not dwell on all the details but as we discuss the quarter we'll touch on the ones that warranted like those that I mentioned.

Over the next few minutes Bruce Rohde will comment and then Jim O'Donnell and I will comment on financial and other matters but before we get started I need to mention that during this discussion we will be making some forward-looking statements and although we are making those statements in good faith and 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 read more about the factors and risks which influence and affect our business I'll refer you to the documents we file with the S.E.C.

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

Okay Chris let me start by saying that the overall direction for the quarter fit with the overall expectations we had for the first quarter due to timing and a variety of other factors.

Each year we expect the first quarter and third quarter earnings to be less significant than the second and fourth quarter and that pattern seems on target with what we're seeing this year. 37 cents per share was actually above what we planned for this quarter but as Chris said it had a lot of pluses and minuses in it.

As it given we knew this quarter earnings would be below last year and we mentioned that at the outset of the year, and that’s most noteworthy because the impact of the divestitures.

Just to refer everyone on the divestiture, during the first quarter last year we still owned the beef business, pork business, tuna business and the cheese business.

We sold all those in separate transactions during fiscal 2003, and since we haven’t yet gone through the anniversary dates from when we sold those, their former presence is going to impact the year-over-year sales and earnings comparisons and it's going to create some confusion.

Unfortunately it's going to create confusion throughout the entire year and we apologize for that but that's simply a fact of life.

As you recall we elected to get out of several businesses because of the risk reward profiles.

It gave us lot more volatility than we wanted and didn't provide sufficient profit margin to compensate some of the risks associated with the volatility.

So while they got many good attributes it attracted from our overall portfolio and distracted us from our mission.

So to get on to one of the main points for today we reported 37 cents of EPS but from my perspective even though we planned for more at the operating line as the year end unfolds we didn't achieve the quality of earnings in the first quarter that I know we're capable of.

In other words our plans are weighted more towards the second and fourth quarters but even though we didn't generate the quality of earnings in the first quarter that we ought to achieve.

In spite of that we're off to a good start in the second quarter and confident that fiscal 2004 will be a solid year given the developments we're seeing inside the business with the number of initiatives.

So what are the initiatives that we're focusing on 2004?

First off we planned to complete the divestiture of our chicken operations in our second quarter and after that we will divested all of our commodity proceeds as part of our strategic initiative to improve the overall quality of our port folio.

So that we're focused on branded and value-added opportunities.

We've said repeatedly that we want our capital concentrated in branded and value-added food products an we've made significant progress along those lines.

In addition we'll continue to focus on the profit enhancing projects we have under way in areas you heard us talk about before, this are things like brand building our targeted customer programs bundled product promotions that we do, new products and customer service improvements which we were accomplishing through things like our logistic our information systems and streamlining our back office operations.

We are pursuing number of cost savings throughout our system.

We think there are significant opportunities in that regard.

I should also mention that In this quarter we've added executive leadership and logistic and marketing.

Along those lines we have got the [Inaudible] to become America's favorite food company, and to better communicate that we just added executive communications as well as sponsorships.

So all in all the initiatives I've just mentioned and the recruiting of top talent are key parts of our building blocks.

They're ongoing initiatives that are going to span several reporting periods but then again that’s all part of the transition that we undertook to transform this company and to boost our margin and returns in our consistency.

As you know when we closed out the last fiscal year, we achieved an all time high on our margins and we aim to beat those targets again this year.

As many of you also know we're doing some things to boost top line performance.

These are not going to be readily apparent to the sales numbers at this point because the divestitures happen to shroud the situation.

The divestitures have taken several of billions of dollars from our top line actually its close to $11 billion, as I mentioned the year over year comparison is going to be skewed throughout this fiscal year because of that.

Our ongoing businesses however we are strategically serving customers with customer devoted teams and we are strategically targeting investments behind our brand.

We're carefully improving our product quality and updating our marketing processes for the areas in which we now compete and we are streamlining the way we go to market.

We have already got a number of bright spots in terms of top line growth I'd like to mention.

Our frozen food unit is ready to first to be driving to our marketing platforms and they're reaping some benefits as a result of that.

Our deli business is also driving the new marketing platform and they're doing well and certain segments of the food service environment seems to be showing some positive signs so we're encouraged about opportunities for top line growth.

We're also encouraged about our sales trends in many of our major categories and I'm sure Chris or Jim will go into that in a minute.

The specific program to go top line across all of our major business to be clear, we're not relying on strong top line growth to drive solid performance in fiscal 2004.

Instead we're looking with equal or greater weight this fiscal year toward our cost initiatives because that's what we think the environment requires at this point in time.

Overall we expect 2004 to show solid operating trends due to some fairly significant opportunities for efficiencies and cost savings that our folks are pursuing.

We're streamlining our supply chain and our administrative functions.

At the same time we are reinvesting in our brands to fuel profitable growth so between both of these we are finding ample fuel to generate a solid year from a operating perspective so in short we're making progress and relentlessly carrying out our strategy to reshape the company and making it more marketing proficient and operating efficient.

Net-net I expect the most significant earnings contributions to be second and fourth quarters.

That pattern seems more likely than not to asides from quarterly timing around the first and third quarter, we look for a strong year-over-year performance.

I'd like to thank all of you for the interest in the company and we look forward to reporting our progress through fiscal 2004 and with that I'll turn it over to Jim.

As Bruce indicated we remain on target with Portfolio changes, two key measurements continue to improve margins and cash flow generated.

Again this quarter both improved.

The gross profit margin was a record for the first quarter hitting 19.4% an improvement over 440 basis points over last year's first quarter.

Likewise our operating profit margin improved over 120 basis points.

We're continuing with our three year trend of generating strong cash flows and strengthening our balance sheet.

Since the end of the first quarter in fiscal 2002, now that's two years ago, we've reduced our net debt by 32% which represents the net reduction of approximately $2.6 billion.

Of course, we're pleased with this progress.

At the end of the quarter our capitalization ratio, that is the amount of debt less cash and total capital employed, stood at 50%.

That's at our target levels, so we've now achieved that goal.

Also, keep in mind that our solid cash flows and the debt pay downs are the drivers of the quarter's 21% improvement in interest expense.

I'll say more about that in a second.

Let me mention a few other points including dividends working capital capex spending and interest expense.

During the quarter we paid our normal dividend to shareholders of approximately $130 million.

And also, net trading capital, and that is receivables and inventories less trait payables, continues to improve and it's down approximately $1.5 billion from the first quarter last year.

This improvement is driven by the change in the mix of our business portfolio, and a focus on working capital management.

Capital expenditures spending for the quarter was on target and it was funded by depreciation.

Overall we are pleased with all of these improvements in our financials.

Turning to interest costs, they came in at $66 million, and that's significantly lower than the $84 million from last year's first quarter.

Most of that improvement came from reduced levels of debt, but to a lesser extent more favorable interest rates also helped to reduce the interest expense.

And while I'm mentioning interest rates, let me talk about some of the actions we commenced two years ago relating to interest rate planning and how that impacted our effective tax rate this quarter.

We closed out some interest rate hedges we put in place as part of our strategy to protect our P&L from interest costs associated with long term debt.

When we closed out these hedges and fixed the interest rates this allowed us on a go-forward basis to utilize a capital loss carry-forward as part of our business disposition process.

As a result of these actions in the settlements of some tax audits our effective tax rate for the quarter was much lower than the normal 38%, which you will see on a go-forward basis.

Turning to the pending sale of the poultry business we expect to close this transaction before the close of our second fiscal quarter and this disposition will generate additional cash proceeds that will be used to further reduce debt.

So I'll turn it back to Chris.

I'm going to briefly touch open some of the issues that relate to the segment performance.

The performance numbers are in the release and some of the brand details are on our q and a document on the Website so I'm not going to comment on all of those but I will touch on the bigger issues.

As Bruce said our first quarter is generally one of smaller quarters, our second and fourth are typically largest.

Packaged Foods are down in terms of sales and profit, however most of the sales decline had to do with selling the can seafood and cheese businesses last spring.

Divesting those businesses cost us a little bit of sales and profits in the short term, but doing that insulated us from some larger term issues that we did not want to get in the way of our progress.

Nevertheless our first quarter was not robust nor do we expect it to be.

Having said that I'll say that several brands and categories are moving in the right direction.

Our sales went up in many key categories for example in frozen meal with brands like Banquet and health choice in [Inaudible] cousin all increasing sales for the quarter.

And the category called Canned pasta brand of Chef Boyardee that's up.

Tomato products are up with our Hunt's brand showing an increase, [Inaudible] showing and increase, cooking spray is up with our PAM brand showing an increase.

Dinner kits are up as a matter of fact we invented that category with the Banquet home sale bake sale brand not too long ago, and we had growth there during the quarter.

Liquid eggs are up with our brand of egg [Inaudible] showing an increase.

Meat snacks are up, our slim gim is up, Chili with our Wolf brand being up and there are several others like sausage, oil, and beans so net net we are growing sales in many key categories.

That not to say that we can't improve because we have some that are down this quarter like Butterball and microwave popcorn, lunch meat, ketchup and some others.

Turning to food services those earnings are down but not Broad based we had some key areas of that business that are showing improvement and we think the environment is showing positive signs in certain segments.

During the quarter we invested behind new products in several categories including shelf stable meals, snacks, frozen meals, and desserts.

New products are key part of our plan and profitably grow our top-line and we can expect to see a fair amount of new product activity over the next several quarters.

We're also improving our marketing mix spending an increasing percentage of resources towards consumers to help pull things through the tray.

This is part of our overall sales and marketing improving initiatives that we have going on.

Inside the company it's part of what is known as our marketing manifesto.

It goes hand in hand with better product quality, more effective spend of marketing dollars, improving service, bundled product offerings, coordinated product development through culinary centers of excellence and several other things that speak to marketing well and selling effectively.

There is a lot of important work going on to boost margins while improving the mix in the top line.

And cost savings will also play a role here this fiscal year as well.

As you heard Bruce mention a minute ago.

Moving on to Food Ingredients we are seeing good flour prices but they are being more then offset by lower volume as we expected from some of our basic ingredients operations, in terms of that segment overall profitability it was down about $8 million compared to last year.

Most of that has to do with hire input cost as well as some lower profits from our merchandising operations.

In the Agricultural Products segment they have continued the turn around they started last fiscal year and increased operating profits by $20 million again this quarter.

The team there is doing a fantastic job and they're making great strides by improving the basic blocking and tackling of the business.

Things like Customer product mix, customer [Inaudible] collection, and overall expense level in the business et cetera, sales are down a little that's as planned as they continue to shift customer mix and to be selective about their customers.

Just as a reminder we no longer have a meat processing segment for the current result since we have divested or will soon have divested all of that portion of our company.

We showed the results for the chicken business for the quarter as discontinued operations.

Their earnings were about a penny lower than what they did last fiscal year's quarter and we expect to complete that divestiture in the second quarter.

Now that we are done with that I will say I am also optimistic about 2004.

It should be a solid year and we look forward to reporting on our progress.

Just as reminder these remarks will be archived at the telephones numbers mentioned in today’s earnings release.

And also be archived on the web at the address specified in today's earnings release and as always we're available for discussions at 402-595-4684.

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

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

You may now disconnect.