康尼格拉食品 (CAG) 2004 Q2 法說會逐字稿

Welcome everyone to the ConAgra Foods second 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 discussions of second quarter and first half of fiscal 2004 results.

I'm Chris Kleinfelter, Vice President of Investor Relations With me are CEO Bruce Rohde and our CFO Jim O'Donnell.

We released our earnings at 51 cents per share for the fiscal 2004 second quarter.

That makes for first half earnings of 87 cents per share.

That's a very strong start to our year.

As reported out in today's earnings release the second quarter earnings of 51 cents per share include charges of about 4 cents per share relating to the divestiture of UAP.

We mentioned the UAP charge when we announced the closing of that deal a few weeks ago.

We earned 44 cents per share in the same period last year and last year's numbers include 3 cents worth of expense related to selling the fresh beef and pork business.

We detail those items in the Q&A document that accompanies this release.

We had a very strong second quarter that came in at the top of our own expectations.

And I'll remind you that we generally expect our second and fourth quarters to be our largest contributor to the fiscal year's EPS and that remains the case this fiscal year.

As we will talk about in a minute, operating transfer in the package foods business have improved in terms of sales and profits adjusting for divestitures and other items.

Our balance sheet is solid, interest costs are where we like them and EPS from continuing operations showed a strong 18% increase in the quarter.

Also, contribution from businesses now classified as discontinued operations, meaning our former AG distribution operation, as well as chicken operation, that was strong in the quarter, and so was the income from equity method investments as we show in the financial tables on this release.

On top of all that we plan to start our billion dollar share repurchase program soon, so overall we're very optimistic about the rest of the year, given the issues that we have underway to focus on growing the top line and the bottom line.

We detail the impact of the quarter's performance in the release and in the Q&A document that accompanies this release and I'm going to refer you to those because we will not dwell on all the details today but we will touch on the ones that warrant it like some of the ones that I just mentioned.

Over the next few minutes Bruce Rohde will comment regarding our strategic objectives and Jim O'Donnell and I will comment on some financial and other matters.

Before we get started, I need to mention that during this discussion we'll 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 that we'll achieve in the future.

So if you'd like to read more about the risks and factors which can affect our business, I'll refer you to the documents that we file with the SEC.

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

Thanks, Chris.

First off I want to comment on the huge progress the ConAgra Foods teams accomplished so far this fiscal year.

We completed our program to strategically reshape our portfolio and that was wrapped up just before Thanksgiving with two significant transactions.

The first was the sale of our chicken processing business which follows last year's sale of the fresh beef and pork business as well as last year's sale of the tuna processing business and the cheese processing business.

So as a result of all those transaction we're now out of the non-core slaughter and protein processing businesses which were heavily oriented toward commodities.

The other major event was the sale of United Agra Products or UAP, which was our AG input distribution business.

That transaction closed on the same day as the sale of the poultry business.

So looking back, these were all good businesses but they were not strategic to where ConAgra Foods is headed for the future.

If you piece all this together and step back and look at the mosaic that we've shaped here, what we've accomplished is a reshaping and a redeployment of capital over a relatively short period of time.

In essences we bought a branded consumer foods business in IHF for $3 billion, about three years ago and we financed that with about $2 billion of debt and we issued close to a billion dollars of equity.

Due mostly to proceeds from the divestitures, we've essentially paid off that $2 billion amount of debt and we're now embarking on repurchasing the billion dollars of equity that we issued.

So when it's all said and done with our stock repurchase program, what we've essentially done is replaced $3 billion worth of commodity oriented businesses with $3 billion worth of branded and value-added businesses and that's the strategic shaping that I mentioned earlier.

We're now a much less complex organization, we're more targeted on consumers and customers, and we're exclusively focused on our agenda to become America's favorite food company with a strong portfolio of branded and value-added products for retail, food service, deli, and ingredients customers.

So again I want to say congratulations to our team for completing a major strategic plan that successfully repositioned this company for the benefit of the shareholders and now it's onward and upward.

With regard to quarter our overall earnings were very solid at 51 cents and that includes the 4 cent loss relating to UAP divestiture, so overall the company's ahead of third party expectations on our EPS.

As we told you earlier this year, our first quarter is normally lower on a relative scale, and our second quarter is normally higher.

And that has to do with the timing of our customers and the business that we do for the holidays.

We expect that each year.

Our second and fourth quarters are usually larger and stronger on a relative scale and as a result the first and third quarters are usually less so.

This year looks like it will stack up the same way, so net-net the second quarter was solid with packaged foods and food ingredients operating trends moving in the right direction so we're encouraged by the way things are shaping up.

Looking ahead we've got a lot of very important initiatives underway to grow the top line and the bottom line of the company.

At the core of the top line initiatives are sales and marking improvements.

Examples of these would span product and packaging quality.

They'd also include how we allocate marketing dollars between consumers and trade spending.

New products will play a role as well as better and more disciplined analytical approaches to how we market and how do we sell to the different channels of customers.

At the core of the bottom line initiatives are operational improvements.

And that means streamlining and integrating and improving the efficiency of our entire supply chain, from procurement to manufacturing, from warehousing to shipping, as well as a number of executional opportunities that are around for administrative, selling, and oversight functions.

So we've got some aggressive programs going on that we expect to drive some good earnings performance in the second half of this fiscal year as well as next year but like all good things, they don't come without some costs so we'll incur some costs periodically and when we do we'll report them to you so you can treat them as you want for your models.

We've run the numbers on the cost saving programs and they look pretty convincing, so we're more than willing to incur some costs that will pay for themselves many times over for future operations.

So at this point in the rebuilding and retiling at ConAgra Foods, I'll say that we're now focused where we should be as a company.

It's taken a lot of strategic work in terms of portfolio changes and operating changes to get to where we are now but I think the best is in front of us and I look forward to discussing our company's progress in terms of the top line and bottom line initiatives that we've got underway.

I'll let Jim and Chris elaborate on the details of how we expect the remaining quarters of this fiscal year to shake out.

Jim, I think you've got the details on that.

Yes, I do.

As Bruce said we're very pleased with the progress we made across the company.

We continue to improve our two key financial measurements, margins and cash flows generated.

Our gross profit margin again posted another record and improved 400 basis points over what we posted a year ago.

Likewise our operating profit margin also increased and hit a new record for us.

Of course the reshaping of our portfolio of businesses that we have achieved over the last 12 months is the primary driver of the year-over-year improvements in these metrics.

During the second quarter we continued our trend of generating strong cash flows and strengthening our balance sheet.

In the last 24 months since the end of the second quarter and fiscal 2002, we have reduced our debt by 31% which represents a reduction in debt of approximately $2.5 billion.

In addition to this debt pay down we have at the same time increased our cash balances by over $850 million.

The sale of our commodity businesses has strengthened our balance sheet and increased our cash flows, and as a point of reference we got that cash the day after the close of the quarter, so you don't see it on our quarterly balance sheet but you do see it as a receivable for those proceeds.

At the end of the second quarter after giving consideration to the cash received from the sale of United Agra Products and the chicken company, our capitalization ratio and that is the amount of debt less cash compared to the total capital employed, was well below our target levels.

Historically our capitalization ratio has been in the 50% range.

And we are below our historic levels.

Let me mention a few other financial points of interest including dividends, share repurchase program, capital spending and net trading working capital.

During the second quarter we paid a cash dividend to shareholders of over $130 million.

Our dividend rate is one of the best in the food industry and we have increased our dividend rate 29 consecutive years.

Due to the progress with our portfolio reshaping and due to our strong cash position we recently announced the authorization to repurchase up to $1 billion worth of the company's stock.

This equates to approximately 40 million shares which represents about 7% of the company's common stock.

Our share repurchase program is part of our strategic capital allocation program and we believe that a share repurchase is the best use of excess cash at this time and will create shareholder value.

We're generating strong cash flows from operating our businesses and in addition we've generated significant cash proceeds from divesting businesses.

Due to the debt repayments that we made over the last two years we have very little short-term or callable long-term debt at the present time.

As a point of reference, in fiscal 2001 we purchased the branded food portfolio of International Home Foods for slightly less than $3 billion.

We paid for that acquisition by assuming and issuing approximately $2 billion of debt and issuing common shares for the balance of the purchase price.

Over the last two fiscal years we have repaid the amount of debt associated with that transaction, and once we've completed the share repurchase program we will have also repurchased most of the shares issued in that transaction.

ConAgra Foods generates a substantial amount of cash annually and we expect to continue to deploy that cash towards investing for future growth, dividends, repaying debt, and repurchasing shares as appropriate.

Now let's turn to capital spending.

This quarter capital spending was on target and funded by cash flows from depreciation.

Likewise our net trading capital, and that is trade receivables and inventories less payables, showed solid organic improvement of over $220 million on a year-over-year basis.

Of course, if you take into consideration the sale of the two commodity businesses, the working capital improvements are even larger than this organic improvement.

Overall we are well pleased with all of our financial metrics that we use in the business.

So to summarize our financial performance, we are pleased and encourage with the continued improvements in our margins, our cash flows, and the strength of our balance sheet.

And we look forward to the second half of fiscal 2004.

So we'll move on to Chris.

Okay, Jim.

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

The performance numbers are in the release and some of the brand details are in our Q& A document that accompanies the release and that's also posted on our Website but I will comment on some of the bigger issues.

Packaged foods sales and profits were up adjusting for the impact of divested businesses and some costs associated with the efficiency initiatives Bruce mentioned earlier.

As these numbers were reported they showed a slight year-over-year decline but just to re-emphasize, that is due to the sales and process from divested business in prior year results.

And just as a reminder, the businesses that we sold were canned seafood and commodity cheese and we sold those last May.

We have several brands and categories that are moving in the right direction.

Indeed we have a few double digit growers for the quarter and we highlight those brands in the release.

But just to repeat we're seeing some very strong trends, meaning double digit sales growth with Banquet, Chef Boyardee, Reddi-wip, Egg Beaters, Slim Jim, Hebrew National, and PAM, just as examples.

And to give some other examples, other brands that posted year-over-year sales growth, that would be Hunts, Kids Cuisine, Marie Callender's, Orville Redenbacher's, Wesson, Snack Pack.

So the point I want to make is that overall our top 30 brands which represent in the range of two-thirds of our packaged food segment sales, that group is up 5% as a whole, and that's pretty solid.

Some of this has to do with our product beings on trend, in other situations it's new products that are making a big difference, and in some situations it's tactable marketing improvements but overall we're feeling very good about our opportunities for top line growth.

That's not to say that we don't have some brands and categories that are difficult and indeed we expect more out of them.

A big example there is the branded processed meats category.

That would be turkeys, hot dogs and lunch meat.

That's been a tough category recently and it's negatively weighed on our packaged foods performance.

We think that our brands will do just fine in that category over time but it is a bit of a challenge right now.

Back to the main point, the takeaway is that we have important top-line growth initiatives underway as Bruce referred to earlier.

It spans the basics like product quality and packaging as well as marketing mix and team selling programs, and we are seeing some encouraging trends in several key areas of the business.

As far as profits go, both segments show profit increases.

In packaged foods it reflects solid brand performance and effective cost management.

And in food ingredients it reflects better margins for some Ag merchandising operations as well as improvement in the dehydrated garlic and onions business.

As we said before, primarily due to operating efficiency initiatives we expect the second half to show strong segment operating trends with the fourth quarter doing most of the work.

To reiterate our points mentioned earlier our fourth quarter is generally a larger one for us than our third quarter.

We expect that trend to continue this year and we expect the rate of EPS growth to be higher in the fourth quarter than in the third quarter.

Realize that part of that is because in last year's fourth quarter, there were some charges related to selling the chicken business that will obviously favorably influence this year's fourth quarter EPS comparison.

The last point I want to make just to repeat, the operating efficiency initiatives that we have underway that we referenced earlier will result in some additional expenses in the second half of this year.

Right now the estimate for those charges is somewhere between 5 and 10 cents a share.

We believe they will more than pay for themselves over time with cost savings and a more efficient business.

Overall I'm optimistic about 2004.

It's already turned out to be a solid year and we look forward to reporting on our progress.

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

The passcode is 3626705.

It will also be archived on the Web at www.conagrafoods.com, in the section for investors.

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

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

This concludes our remarks.

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

Thank you ladies and gentlemen for participating in today's conference.

This concludes today's call, you may now disconnect.