康尼格拉食品 (CAG) 2004 Q3 法說會逐字稿

Good morning.

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

At this time, I would like to welcome everyone to the ConAgra Foods fiscal year 2004 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.

Welcome to ConAgra Foods' discussion of third-quarter fiscal 2004 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 announced earnings of 38 cents per share for the fiscal third quarter of 2004; it was a solid quarter.

It adds up to year-to-date earnings of $1.26.

At the core of it, we're seeing positive results in several areas of our business and our year is shaping up as planned.

We're going to say more about this in just a few moments.

Third-quarter earnings of 38 cents per share and the prior-year earnings of 30 cents per share include some items that relate to the comparability and we detail those in the release and the related Q&A documents, for those who want that type of information.

As we will talk about in a minute, operating trends from our Packaged Foods and our Food Ingredient segments are moving in the right direction.

Both of those segments posted good results.

Sales are growing in important areas, profits are solid, our balance sheet and interest expense are where we want them and, as we have said before, we remain focused on sales, mix and costs.

So overall, our fundamentals are continuingly strengthening and we are encouraged by our progress.

We also started our share repurchase program during the quarter, buying back over 8 million shares, and that is a part of our capital allocation (inaudible).

We detailed the impact of the quarter's performance in the release and in the Q&A documents and I will refer you to those because we will not dwell on all of the details but we will just discuss the major items for the quarter.

Over the next few minutes, Bruce Rohde will comment regarding our strategic objectives and then 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 will be making some forward-looking statements.

Although we're making those statements in good faith and we're confident about our direction, as you know, we do not have any guarantee about the results that we will achieve in the future, so if you would like to read more about the factors and risks which can influence and effect our business, I will refer you to the documents that we file with the SEC.

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

Thanks, Chris.

Our third quarter was a good quarter; actually, it was better than what we planned or saw on the horizon for this part of our fiscal year.

I think it is a good indication that many of the initiatives we have underway to build ConAgra Foods into America's favorite food company are now starting to pay off.

Transition like our company has gone through is not easy but it's good to start seeing the payback.

We have got several bright spots right now.

For example, sales to all major customer channels in our Packaged Foods businesses -- and that encompasses resale consumer products, foodservice and deli grew on a comparable basis.

By that, I mean I'm comparing the businesses we have on our portfolio this year against how they performed last year, and they did better this quarter.

Let me give you some concrete examples.

Our top 30 brands grew over 6 percent as a whole and that was ahead of our expectations.

We had several bands that posted double-digit sales growth.

We had several categories with share gains, and we picked up a number of points of distribution.

We also saw increased business with a number of foodservice customers.

We're doing well there in many respects, both with key customers and major product lines.

We can say the same for our deli business as well.

We're also pleased with our Food Ingredients business.

It enjoyed a good performance, both in terms of topline and operations as well.

So, when we take all of this into consideration, we had a solid quarter.

Those of you who have been following this, you know that we have strategically repositioned our capital and our company over the last few years.

We have methodically invested our capital in branded and value-added products and we have methodically divested our commodity operations.

We think that our current mix of business does more for our shareholders because it provides a stronger and more consistent earnings base with much less volatility than we had in the past.

For all intents and purposes, we essentially wrapped up the divestiture program in our second quarter, so in essence, the quarter we just completed is the first one where we had a business mix that solidly focused on Packaged Food and Specialty Ingredients.

Our goal is to profitably grow these business lines and as we do, we want to strengthen our market positions, our margins and our returns.

Getting there is going to be a combination of executing the basics in terms of mix, marketing, capabilities and costs.

Along those lines, there are a lot of actions underway right now to make us more efficient in terms of basic operations.

Again, let me give some concrete examples.

To optimize production and distribution systems, we are consolidating some manufacturing and distribution facilities; we are honing in on our supply chain practices; our logistics and information systems platforms have undergone makeovers and are performing well with more benefits to be achieved as time progress.

We're also in the process of consolidating our R&D resources around centers of excellence to optimize our collective talent pool.

We are consolidating customer service and streamlining a number of administrative functions in customer interfaces.

All of this is part of our multi-year program to improve our operations and optimize our scale so we can give our customers a level of service that is going to best serve their needs.

We believe that there is real business advantage here, especially given the level of sophistication of our customers and their desire to streamline their operations and to tighten up their supplier relationships.

So (indiscernible) that turning our service capabilities into business linkages and that is why these types of initiatives are getting so much of our attention right now.

We think that translates into solid customer relationships and margins out front.

It is also why we're investing some incremental effort and expense around these kinds of things this year.

We have identified those costs in our earnings release and we will continue to do so when we incur them, so you can plan for these.

There are some more expenses like this in the horizon in the range of about 4 cents per share or so that will be absorbed into the P&L in the fourth quarter.

I should point out that these operating types of initiatives are only part of our strategy.

Our other initiatives are more directly related to sales and marketing and again, some more concrete examples.

We're now one year into retooling our marketing approach to build brand equities more effectively and consistently; we're utilizing fact-based analytical tools to identify opportunities and evaluate our marketing investments; we're strengthening the basics of our products in areas like quality, packaging and of course, taste; we're paying attention to how we communicate our value proposition to consumer and trade customers all across our food business, whether it is in retail consumer products, foodservice or ingredients.

So, using our most recent results as a gauge, I would say that things are starting to take shape with regard to topline progress.

We have got some brand equities that have had many successful quarters of growth.

I'll mention just a few like Redi-Whip, Egg Beaters, Slim Jim, and Banquet, as well as Hebrew National, which has done very well.

On a related note, we're also seeing some of the stronger share positions we've seen in a long time for several of our items.

Our share strength is confirmed by information we get directly from customers, so we consider it a reliable indication of our progress.

I will also point out that consumers of many of our brands, like Chef Boyardee, or Pam, or Marie Callendar's, or a number of others seem to be responding very well to the improved marketing frameworks that we have been implementing.

There are a lot of things that are driving that, like product changes, improvements in how we communicate with consumers, as well as new products and renovated products and cross merchandising amongst all of our products.

Net-net, things appear to be headed in the right direction in this arena.

The main point is that we are developing some momentum and that is not just with consumer brands like the ones I just mentioned; it is also in our culinary and specialty lines and our foodservice business, where we market value-added and customized menu items for just about any place or any kind of menu item that you can imagine for away-from-home eating.

We're doing well with many key counts in that channel and we're strengthening our foodservice organization through a major consolidation here in Omaha of several functions within that business to optimize our sales strength, our customer service and our menu development efforts.

That, of course, is all designed to make our foodservice arm even stronger in the future.

You'll continue to hear about our topline initiatives, about our cost savings projects and our customer focus initiatives across our food operations because that is where our attention is and where it is going to be in the foreseeable future.

On that note, I should touch on one component of our topline growth initiatives, which is timely innovation, and briefly mention our most recent innovation news.

It is a new line of convenient frozen meals for carb-conscious consumers and it is called Life Choice.

It is targeted toward carb-conscious folks in a very responsible and consumer friendly way.

We launched it and sold it in the marketplace towards the end of January.

We were the first among major companies with a new line that is specifically dedicated to providing nutritionally designed, carb-conscious meals.

It's not just components to reduced versions of existing products.

The response to this product line has been very strong so far.

The products are already available nationally and based on the feedback we're getting, we think that this new product line is going to have some legs.

As you might expect from a company that is on the move like we are, we're committed to profitable innovation and we have got some other very promising items in the pipeline.

We will talk more about those in due course.

Looking forward for a moment, I will say that, at the present, we should wrap up the fiscal year with a solid finish.

That is due to the initiatives I just highlighted.

While the business environment isn't perfect -- in fact, it's got many challenges.

For example, the rising input costs that our industry is dealing with at the moment, as well as what we do not know and can't control about the state of the economy lately.

But I still think that we will management through it as well as anyone can and that we will finish with a solid year.

So, I would like to say thanks for your interest in our company.

We have a lot of things going on to move our topline and bottomline in the right direction.

We're making some good progress, so I look forward to updating you.

Now, I will turn it over to Jim for some financial details.

Thank you, Bruce.

From a financial perspective, we posted another solid quarter.

We're continuing our progress in the key areas of capital management, and I want to hit on a few of the highlights.

Here are a few examples.

Our nine-month net cash flows from operating activities were strong at approximately .75 billion and we had a strong contribution for the third quarter.

Total capital expenditures were $91 million for the quarter, which was roughly equal with our depreciation and amortization, so these roughly offset.

Interest expense was on track at $62 million, which is about where it was last year.

During the quarter, we bought back about $218 million of stock, representing about 8 million shares.

In addition, we paid about $138 million of dividends to our shareholders.

As we ended the quarter, we had cash balance on hand of 534 million.

Looking at some other items on the balance sheet, year-over-year debt, net of cash, decreased over $925 million.

Our net debt as a percent of total capital at the end of the quarter was 49 percent, which is within our target range.

So on balance, we had a solid quarter in terms of capital items and net operating cash flows.

Now, I want to say a brief word about an accounting change, the adoption of FIN 46 and its effect on our balance sheet.

FIN 46 is new for many people and we adopted this accounting change in the third quarter.

FIN 46 deals with the consolidating and deconsolidating of certain entities, including ones that lease property to us.

It had almost zero impact on our statement of earnings but it did add some assets and liabilities to our balance sheet.

These assets and liabilities are related to assets that we're currently leasing and in addition, it reclassified $175 million of preferred securities into long-term debt, as we deconsolidated a financing subsidiary.

I will refer you to our press release that has a section discussing FIN 46.

Given the strength of our balance sheet and the size of our capital base, adding these assets and liabilities to our balance sheet is not a substantial issue but it is worth noting for folks who track year-over-year balance sheet changes.

So, in summary, our capital allocation discipline continues on target and we expect to finish our year on a solid note in respect to capital items, including cash flows, debt, CapEx, interest dividends and share repurchases.

We will now turn this over to Chris so he can wrap up some comments on the segments.

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 on our Web site, so I will not dwell on all of those but I will comment on some of the more significant items.

Packaged Foods sales and profits were up at a solid rate, adjusting for the impact of divested businesses as well as the costs associated with efficiency initiatives that you heard Bruce talk about earlier.

As the numbers were reported, they showed a slight year-over-year decline.

Just to reemphasize, that is due to the sales and profits from divested businesses and prior-year results, meaning the seafood and cheese businesses we sold last May.

This is also due to the $24 million worth of costs relating to efficiency initiatives, which are in the current quarter.

Packaged Foods sales were up 4 percent on a comparable basis.

All major customer channels (indiscernible) Packaged Foods, meaning retail, foodservice and deli showed a sales increase.

We're making progress with our topline oriented initiatives.

As a matter-of-fact, our top 30 consumer brands were up over 6 percent as a group with several of those top brands growing at 10 percent or better for the quarter; that is pretty strong.

To just remind you, as a reference point, our top 30 brands represent close to two-thirds of the Packaged Foods' segment revenue.

We like the direction of our category share for several items.

It is the strongest we've seen in a while, and we have a few high margin products that have posted several successful quarters of strong growth.

Our overall progress with the topline is due to being on trend with a range of consumer preferences and product platforms like health and wellness, carb-conscious, convenience, snack and several others.

It is also due to getting new distribution, which means getting into stores we were not in before, as well as expanding our presence with existing customers.

It is also due to success with the marketing initiatives you heard Bruce describe.

We're still implementing our new marketing tools across the portfolio, so there's more to be done but we believe that there is a lot of upside.

With regard to foodservice, we (indiscernible) some increased business with key customers and having solid growth with a fair amount of our product lines.

I think the outlook for the foodservice component of our business has improved over the last few months and things are moving in the right direction.

Overall segment sales growth also reflects some price increases.

Those were necessitated by higher input costs.

Our industry is seeing a lot of rising costs and we will manage it the best that we can.

Profits were also solid.

Part of that is due to the sales growth we've just mentioned, but our efficiency initiatives also play a role as well.

As we go forward, we have initiatives underway to continue to take costs out of our organization and to improve our product mix, which should, over time, enable margin expansion and profit growth at a rate that exceed sales growth.

Overall, Packaged Foods is building strength with topline and bottom-line oriented initiatives that you heard Bruce mention.

While we like a lot of what is happening, there are some areas that are difficult and that we look to improve over time.

The biggest of these is our branded packaged process meats business; this would be things like sausage, turkey, (indiscernible) meat and so on.

We have had it tough for those products this year.

You have heard us talk about that before.

The input costs have remained a challenge there, as has our transition from a (indiscernible) sales force to direct.

So, this area is an area that we expect we will profit out of and we are going to be focusing on it to get it where it should the.

You heard Bruce mention the expenses associated with the cost saving initiatives this quarter.

Most of that fell in the Packaged Foods segment and we show that in the release.

We expect some more in our fourth quarter, and that is about 4 cents per share.

We will call that out in our release, just like we did this quarter.

Moving onto Food Ingredients, profits were up a lot due to being more efficient with Specialty Ingredient products, such as processed garlic, onions, seasonings, flavors and specialty milled items.

The topline growth for this segment reflects prices for (indiscernible) input that we deal in in merchandise, and those prices fluctuate with market conditions.

Presently, they're on the rise (ph).

We think this segment has a lot of upside and (inaudible) terms of customer relationships and we expect to expand the (inaudible) of our business.

We expect both segments have a solid finish to the fiscal year, which fits with the expectations we have communicated in the last few quarters.

This concludes the business portion of the 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 passcode is 537-7576.

This call 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 also find the question-and-answer document relating to this release.

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

This concludes our remarks.

I want to thank you for your interest in ConAgra Foods.

Thank you for participating in today's ConAgra Foods fiscal 2004 third-quarter management discussion.