康尼格拉食品 (CAG) 2005 Q1 法說會逐字稿

Good morning, my name is Melissa and I will your facilitator today.

I would like to welcome everyone to the ConAgra Foods first quarter fiscal year 2005 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 first quarter fiscal 2005 results.

I'm Chris Kleinfelter, the Investor Relations contact for the Company.

With me are Bruce Rohde our Chairman and CEO, Dennis O'Brien, Chief Operating Officer of our Retail Products segment, Allan Lutz, Chief Operating Officer of our Foodservice Products segment, and Greg Heckman, Chief Operator Officer of our Food Ingredients segment.

Today we released first quarter earnings of 26 cents per share.

That number includes 2 cents per share of costs related to implementing efficiency initiatives and as a point of reference, last year in the first quarter, we earned 37 cents per share, that number includes contribution from businesses we don't own anymore, as well as some other items that affect comparability and we detail those in today's announcement.

Overall, from the standpoint of continuing operations it was a pretty solid quarter with strong 8% retail volume growth, that accompanied strong overall sales and overall operating profit growth, which demonstrates year-over-year progress from continuing operations.

Our Food Ingredients segment in particular posted significant profit gains, and you'll hear more about each segment's performance in a minute from the folks closest to them, the Chief Operating Officers, in addition to hearing from our Chairman, Bruce Rohde shortly.

I'll offer a couple of comments about the financials before I turn it over to Bruce, Dennis, Allen and Greg.

We're pleased with the sales growth in the Retail and Foodservice channels.

Our sales and marketing initiatives are producing solid top line results.

One of the things I want to point out is that our Retail Product sales were up 9%, which is the result of 8% volume growth, and that's pretty solid.

Also, just so we keep it all in perspective, this same quarter last year was not our strongest because we were going through a salesforce transition, so it made that kind of volume growth, a year later, that much more likely because our consolidated salesforce is on the ground doing what it's supposed to do.

The other points I'd like to make are that we continue to repurchase our stock during the quarter, reflecting our capital allocation discipline.

We repurchased about $180 million worth of stock during the quarter, and we paid out more than 130 million in dividend, yet we still ended the quarter with 370 million of cash on hand.

Our capital expenditures of 105 million were ahead of depreciation and amortization expense of approximately 89 million.

In most years, we expect those amounts to come close to offsetting, and as we mentioned in previous communications, they probably will not offset precisely this year as we have some increased information systems investment ahead of us.

Our unallocated corporate expense was 67 million, which is below last year's 92 million.

And to keep this in perspective, last year's amounts include 22 million of expense related to settling litigation pertaining to a 1990s joint venture.

Our interest expense of 73 million was a little ahead of last year, as we expected it to be, and our tax rate was just shy of 38% and close to what we would consider normal.

With all of those changes we have made to our business over the last years, our tax rate has fluctuated over the last few quarters, and that is one of the items affecting comparability this quarter that we detail in the release.

So with that being said, I will now turn it over to Bruce Rohde, who will make some comments on strategic matters and then Dennis, Allen and Greg will comment on their segments.

As a procedural matter, I'll mention that we detail the impact of this quarter's performance in the release and in the Q&A document, and I'll refer you to those because we will not dwell on all the details today, but we will touch on the major ones.

I'll also mention that today's comments include non-GAAP financial measures, and I'll refer you to the Company's reconciliation in today's press release, which is posted on the Company's Web site.

And 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, and I refer you to our note on forward-looking statements in our earnings release.

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

So having said that, we'll get started and now I'm going to turn it over to Bruce.

Thanks, Chris.

I want to start by saying that I'm pleased with several aspects of our first quarter.

Overall I'm pleased with our 8% sales growth and I'm pleased with the 9% growth in operating profits.

That signals to me that we're building some momentum and my thanks and congratulations go to all those in the ConAgra Foods team for a fine and solid quarter.

These folks are really working hard for the shareholders.

I'll also say that we would have liked more of our sales increases to have translated into even greater growth and operating profits.

However input costs worked against us as has been the case for many other companies.

Obviously, no one's immune to the rising costs lately so it's a situation we'll have to keep managing through, but even in light of that, our overall EPS number was solid for the quarter and the time of the year that it reflects.

As you've heard me say before, our Company's focused on profitable growth with a series of marketing, operating and technology initiatives that are designed to help us reach our marketplace potential.

In a nutshell, it's those actions that help continually improve our profit margins and our returns on capital.

I said a fair amount about those initiatives in my letter to shareholders in this year's annual report and we do the same thing on our Web site, but if you haven't had a chance to see these, I'll touch on the main points so we're all on the same page.

Our marketing initiatives are designed to help build more potential for our brand and product equities, so we're improving product fundamentals like quality packaging and taste.

We're very mindful of consumer trends.

We're communicating better with our consumers.

We're investing our marketing dollars very wisely and we're also going to the trade much more efficiently and effectively utilizing the direct selling approach that Chris mentioned a moment ago that's molded around each customer to make sure that we get the customer's attention and of course that we get the sales opportunities that go along with that.

All these things represent a strategic discipline in our Company that's being aggressively implemented and we're enthusiastic about what we're seeing.

The operating initiatives we have underway are about serving customers the way they want to be served, while at the same time taking unnecessary costs out of our organization.

This impacts our supply chain, where we're reducing the number of shipment and storage facilities and we're replacing them with larger, more efficient mixing centers that serve as regional assembly and loading platforms which are designed to improve things like inventory turns, working capital levels, shipment efficiency, and storage costs.

And other examples are our newly remodeled and expanded research and development center.

There we've now linked a whole host of activities and we're utilizing across functional concept called "Centers of Excellence".

That's where different experts and disciplines share ideas and capitalize on consumer insights to better serve all of our customer channels.

Another example would be our customer service center where we consolidated activities to give customers a single point of service.

There are other examples I can cite where we're consolidating and streamlining to better serve customers and pull costs out of the system, but this list gives you a pretty good snapshot of what we've got underway.

We're also working on better linking our information platforms and that's a project that we call "Nucleus".

Its purpose is to tightly link manufacturing, marketing, and sales, as well as all the other key areas of our business to attack service and cost improvement opportunities with better decision support tools.

In a nutshell, I'd say that we're progressively seeking a new level of excellence for our company and a strong earnings potential to go with it.

With all that in mind, I'll say that I'm optimistic that fiscal '05 will progress and will be a solid performer.

I look for the overall profit margins to improve as the fiscal year moves forward.

Some of that should come from the benefits we expect from the initiatives I've just mentioned, particularly the cost savings initiatives that we're aggressively implementing as we speak, but also our outlook shaped by the fact that we plan to keep adjusting our prices upward to offset the increased input costs that we've all been experiencing.

We're not out of the woods on that yet, but another 90 days or so should make a marked difference as prices catch up with costs.

Net-net, all those things should contribute to a more solid spring selling season.

And a solid year should also reflect the same type of capital allocation discipline that you've seen us utilize.

That means investing for growth, it also means dividends, it also means a debt balance in line with our targeted range of 50% of total capital and so forth.

For those of you who know the details of the divestiture transactions that we've accomplished over the last couple of years, you also know that there are still some assets that we plan to liquidate in connection with these divestitures, like our minority stake in Swift and Company related to our beef divestiture, and also the stock we own in Pilgrim's Pride, and the international remnants of the Ag Distribution business that we recently sold.

So I'll conclude my remarks by saying that as we get some of the cost increases absorbed, 2005 should become a solid year in terms of core operations and capital allocation.

Relative to the industry environment, we're off to a pretty good start and I look forward to discussing the rest of the year as it progresses.

Now I'm going to turn this over to Dennis O'Brien who's the Chief Operating Officer of our Retail operations.

Thank you, Bruce.

For the Retail segment, sales increased 9% to $2 billion.

Operating profit was up 3% to $213 million.

Volumes increased 8% year-over-year, with solid product mix, and some pricing reflected in the net sales growth.

Input costs, especially for package meats, worked against us in the quarter which resulted in sales growth at a higher rate than the operating profit.

We also incurred some costs related to the implementation of efficiency initiatives which are cited in the earnings release.

Our strong top-line growth indicates we are making significant progress with our marketing and sales initiatives, specifically the strengthening of our brand equities, and the unification of our selling organization.

Let me provide more details.

Again, net sales increased 9% versus year-ago on a volume increase of 8%.

As another point of reference of our top 30 brands representing 80% of our segment sales, those brands generated a 9% sales increase, with over two-thirds of our brands posting volume increases of over 5% or greater.

A number of those brands would include businesses like Chef Boyardee, Egg Beaters, PAM, Peter Pan, and a multitude of others listed in the earnings release.

Also our top 30 brands demonstrated growth with traditional grocery retailers as well as in other channels including mass merchandisers and supercenters.

Net-net, our sales growth performance was broad both in terms of categories, brands, and channels, and we expect that momentum to continue going forward.

It should also be noted we are making top-line progress while concurrently taking pricing where appropriate and accelerating supply chain efficiency initiatives.

We have multiple initiatives in place to take non-value added costs out of the supply chain, including, but not limited to programs in purchasing, manufacturing, and logistics.

Additionally, as we optimize our item assortment and mix at retail, it affords us the opportunity to eliminate non-productive SKUs while improving our overall in-store sales philosophy.

As discussed, last quarter we continue to focus on two categories where our performance is below our expectations, specifically our branded processed meats and microwave popcorn businesses.

In the popcorn category, we are growing our share and have initiatives underway which will get the microwave popcorn category growth momentum restored.

In processed meats, we have seen our shares stabilize this past 12 weeks behind improvements in our product quality, package offerings, and in-store presence.

We expect to see further improvement in top-line momentum in the months ahead.

In summary, we expect top-line momentum to continue and for operating profit growth rates to improve as we see the benefits of price actions and supply chain productivity programs take hold.

We believe we have the opportunity for a very solid performance for the year.

Now, let me turn it over to Allan Lutz, Chief Operating Officer of our Foodservice organization.

Allen?

Thank you, Dennis.

I will also take a few minutes to recap the quarter and comment on why we're optimistic about the remainder of the fiscal year for our Foodservice segment.

As you can see in today's release, our sales were up 3% to 905 million.

Our business with key customers is solid.

Our profits were down, however, year-over-year, to 67 million.

That includes some costs related to implementing efficiency initiatives, as well as unplanned costs related to a plant consolidation.

Our business is organized around three platforms: specialty potato, seafood and culinary.

Our specialty potato and culinary group showed sales growth for the quarter reflecting strong trends with key customers, while our seafood products did not show the sales growth.

I will offer, though, despite the sales being down for seafood, their profits were up year-over-year due to progress with some of the efficiency initiatives.

Our culinary platform is a relatively new development.

We consolidated some fragmented operations last year to establish culinary product which now includes pizzas, sauces, frozen meals, lunch meats, dessert toppings, ethnic foods, and branded consumer products like Egg Beaters and ReddyWhip which are very popular in the Foodservice channel.

Because the culinary platform is relatively new and has untapped potential, we believe it has a great deal of opportunity going forward.

Our agenda going forward is to continue implementing the initiatives Bruce mentioned earlier, around marketing, operations, and linking information systems to continue expanding our customer base with higher margin, value-added products and capabilities.

So just like Dennis mentioned for Retail, we are dead set on maximizing the equities of our value-added products, serving customers better, and taking costs out of the system, all while taking appropriate price increases to cover increased input costs.

We want to be the preferred provider, a strategic partner with our customers, with value-added capabilities that are unmatched as a manufacturer for the food service industry.

That means making customized products with differing specifications for our targeted customer base and helping them stake out their respective points of difference in the marketplace.

We are already doing some of this, but there's a lot more we can do.

And there's real margin upside in doing this as well.

We have a lot to leverage as we drive profitable future growth.

We are the largest provider of value-added food service products in the country.

We have great relationships, and a very developed base of business with all the major restaurant operators and distributors in the industry.

And most importantly, we are improving our customer service in many development capabilities to become the go-to company for many solutions.

So all the initiatives you have heard our Company talk about with regard to better marketplace activities and more efficient operations in sales, marketing, supply chain and information systems, are all very much a part of our plan for profitable growth.

We have a great deal of opportunity and I expect fiscal 2005 to show progress to further validate our potential.

Thank you.

And now, I would like to turn it over to Greg who runs our Ingredient business.

Thank you, Allen.

I'd like to spend a few minutes on the quarter we just posted in Food Ingredients.

Before I start, let me spend just a minute or two describing our Ingredients business because not everyone is familiar with it.

We produce a variety of specialty food ingredients that are used by food manufacturers, food service operators, and other ingredient companies.

Examples include natural spices, seasoning blends, savory flavors, dehydrated onion, garlic and capsicums, as well as a broad portfolio of wheat flours and oat and barley products.

With these types of products we have some very strong brands.

Brands with which the consumer may not be familiar, but everyone would recognize the customers who prefer us, and this is the portion of our business I see growing the fastest in the future.

The other types of products and activities in this segment are ingredient distribution services, and the merchandising of input.

For the quarter we just posted, our sales increased 14% to 577 million, and operating profit more than doubled to 60 million.

That growth is due to a favorable environment for input merchandising operations.

If you follow the commodity markets, you know that there's been a fair amount of volatility lately, with all of the rising input costs, and that has helped that particular operation.

This is an unusually good quarter for the inputs merchandising operations.

As we go forward, just as you heard from Dennis, Allen, and Bruce, our focus is on profitable growth for our higher margin products enabled by the marketing, operating, and information systems initiatives that are underway for our entire Company.

As we leverage the power of ConAgra Foods other food business, meaning our Retail and Foodservice connections, we've talked about that before, so I won't dwell on it now, but I will say that our greatest opportunity is growth through our existing customer base, by selling the right mix of higher margin innovative and ontrend products.

That's what we're focused on now.

To that end, one item you might have heard or read about lately is ultra-grain whole wheat flour.

Ultra-grain is our proprietary product that we expect to be revolutionary in the baking industry.

It is an all natural, 100% whole-grain flour with the taste and texture of popular white flours.

So consumers can get the best of both worlds.

All the fiber and nutrition of whole wheat and the permission to eat the products they enjoy.

Our customers which include bakers, pasta manufacturers, pizza chains, and other food manufacturers and food service operators, are showing interest and we think ultra-grain has significant potential.

So just to reiterate, we're dead set on maximizing the consumer and customer appeal of our products, operating as efficiently as possible, and generating profitable top-line growth with our very strong portfolio of value-added ingredients.

I look forward to updating you on our progress.

Thank you.

And now, I'll turn it back over to Chris.

This concludes the business portion of the remarks.

Just as a reminder, these remarks will be archived at the telephone numbers listed in today's earnings release.

The pass code is also in the earnings release for accessing it.

This call will also be archived at 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 this release.

And as always we're available at discussions at 402-595-4684.

Thank you for your interest in ConAgra Foods.

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

You may now disconnect.