康尼格拉食品 (CAG) 2005 Q2 法說會逐字稿

At this time I would like to 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 discussion of second quarter fiscal 2005 results.

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

With me are Bruce Rohde, our Chairman and CEO, Frank Sklarsky, who recently joined us as Chief Financial Officer, Dennis O'Brien, Chief Operating Officer for our Retail Products segment, Allan Lutz, Chief Operating Officer for our Food Service Products segment, and Greg Heckman, Chief Operating Officer of our Food Ingredients segment.

Today we released first quarter earnings of 47 cents per share.

As a point of reference, last year in the second quarter we earned 45 cents per share from continuing operations.

And as we told you, last year's 45 cents per share included a penny of expense related to implementing efficiency initiatives.

Last year's total EPS for the second quarter was 51 cents which included 6 cents of contribution from businesses we no longer own.

So that makes earnings per share 45 cents from continuing operations last year.

Over the next few minutes, you will hear from Bruce about strategic matters.

You will hear from Dennis, Allan, and Greg about what's taking place in their business, and you'll hear from Frank about financial matters.

I will mention that we detail the impact of this quarter's performance in the release and in the Q&A document and that we'll refer you to those for more details as we will touch on the highlights.

Today's comments include some non-GAAP financial measures for clarity and I 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.

Although we're making those statements in good faith and we are confident about our direction, as you know, we don't have any guarantee about the results that we'll achieve in the future.

So I'll refer you to your 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'll refer you to the documents that we file with the SEC.

With that out of the way we'll get started and I'll turn it over to Bruce.

Thanks, Chris.

I'll start by saying that there are a lot of reasons to be pleased with our second quarter.

We're reaping the benefits of the strategic shift we made in our sales mix and that shift is steadily improving our profits.

Overall, sales were up at a healthy rate in the second quarter, and all segments posted operating profit growth.

That makes for a solid first half of the fiscal year in terms of EPS from continuing operations, and with our top line again showing momentum this quarter, we expect this trend to contribute to a successful second half.

Our solid first half is the result of a dedicated team effort which is focused on three strategic initiatives that you've heard us discuss before.

Those are the marketing, operating, and information systems initiatives that we have underway.

Together these three programs are instrumental in our plans to expand our profit margins and strengthen returns on the capital we invest.

They impact all three of our reporting segments.

I call your attention first to our marketing manifesto initiative, which has been designed to strengthen our brand in product equities.

The point of this project is to connect our sales and marking dollars with customers and consumers so that we sell more of our products to more people in more places more often and that we do so more efficiently so we realize more margin dollars in the process.

We've been implementing a fact-based discipline process throughout our Company to impact every activity that touches a consumer or a customer.

And that involves everything from product packaging and quality, to trade programs, to advertising content, to customer sales, and even including customer service teams.

The progress is evident in our top line strength and our recent volume trends.

Several of our key brands have now posted successive quarters at double-digit growth, along with strong share gains.

When Dennis O'Brien comments on the Retail business in a couple of minutes, he'll tell you more about brand success stories, but the point I want to briefly make here is the top line momentum is developing because our team is making substantial progress with their strategic marketing initiatives.

While marketing is a bright spot, I'd also like to call your attention to another bright spot which is our major information system initiative.

We're using our new information systems to streamline and to strategically link manufacturing with marketing and sales activities so that we serve our customers precisely and efficiently.

This initiative was designed to improve our customer connections and it required a massive overhaul to establish common systems and common applications across our businesses.

We've been deep in the process of implementation throughout this fiscal year, and as you might imagine, this was a big change from our decentralized roots which spawned lots of different processes and a myriad of systems.

So we call this initiative "Project Nucleus" because it links everything and everybody across our supply chain right up to the customer's point of sale.

The information it produces is meaningful and it's timely, and the point I want to make is that we've been methodically implementing state-of-the-art SAP processes across our Company.

It's been going on for a while and it will continue to be because we're doing this in planned ways of activities so that we minimize any potential disruption.

From where I sit, we're very pleased with the progress so far.

Here's why.

Over the Thanksgiving holiday weekend, we passed some very important milestones.

We accomplished all of our order to cash transitional activities and those included such things as purchase orders, pricing, promotional programs, delivery schedules, payment terms and so forth, and this conversion has been proceeding according to plan.

So, so far so good and that's meaningful in and of itself.

So, I'd like to take this opportunity to recognize the ConAgra Foods implementation team for a job extremely well done and for their continued efforts to complete this conversion.

That brings me to our third initiative, which is operational efficiency.

This initiative is all about being as resourceful as possible.

There are many fresh internal and external profit opportunities that can increase the operational efficiency of our supply chain and drive down costs in our manufacturing, purchasing, and logistical activities while maintaining stringent quality standards.

The operating efficiency initiatives across our supply chain go hand in hand with our new information systems because we'll now be able to focus on our most promising and profitable products while we systematically identify and phase out those that are less profitable.

This amounts to disciplined SKU prioritization, which simply means we'll be increasing our focus on our highest margin, highest moving, highest opportunity items, and we'll be aggressively phasing out our lower margin, lower moving items through a planned substitution process.

It's all part of a strategic plan for continuous mix improvement to generate more gross profit per dollar of sales.

This process is actually going to help our top line growth as we simplify and focus our sales and marketing efforts so that we can better utilize our manufacturing resources on the products that have the highest growth potential and which can most likely improve our total gross margin dollars.

There's a lot of opportunity to become more efficient here and that translates into significant opportunity for margin expansion.

So, I'll conclude my remarks today by saying that we think fiscal 2005 has been a year of progress so far and we think the second half, which stretches from now until Memorial Day weekend, shows a lot of promise for another fiscal year of solid performance because of the traction we're gaining with the three strategic initiatives we have underway.

So, please stay tuned for the second half of the fiscal year and thank you for your interest in our Company.

With that, I'll turn it over to our three Chief Operating Officers and Dennis O'Brien, President and COO of the Retail Products business is up first.

Thanks, Bruce.

Net sales for the Retail Products segment were 2.5 billion, an increase of 9% versus last year.

Volume grew 7% and pricing contributed 2 points of net sales growth.

This marks the second consecutive quarter of 8% or greater top line growth.

Operating profit for the second quarter was 375 million, up 5% versus year ago.

This was driven by volume, pricing, and productivity initiatives across the supply chain, including purchasing, manufacturing, and logistics.

Our pricing actions and productivity initiatives were effective in offsetting the majority of the input inflation incurred in the quarter.

This performance demonstrates we are effectively executing against the four key operating strategies we have previously outlined.

Those being: One, improving base brand marketing execution.

Two, introducing on-trend new products.

Three, becoming more essential our retail customers.

And four, accelerating pricing and supply chain productivity initiatives to offset input inflation.

Let me briefly describe the impact of each of the four operating strategies on second quarter performance.

First, in terms of improving base brand execution, approximately 70% of our brands, representing 75% of our businesses, grew top line sales.

Multiple brands delivered double-digit growth including Banquet, Chef Boyardee, Marie Callenders, PAM, and Egg Beaters.

It's noteworthy that these businesses now are close to double-digit year-over-year growth for several successive quarters.

This performance reflects sustainable improvement executionable marketing fundamentals including more precise targeting, more effective consumer communication, and improved in-store SKU assortment and shelving.

Second, relating to new products, we are very positive about the results to date around the new Banquet Crock-Pot Classics.

As we described during the earnings call last quarter, Banquet Crock-Pot Classics is making it easier to prepare and enjoy complete meals using the crock pot.

Sales are on pace to approach $100 million in year one, exceeding our expectations.

Third, and potentially most important, the unification of our sales force has allowed us to better bundle our brands with our retail customers to drive their store traffic and sales.

Our merchandising execution, both in terms of effectiveness and efficiency has been very strong and we expect performance to continually improve.

Relatedly, as Bruce previously described, we have now successfully integrated our information systems, which will allow us to better serve our customers and to make us more efficient in terms of our customer cost to serve.

Fourth, let me provide some specifics around our pricing and productivity initiatives to date.

As I indicated earlier, our second quarter 9% growth was a function of 7% increase in volume, and 2 points in pricing.

We have taken pricing in the form of either list price increases or reductions to trade discounts on brands representing roughly half of our business.

That pricing action began in the first quarter with the majority of it being implemented during the second.

The impact of those actions will be more pronounced in the back half of the year as those increases implemented during the second quarter will be in place for the full period in the upcoming quarters.

As we move forward into the second half of the fiscal year, we have strong volume momentum.

We will continue to generate operational productivity savings and realize increases in our average selling price.

Like pricing, our operations productivity initiatives will continue to impact the business at a greater rate in the second half.

Additionally, we will continue to control our selling and administrative costs very diligently.

We are confident we will continue to build on our solid first half performance and should position the business for further profitable growth.

I look forward to updating you on our progress.

Let me now turn it over to Allan Lutz, President of our Food Service business.

Thank you, Dennis.

I will also take a few minutes to recap the highlights of Food Service for the quarter we just posted.

As you can see in today's release, our sales were down 2%, but our profits were up 6%.

Part of the sales decline was due to contributions from divestitures in prior year numbers, but some challenges in our seafood operations were the main reason for the sales decline.

And I'll touch on that in just a minute.

Regarding overall segment volume, we grew volumes about 1% this quarter, adjusting for amounts in prior year results that came from businesses we no longer own.

As a reminder, our business is organized around three platforms: Specialty potato products, seafood, and culinary.

The specialty potato and seafood platforms are self-explanatory and the culinary platform is a relatively new development.

We consolidated several operations last year to establish the culinary business unit, which now includes pizzas, sauces, frozen meals, lunch meats, dessert toppings, ethnic foods, as well as branded consumer products like Egg Beaters and Reddi-wip that are in high demand within the Food Service channel.

Now back to the results we just posted this quarter.

As I said, we posted a 6% profit growth.

During the quarter, we had solid volumes from specialty potato business and an overall improved product mix across the business.

That improved product mix, along with pricing adjustments, essentially offset increased input costs.

Reduced SG&A expense also played a significant role in the operating profit performance.

We are continuing to find ways to reduce costs throughout our system.

Cost reduction is one of our core areas of focus as you've heard us say before.

And as Bruce mentioned earlier, it remains a key area of focus for us in the remainder of fiscal 2005.

Every day we discover new opportunities to operate more efficiently and more effectively.

During the quarter, we experienced some profit decline in our seafood operations.

Over the last few months, there have been tariffs imposed on imported shrimp products and that has caused some disruption in the market.

We think some of that disruption will work itself out of the market eventually.

We utilize a wide range of suppliers, some of whom are impacted by the tariff, some of whom are not.

We are continually working on having the right mix of suppliers so that we can manage through changing market dynamics.

We also had some challenges in some of the prepared meat operations.

There are some things we can do better in terms of execution and production costs.

We are very focused on improving our performance in this business.

With regard to the bigger picture for our segment, as you have heard me say before, our agenda in Food Service is to be a meaningful partner to our customer base, bringing a strong product portfolio and relevant integrated R&D capabilities together in a way that allows to us add value for our customers, creating a point of difference.

We have done a lot of heavy lifting over the past few quarters to integrate our operations so that we work better together to leverage our marketplace strengths.

After all, we are one of the largest manufacturers and marketers of food service items in the U.S, so we have a great deal of opportunity to further distinguish ourselves as a world class value-added partner to our customers.

Whether it's hand-held desserts in the quick service restaurant segment or Reddi-wip topping for hot specialty drinks, we have the products and the menu solutions that are on trend with the consumer demand.

Given our industry position, capabilities, and relationships, we aim to be the industry go-to supplier for value-added food service solutions.

This requires being able to produce tailored customized products for a wide range of customers.

We will execute this through the marketing, operating and information system initiatives you heard Bruce talk about earlier.

So, that's where we're going to be focusing our energies.

I'll wrap up by saying I think we'll post a solid year-over-year growth in operating profits during the second half of fiscal 2005, driven most by the ongoing operational initiatives that are enabling us to take costs out of our business and the fact that last year our profits included some costs related to implementing efficiency initiatives.

And now I'll turn it over to Greg Heckman, Chief Operating Officer of our Ingredient business.

Thank you, Allan.

I'd like to spend a few minutes on the quarter's results.

Before I start, let me briefly remind everyone what the Food Ingredients business is 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 and 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 that aren't really known by individual consumers, but which are definitely known by our trade customers who rely on our high-quality ingredients and reliable service.

In this segment, we also distribute ingredients and we trade inputs and commodities like energy, grains and fertilizer.

For the quarter we just posted, our sales and profits were up at a very strong rate.

Sales increased 20% to 691 million, and operating profit grew 46% to 79 million.

Most of that sales and profit growth is due to a favorable environment for the trading operations.

We trade inputs and commodities.

The market prices and volatility for those items have driven our strong performance and while they resulted in strong profits for the quarter due to unusual market conditions, trading isn't the main focus of future growth for Food Ingredients as I'll say more about in a minute.

And in most quarters, we would normally expect the profits from the other activities in the segment, meaning seasonings, blends, flavorings, grain-based ingredients and the like, can be larger than those from trading.

This quarter, that wasn't the case due to the unusual markets for commodities.

Grain-based ingredients also posted profit growth for the quarter.

As a whole, our flour volumes are ahead of last year and market dynamics are better.

And that's a big part of the profit increase for those types of items.

For the quarter, our dehydrated products, like onion, garlic, and other vegetables posted lower year-over-year profits.

That's mostly due to difficult competitive conditions.

We expect the marketing, operating and information systems initiative Bruce was talking about earlier to help us improve the fundamentals of those operations over time.

Our focus is on profitable growth for our highest potential products.

We have new sales opportunities with our seasonings, blends and flavoring items, our whole grain products, and our grilled and roasted vegetables, all of which allow us to give our trade customers ingredients with great taste and consistent quality and which allow those trade customers to make products that appeal to a wide range of consumers, including those folks [inaudible] health and wellness.

Our ability to connect with our customers is well-supported by our Company's centers of excellence, which are integrated R&D resources and facilities where great ideas across product platforms, temperature states, and customer channels are shared so that we use our insight to provide quality products that meet and exceed our customer's expectations.

So, to summarize on that point, we have the internal R&D and customer channel resources to leverage against the goal to profitably grow our most promising products.

I'll now turn it over to Frank Sklarsky, who joined us a few weeks ago as Chief Financial Officer.

Thanks, Greg.

As Chris and Greg mentioned, I joined the Company just a few weeks ago.

So I will make my remarks brief and touch on some of the financial highlights and how we view our significant opportunities going forward.

As we detailed in the release, our performance this quarter shows a great deal of progress in many important areas of our business.

Our overall earnings per share from continuing operations was ahead of last year.

That comparison is 47 cents in the current quarter versus 45 cents last year.

All of our segments posted year-over-year operating profit growth.

There have been many developments in terms of our capital resource management that are worth noting.

During the quarter, we sold our equity interest in Swift Foods for $194 million.

As a result of that, we are no longer equity participants in that business.

Shortly after the quarter, we sold 10 million shares of Pilgrim's Pride stock.

We received that stock when Pilgrim's Pride bought our fresh chicken processing operations about a year ago.

That deal worked out very, very well for our shareholders as we sold this portion of our shares at a very nice profit.

Our proceeds before taxes from the sale were close to $280 million and the gain was approximately $185 million.

Because the sale occurred in early December, the profit will be reported as part of our third quarter results.

I would like to briefly address the question of what we intend to do with the proceeds from the divestitures as well as the cash generated from operations.

I want to reiterate that we are committed to the same capital allocation programs you have heard the Company describe before.

That involves the right mix of share repurchases, debt retirement, strategic acquisitions, and dividends.

We have a share repurchase program underway and we're committed to that, as you've heard us say before.

We've also used some of our excess cash to retire debt.

During the quarter, we repaid $300 million of debt that was currently due.

In addition, shortly after quarter-end, we retired another $600 million that was due next September.

By paying this off a few months early, we were able to reduce interest expenses as we move into fiscal 2006.

Now, since we paid off the $600 million early in the third quarter, that amount is still included in the second quarter balance sheet under "Current Maturities of Long-term Debt".

So overall, we've retired $900 million of debt in just a few months.

All of our actions at ConAgra Foods are intended to improve profit margins and returns on invested capital over the long-term.

We have a significant opportunity to enhance our profitability with the marketing, operating, and information systems initiatives that Bruce has described to you.

And while we have made a great deal of progress, we have only scratched the surface with what we believe are tremendous possibilities going forward.

The discipline of capital allocation obviously plays a role in our agenda to strengthen returns on invested capital.

So you will continue to see us utilize the right financial tools and metrics to measure and improve our returns, free cash flow generation, asset utilization, and the overall strategy of our business.

We will continue to talk about asset efficiency in future quarters and how this is a key part of our agenda to create richer business model, aimed at improving both customer and shareholder value.

At this point, I'll conclude.

Wish you all happy holidays and thank you for your continued interest in ConAgra Foods.

I'm thrilled to be part of the ConAgra Foods food team and look forward o updating you in the coming quarters.

Now, Chris I'll turn it back over to you.

Before we wrap up, I'll simply say that we've had a solid first half of the year and expect our second half to show continued momentum and a more significant contribution from our operational initiatives to our bottom line results.

This concludes the business portion of the remarks.

I want to say happy holidays to all and thank you for your interest in ConAgra Foods.

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 contained in today's release.

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 find the question and answer document relating to this release.

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

Thank you.

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

You may now disconnect.