康尼格拉食品 (CAG) 2007 Q1 法說會逐字稿

Good morning and welcome to today's ConAgra Foods first-quarter conference call.

This program is being recorded.

My name is [John Daniels], and I will be here conference facilitator.

All audience lines are currently in a listen-only mode.

However, our speakers will address your questions at the end of the presentation during the formal question-and-answer session.

At this time, I'd like to introduce your host for today's program, Gary Rodkin, Chief Executive Officer of ConAgra Foods.

Please go-ahead, Mr. Rodkin.

Good morning.

This is Gary Rodkin and I'm here with Frank Sklarsky, our CFO, and Chris Klinefelter, our VP of Investor Relations.

Today, I'm going to say a few words about the quarter, our broader initiatives, and our expectations for fiscal 2007.

Then Frank will give some commentary on financial results.

Before we get started, Chris will say a few words about housekeeping matters.

Good morning.

During today's remarks, we will be making some forward-looking statements.

While we are making those statements in good faith and are confident about our company's direction, we do not have any guarantee about the results that we will achieve.

If you would like to learn more about the risks and factors that could influence and affect our business, I will refer you to the documents we file with the SEC, which include cautionary language.

The other thing that I will mention is that today's release is technically preliminary; that is because we are in the process of finalizing some items regarding the pending meat transaction.

Those items, which are customary for transactions of this nature, could impact the overall financial results of discontinued operations, so we cannot quantify the results of discontinued operations for today.

We will file our 10-Q in the first week of October, and the discontinued operations number will be final in it.

So today's release is about continuing operations only, and it is technically preliminary.

Now, I will turn it back over to Gary.

Thanks, Chris.

I'm going to focus more on bigger-picture issues because the details are out in the documents we released today.

We released EPS of $0.21 in continuing operations, including $0.05 of restructuring charges.

That means a $0.26 quarter from continuing operations, excluding those items.

That's higher than we thought when we made our forecast back in June.

In a nutshell, the main story is faster progress with operating costs, largely -- (technical difficulty) -- productivity gains.

We are also helped by a solid mix and higher pricing in some areas.

These items more than offset a decline in trading profits that was expected.

I think it's also worth saying that the quarter's strong profits and working capital progress are in part because our team has embraced the Company's cultural changes so well.

You've heard me say on more than one occasion that we are radically changing the culture here, focusing on simplicity, accountability and collaboration.

We've got a unified vision that all employees are embracing and we've summarized for you in our annual report.

To put our money where our mouth is, we've also changed our incentive plans, so that everyone involved has a big stake in now the overall company performs, as opposed to just individual businesses or functions.

Culturally, we're not all the way to bright yet but things are moving in the right direction, as folks are working much better than before and focusing on things that really count.

The most significant profit improvement was in our consumer foods operations.

Comparable profits improved significantly and profit margins expanded, primarily reflecting cost progress but also because of an improved mix.

Our high-focus brands, which are more than two-thirds of our sales, were up about 4% as a group.

A number of brands had strong performances with few double-digit growers like Slim Jim, Kid Cuisine frozen dinners, Snack Pack pudding, Orville Redenbacher and Hunt's tomato products.

Our lower-focused brands posted sales declines.

Some of that was intentional as we walked away from some businesses -- or some business that wasn't profitable enough for us.

Even though sales for the low-priority brand group were down, profits for that group were up because of the operating cost improvements.

Remember, that with this group of brands, we are focused on profits more than sales; that means getting more for our trade promotion spending, occasionally rationalizing SKUs, and trying to improve the customer mix.

You will continue to see more of this as we go forward.

You can expect to see profits outpace sales as we go forward.

It's driven by the relevant size of the opportunities in the supply chain and from mix improvement.

Those opportunities importantly translate into operating leverage.

That being said, I want to point out that we're just starting to begin heavier marketplace investments.

We're going to be spending some of that fuel that our progress on savings has generated.

As you know from what I've said before, we expect our sales growth to ramp up slower than our cost savings and that the topline growth will be driven by the right type of sales channel focus, marketing and innovation programs.

We're making progress on all of these fronts.

For example, our Gold Store initiative, which is aimed at achieving the right in-store execution for the highest-opportunity brands, is off to a good start.

We are on track in terms of our executional targets with this important program.

On marketing, I am personally involved in allocating marketing dollars through a much more disciplined internal process.

We are beginning to put the money to work behind the brands that can demonstrate the payback.

You won't see a major marketing campaign coming from us without my stamp of approval.

To that point, we recently kicked off newer and better campaigns for some key brands.

The results for the new campaigns around Orville Redenbacher's and Hebrew National have been great, and we have very recently launched new campaigns for Slim Jim and Healthy Choice that hit the mark with the right message.

These are important steps in the right direction.

You'll see more of this over the next few quarters.

In terms of innovation, expect to see some news from us in the back half of this year.

We have a lot of important work going on, and we expect it to start showing up in the marketplace before the fiscal year is out.

We have an excellent new R&D head in Al Bolles, who joined us from PepsiCo about six months ago.

We're making huge progress in applying our R&D capabilities towards things that can make a real difference in terms of new products (indiscernible) working closely with Jim Hardy and our supply chain to upgrade quality on existing products.

Consumer foods isn't all of the story for the quarter.

There were other bright spots in terms of volume, pricing, operating efficiency and mix, in various areas of the portfolio.

Some combination of those comments contributed to profit growth for our specialty potato operations, our spice operations, our milling, and our branded Canadian business.

The area of our portfolio that was down significantly from last year was our Trading & Merchandising business.

We told you we expected to be below year-ago amounts this quarter.

That's exactly what happened, because of the unusually strong performance that group delivered a year ago.

The nature of this business is volatility, so we don't expect the same level of profits each quarter or each year.

We took all of that into consideration in our planning, and when we gave you our financial expectations for the total company this year.

Going forward, the key to unlocking this company's potential is capturing supply chain and administrative savings, and using them to fuel good ROI investments that will drive the top line.

To that end, we are pleased to be close to closing our meat deal, which is the last component of the divestiture program that we outlined for you.

Completing the entire divestiture program early means we can attack our cost structure earlier, which is good news for all the plans we've outlined.

Related to cost structure, many of you saw our announcement last week about the plant rationalization program.

We told you last March that we would close 10 to 12 plants in Phase I of a plant rationalization program.

The objective of that program is to deliver $100 million of fixed cost savings annually by fiscal 2009, which is one component of the overall financial profile we shared with you for the '07 to '09 forecast period.

The announcement last week relates to five closures, and that puts us in the range for about half the savings targeted.

There will be more news about the rest of Phase I before the end of this fiscal year.

Before I close, I will recap what I said about EPS for the year.

I'm sure you saw that we raised the year's EPS expectations by $0.05, which is essentially the amount of the Q1 upside.

We're not committing to any more than that now because it's early in the year.

We know there will be some choppiness, given the types of initiatives we are implementing, and we certainly can't predict inflation.

We also haven't yet finalized plans for marketing investments that will show up throughout the rest of the year, nor the timing or method of allocating all divestiture proceeds.

We will provide updates on our progress throughout the year.

Now, I will turn it over to Frank.

Thanks very much, Gary, and good morning, everyone.

As Gary described, the first quarter was one during which the Company was able to demonstrate progress toward our near-term goals of reducing costs, improving margins, and enhancing working capital efficiency.

This improvement is, however, just the beginning, and there's still a lot more work to do.

These improvements will enable the Company to generate the fuel needed for our committed reinvestment in product innovation, commercialization of new products, and meaningful advertising and marketing of our priority branded portfolio.

Before we continue, I'd like to point out that, as we did last quarter, we are now reporting company results on the basis of four segments for all periods presented, reflecting the way we now run our business.

And is Chris pointed out in this call, we're focusing our remarks on continuing operations only.

Given the recent announcement on the divestiture of the packaged meats business, we're going through final calculations of earnings from discontinued operations, and those details will be available in our 10-Q document to be filed with the SEC in a couple of weeks.

Suffice it to say, we do not expect any significant changes to estimates of total proceeds from divestitures communicated in today's release.

For continuing ops, the $0.26 per share reflects earnings, excluding restructuring charges of $0.05 per share; it also reflects a tax rate of about 36%.

There were no significant unusual items in this first quarter related to taxes.

We also expect this tax rate to be our normalized rate going forward for the remainder of the fiscal year.

The first-quarter result of $0.26 per share from continuing operations was slightly ahead of last year's comparable EPS performance, and we have noted the details related to items impacting comparability in this morning's release.

Please keep in mind the comparable historical numbers were impacted somewhat by the A&P methodology change and by reclassifying one of our smaller businesses to discontinued ops in the first quarter.

We are pleased with the first-quarter performance, particularly with the progress made on gross margins in the consumer business, driven by cost improvements.

These were aided by savings in manufacturing productivity, a manageable input cost environment, progress on transportation and warehousing efficiencies, and continued discipline over general and administrative costs.

In addition, there continues to be progress in the area of working capital, specifically in the areas of finished goods inventory and Accounts Receivable.

It shows that with discipline and execution, improved processes and consolidation of the supply chain function, we can achieve cost improvements, excellent customer delivery metrics and enhanced asset efficiency, all simultaneously.

We have not even begun to see the benefits of our announced upcoming manufacturing footprint consolidation, which will result in improved capacity utilization over time.

Those areas of good news more than offset the difficult quarter for Trading & Merchandising.

That segment had an extraordinary performance in the year-ago period, and the decline was due to market conditions and fewer opportunities.

This had largely been anticipated when we provided our outlook earlier in the quarter and did represent a shortfall of about $0.05 as compared to the same period a year ago.

Now for a few other items of note, during the quarter, we completed the divestiture of the cheese business and reached an agreement to sell the refrigerated meats business to Smithfield Foods.

The meats transaction is expected to close before October 31.

Closing this transaction earlier than originally anticipated will allow the Company to pursue cost reduction opportunities more aggressively.

We have said all along that we would hope to achieve G&A reductions as quickly as possible, and we will keep you apprised of progress on this front over the next several quarters.

As announced last week, we also sold our interest in a malt joint venture after the close of the quarter.

The combined anticipated pretax proceeds on the meats, cheese and malts transactions is expected to be around $650 million.

In addition, subsequent to the end of the quarter ,we completed the sale of our note receivable from Swift Foods, yielding additional net proceeds of about $117 million.

During the quarter, the Company repurchased an additional 2.4 million shares of its common stock at a total cost of approximately $53 million, and we paid dividends in the amount of $93 million, as compared to $141 million in the previous year's quarter.

This quarter's payment was at a new level of $0.18 per share, and related to the June 1 payment.

The same rate was used for the dividend payment made on September 1, subsequent to quarter end.

Capital expenditures for the quarter totaled $46 million for continuing ops, compared to 61 million a year ago.

Depreciation and amortization for continuing operations was approximately $89 million for the quarter, compared with $75 million last year.

For the remainder of the year, as previously communicated, we do intend to make significant investments in our plant rationalization and infrastructure.

Capital investments for these items will become increasingly evident as we proceed through the fiscal year.

We still believe that the overall guidance and capital spending for fiscal 2007 will be in the range of $450 million, and we believe that's appropriate.

Subsequent to the end of the first quarter, the Company made a $51 million contribution to its defined benefit pension plan, providing additional funding consistent with the Pension Reform Act and consistent with our internal plans.

And we believe our overall pension liability to be quite manageable.

Our cash balance at the end of the quarter was $695 million, so we are in very good shape from a liquidity standpoint.

This was after the share repurchases we completed.

It also includes the benefits of proceeds from the cheese divestiture.

Our weighted average share count for the quarter was just over 512 million shares, and the ending share count was just under 512 million shares.

Going forward, the Company, along with its Board of Directors, will carefully evaluate the most appropriate use of excess cash.

As we've consistently stated, we will benchmark our capital allocation decisions against share repurchases.

At the end of the quarter, our interest-bearing debt was approximately $3.6 billion.

As was the case last quarter, the current portion of long-term debt reflects 400 million of senior debt due in 2026 that is classified as current because it will put option exercisable during a period extending into the second quarter.

We will be reclassifying the debt back into long-term debt during the second quarter, and you'll see this reclassification of in the filing of our second quarter 10-Q in January.

In terms of our outlook going forward, you've heard from Gary and saw the release today, that the Company is revising upward its overall fiscal 2007 outlook by $0.05 to now be in the range of $1.17 to $1.22 per diluted share.

This range, representing earnings from continuing operations, excludes any items impacting comparability and any incremental benefit from allocating divestiture proceeds.

We will count further on the fiscal 2007 results as the year progresses and as we know more about the timing and amount of marketing and R&D investments, cost savings and deployment of divestiture proceeds.

One other item I wanted to cover briefly is that, during the first quarter, the Company changed the method by which we expense certain marketing costs.

This will not change the total amounts for the fiscal year, but will change slightly the quarterly phrasing of those amounts.

The release describes the change, but overall, we currently believe that our second-quarter impact could result in approximately $0.02 to $0.04 per diluted share of additional marketing expense that would have been reflected in the later quarters under the previous methodology.

In addition, the Company expects fiscal second half marketing investments to increase in support of our innovation and growth strategies.

With that, Gary and I would be happy to take your questions, so at this point, I will turn things back over to our conference operator.

Thanks very much.

Thank you.

Now, we would like to get to an important part of today's call, taking your questions.

The question-and-answer session will be conducted via the telephone. (OPERATOR INSTRUCTIONS).

David Driscoll, Citigroup Investments.

Well, first off, congratulations on being able to show progress right out of the gate here, Gary.

Thank you.

I would just like to talk a little bit about the guidance range, and in fact it seems, Gary, that you had an opportunity here perhaps to take this (indiscernible) and actually add it to your marketing budget, but you chose to drop it to the bottom line.

Can you just talk to us a little bit about the marketing plan and the dollars that you have allocated for the increase for fiscal 2007?

Is there -- you know, just exactly why would you want to raise guidance right now instead of actually putting that money right towards marketing spending and trying to go after topline growth maybe a bit even sooner?

Yes, David, that's a good question, and I guess I would answer it by saying it's not "or"; it's "and".

We believe that we can do both.

You will see, as the rest of the year goes, we will have significant increases in our marketing spending.

We have planned for that, given what we believe we've got coming, in terms of the take down in our cost structure, so you'll see that across the rest of the year.

Importantly, we are on target for the way we have planned on a go-forward basis, and that again is to first at the same time attack our cost structure and raise the effectiveness of our marketing.

We have done both, and now that we are starting to see the savings come in and we are comfortable that on some of our most important products we have jumped over the bar in terms of the effectiveness, you'll see us start to spend more.

So we think we can deliver more to the bottom line, as well as spend more marketing.

Do you still see the absolute marketing spending for the year around 450 million?

I wouldn't get to an exact number, but what I can tell you, it will be significantly more than a year ago.

Christine McCracken, Cleveland Research.

Good morning.

I just wanted to delve a little deeper into the commodity cost environment.

It didn't come up on the call to any great degree but several of your peers have talked about it actually increasing recently and probably being a little higher than they expected.

As I recall, in your guidance, you actually gave a pretty big cushion for commodities to increase.

So maybe you could talk about that and specifically what you're outlook is on energy.

Yes, Christine, this is Frank.

Overall in the first quarter, we thought we were going to see about a 2 to 3% increase in overall input costs, and that's really about where we landed.

There was a lot of variation within that category, though.

We saw beef costs come down over 20%, poultry weighted average -- (technical difficulty) -- between all the poultry categories was roughly flat.

We saw natural gas come down, which gave us a little bit of wind at our back on the plant operating costs.

And the big increase, like our competitors, was in diesel, up over 20% year-on-year.

Now, recently, as we've seen oil come off and diesel, that should provide a little wind at our back in Q2 as all this rolls through our inventories, applied to the P&L.

So going forward, we are hoping we continue to see moderation in the protein category, and we think we will see a little bit of moderation in diesel but that's always an open question.

So overall, we are still calling the year at about 2 to 3% inflation; that's what our current plans reflect.

Great, thanks.

Todd Duvick, Banc of America Securities.

Good morning.

I just wanted to ask a question in terms of kind of balancing the priorities you have.

Obviously with the divestitures, you've gotten rid of quite a bit of income generation, but I recognize they were the lower-margin and more volatile businesses.

As you look at applying those proceeds, how do you balance kind of applying those to growth in EPS versus kind of maintaining your credit rating?

I guess related to that, what is your credit rating target that you have established?

Let me start, Todd, and then I will turn it over to Frank.

As we've always said, we will benchmark our use of the proceeds always against share repurchase.

Having said that, we think that, because we have the significantly raised the bar in terms of the way we look at our capital spending, our capital projects for our infrastructure, just like we've done on marketing, that as we look hard at ROI opportunities, we've got a number of projects coming forward.

In fact, we just visited a key facility that we will put a significant amount of funding into, always looking at the ability to improve our productivity and hence our margins, our capacity on key businesses and our quality for long-term sustainability.

So, we will always look those kind of opportunities, but again, we will always benchmark every use of those proceeds against share repurchase.

Frank?

Yes, I think that's absolutely correct.

Please keep in mind, Todd, that when we look at our capital allocation for the year, one of the things we did when we put the plan together, which includes a significant increase in CapEx as well as A&P and R&D, as we knew we could fund a piece of that through the adjustment of the dividend that we made a couple of quarters ago.

So that provided some of the fuel.

So we are well-covered, through operating cash flow and the reduction of the dividend, in fully funding those increases.

So again, we will look at the divestiture proceeds, benchmark against share repurchase, and if we can find incremental organic opportunities that exceed the return from a repurchase, we will certainly address that.

But aside from that, the share repurchase becomes the benchmark.

Now, that said, we are committed to maintaining a solid investment grade credit rating.

We are the equivalent of BBB+ from two of the agencies right now, and BBB from the third, and I think that we would like to be remaining in that range.

So we don't have a specific target rating in mind, other than to say that solid investment grade is a target in maintaining a very, very prudent balance sheet posture.

Okay, thank you.

Then just kind of a follow-up on a different topic -- some companies, especially in the agribusiness area, have significant trading operations.

I know, in certain cases, they've grown to be a bit problematic from a credit rating standpoint, in terms of them actually becoming more like a hedge fund.

My question is, with respect to your trading operations, obviously I know you use them partly to help manage costs.

But can you comment on some of the trading operations that you have in terms of being a profit center, and if you view those to be core?

Yes, Todd, it's Frank again.

Also, one thing we've got to keep in mind here is that we do have an active management of maintaining risk -- maintaining a management of our commodity input costs.

That is a separate operation from the trading-for-profit, which has very, very tight value-at-risk limits on a daily basis and very, very tight quarterly loss limits.

So, we have a separate Risk Officer that reports directly to finance, that's on the trading floor -- a very experienced person, and very, very tight risk limits.

So we don't have the kind of exposure, financial exposure, significant financial exposure that you might see in some other operations.

You know, that's about all we can say about it.

The active Risk Management side, which (indiscernible) hedging input costs, is a separate category.

By the way, the commodities that we do trade for profit are the same commodities we trade for managing input costs on the production side.

(OPERATOR INSTRUCTIONS).

Eric Larson, Piper Jaffray.

Good morning, everyone.

A question both for either both Gary and Frank.

Looking now kind of at your new mix of business, you've kind of got everything out at least (indiscernible) of any sort of scale.

You may have small productline divestitures or some other things that happen in the future but the heavy lifting is done.

I know you've given guidance through 2009 but when you look at now your mix of sales, retail versus all the others, looking out five years -- what is the gross margin potential for kind of the new ConAgra?

Eric, this is Gary.

I will tackle that first.

I would tell you that, as we look at the consumer side of our business, there, our objective over time -- and I can't give you an exact timeframe but as we look out over time, we believe that we can continue to close the margin to the point where we can reach the peer group average.

When I say peer group, I mean comparable companies.

Certainly, within that, mix is very important.

The efficiencies from our productivity are very important.

Something that you'll begin to see from us as we get later in the year, innovation on a go-forward basis will be very, very important.

So we really do believe, on that side of our business, that we will continue to target the peer group average.

Frank?

Yes, and I think, to what Gary was saying earlier, you've seen a lot of progress in that the first quarter mainly due to costs.

On the consumer side, if you adjust for some of the restructuring items, we've picked up more than 2 percentage points on gross margin and on the international operations, more than 2 percentage points.

That does not even address yet the kinds of investments in brand equity and R&D that Gary spoke about.

So, you can't put a real number on it because it depends on the mix of the business, but good progress already and more to come and it will be beyond that three-year timeframe, as we said in March.

So when you talk about a peer company gross margin, would it be fair for us to just find peer companies in each of your four business segments and do that, or should we just use a regular CPG company that is more retail oriented?

You know, I would say kind of the center-of-the-store company a la a Kraft, a General Mills.

Certainly, we're not talking about a Wrigley or a PepsiCo -- (technical difficulty).

Okay, good.

Thanks, guys.

This concludes our question-and-answer session.

Mr. Klinefelter, I will hand the conference back to you for final remarks or closing comments.

Thank you.

Just as a reminder, this conference is being recorded and will be archived on the Web as detailed in our news release.

And as always, we are available for discussions.

Thank you very much for your interest in ConAgra Foods.

This concludes today's ConAgra Foods first-quarter conference call.

Thank you again for attending, and have a good day.