J M Smucker Co (SJM) 2003 Q1 法說會逐字稿

Please stand by your conference is about to begin. Good morning and welcome to the International Multifoods first quarter earnings conference call. At the request of International Multifoods the conference is being recorded. All participants will be in listen only until the formal question and answer portion of the call.

Beginning today's meeting is Miss Jill Schmidt, Vice President of Investor Relations for Multifoods, Miss Schmidt, you may begin.

Thank you and good morning, everyone and welcome to Multifoods fiscal 2002 first quarter conference call.

Joining me today is Gary Costley, the company's Chairman and CEO and John Byom, our Chief Financial Officer. This morning, John will begin with a recap of our first quarter results of the company over all and by business. He'll also review some of the key factors affecting performance. Then you will hear from Gary, who will discuss our outlook and update you on the integration of the Pillsbury Desserts and Specialty Products business.

Finally, we'll open the call up for questions. As always, if we run out of time today or if you have follow-up questions please feel free to call me at 952-594-3385. Before we begin let me make the usual disclaimer. Any comments that we make today about Multifoods outlook or future performance are forward-looking statements, they are, of course, subject to uncertainties and risks. And actual results may different materially from those contained in the outlook. We you suggested you review the company's SEC filings including our 10Q's and Forms 10-K to get a more complete report of the risks and factors that work in our business.

I assume you received a copy of the earnings release we issued earlier this morning, If not, please call Judy Morning at 952-594-3328, and she'll fax a copy to you. Now, let me turn the call over to John, who will review our financial performance for the quarter.

Thank you, Jill. Good morning, everyone. We appreciate the opportunity to talk to you again about Multifoods.

I'm pleased to report that Multifoods's first quarter earnings performance exceeded exceptions, we delivered solid results in our new U.S. consumer price division and all of our businesses are doing a good job of managing working capital and debt levels. Over all we remain focused on successfully transitioning the new consumer brands to Multifoods and positioning our core food manufacturing businesses for long term growth. We also are continuing to pursue key strategies to improve market share and profitability.

Let's look at our first quarter results for the company. I'll exclude the impact of the change of the accounting principal from the discussion to facilitate comparisons. Earnings per diluted shares increased to twenty-five cents, up from eleven cents in the first quarter a year ago.

Net sales in the 13-week period ending June 1st, rose 17% to $780 million, excluding the businesses acquired in November, 2001, and adjusting for currency first effects sales increased 3%. First quarter operating earnings totaled $16.9 million up from $7.1 million in the same period last year. Net interest expense in the quarter increased $5.4 million to $9 million, due to the higher debt levels associated with the Pillsbury Desserts and Specialty products acquisition. Our effective tax rate was 38% even with the first quarter a year ago.

Now, moving onto the balance sheet , our debt at the end of the quarter was $536.4 million, down slightly from $539 million at year-end, and we ended the first quarter with a debt to total capitation ratio of approximately 69%,which is slightly higher than our year-end to debt cap ratio because of the impacted of the goodwill write-off on shareholders' equity.

Depreciation and amortization totaled $6.8 million in the quarter and capital expenditures were $4.9 million. For the full year depreciation and amortization is expected to be about $31 million, we expect capital spending, this year to be $40 million. The majority of this investment is for infrastructure we are putting in place to manage and grow the acquired businesses.

As indicated in our earnings release operating cash flow in the first quarter was $31.3 million, this strong performance was principally due to improvements in working capital and in operating earnings. The strong cash flows enabled us to prepay $5 million of long-term debt during the quarter.

As you know the acquired brands significantly enhance our pre-cash flow, which will enable us to continue to improve our financial position. For the fiscal year we expect to generate pre-cash flow of approximately $40 million. Our priority for this cash will be on reducing debt.

Now before I turn to our operating performance by the business, let me briefly review the impact in the change and accounting principal on the company.

As, we announced at the end of fiscal 2002, we adopted the new financial -- new statement of financial accounting standards number 142 in the first quarter this year. As a result we recorded a noncash after-tax charge of $41.3 million or $2.12 per diluted share to write-down the goodwill and Multifoods distribution group. This reduces the net book value of the distribution business to about $230 million. So, including the impact of the change in accounting principal the company reported a net loss of $36.4 million for $1.87 per diluted share in the first quarter of fiscal 2003.

Now let's look at our first quarter performance by business, I'll begin with our food manufacturing group.

Operating earnings in the quarter increased to $15.9 million, reflecting the accretion from the acquired brands. Net sales for $210.4 million up from $112.4 million a year ago. Excluding results from the acquisition and adjusting for currency effects, sales grew about 5%. Over all, shipments in the U.S. Consumer products increased 11% year over year and unit volume continued to improve as a result of strong brand building initiative, more effective merchandising and distribution gains. We are very encouraged by the response, we've received to the efforts we have undertaken to re-energize and enhance the value of our brands.

As you know, the business we acquired came in softer than anticipated, due to the prolonged sales process and the lack of merchandising support and sales attention during the lengthy delay. In the four-week period ending May 25th, volume was up significantly in nearly all product categories. This represents a major turn around from the 52-week data, which shows an over all volume decline of 7.5%.

During the quarter we continued our aggressive marketing initiative to build brand equity and dry volume growth. In May, we initiated a portfolio promotion for our Pillsbury products and Hungry Jack brands, that contributed to our strong performance.

Our Martha White brand extended its long-standing associations with the Grand Ole Opry and Bluegrass and Country Music to the Martha White sing-along contest, In March, 10 consumers were selected to sing the Martha White Jingle at the Grand Ole Opry Stage with Grammy Award winner Marty Stewart and the International Bluegrass Music Associations, winning entertainer of the year Rhonda Vincent. The Martha White Jingle is considered a standard at Bluegrass Festivals Nationwide.

We also, entered into a partnership with Rhonda Vincent that will further link Bluegrass Music to the Southern Heritage of Martha White. This summer Rhonda Vincent and her band are touring on the Martha White Bluegrass Express bus. Now, a new generation of consumer will experience the heritage and partnership of Bluegrass Music and Martha White.

In addition, our sponsorship of the National Cornbread cook-off in April provided the opportunity to further position the Martha White brand as the Southern baking expert. During the quarter, we introduced a new seasonal Pillsbury Fun-fetti Cake mix and frosting offering called Stars and Stripes, to help Americans celebrate and enjoy special summertime occasions.

We also rolled out a new Hungry Jack four-pack complete Pancake mix product in the Military Commissary Channel, this product which includes, four convenient, pre-measured, stay-fresh packets of Hungry Jack Pancake mix, was developed to meet the needs of individuals and small families on the go. We will be launching more new consumer products in the coming quarter.

In our U.S. Food service products division, sales in the quarter were up 11%, due to the addition of the Pillsbury noncustom food service baking mix business. Excluding the Pillsbury business, sales were essentially flat.

Earnings were negatively affected by higher commodity costs, principally for sugar, and the write-down of an advance to a supplier that filed for bankruptcy. Adjusting for these factors operating margins in the first quarter would have exceeded 4%, a solid improvement from 3% last year. During the quarter we achieved good volume growth in our new line of Bonn Serve Muffins and margins improved on our ready to bake cookie line. We also continue to take steps to strengthen our food service product sales force.

As you may recall the Pillsbury food service business we acquired opened up new opportunities for us in the food service distribution channel, a channel in which we had low penetration. We've hired new field sales personnel and expanded relationships with brokers to enhance our ability to serve customers. We're also investing in training to broaden our capabilities, bring greater value to our customers, and achieve deeper account penetration with them.

In our Canadian food segment sales were up 10% in the quarter, primarily on volume growth in our commercial flour, consumer ethnic grain-based products and consumer condiments. Operating earnings were down slightly reflecting higher condiment manufacturing costs. As you may recall we accelerated our condiment processing consolidation project by a full year, at the same time we were starting up our new facility last year, Canada experienced one of the hottest summers in 35 years and the Cucumber crop came in early and more rapidly than normal. Consequently we added labor to handle the higher volume, which increased our cost structure.

We continue to experience inefficiencies at the new plant. We are selling high-cost condiment inventory, that was produced last year. We have taken steps to improve productivity. For example we've added engineering resources to identify opportunities to improve yields in manufacturing costs and we've increased training. We expect condiments margins to increase , as we enter the new crop season in June and our throughput and asset utilization will improve.

During the first quarter we continued to experience strong demand for our new Bics Snackums Pickles, which appealed to consumers seeking a healthy snack alternative.

We also are benefiting from growth and exports of our Golden Temple brand, ethnic flour and rice products to India and Pakistani communities in the United States. In addition, we recently added the Gatusso brand of pizza crust mix to our consumer product line in Canada. We also began producing Robinhood flour for the U.S., which improved our plant utilization and product mix.

Finally our commercial baking mix business, benefited from new store growth at one of our major national food service customers.

Before I turn to Multifoods distribution group, I would like to point out that we recently settled a labor strike at our Port Colburn, Ontario, mill. The strike, which began at the end of May, had no material impact on our financial results. Moving on to Multifoods distribution group.

Operating earnings increased 7% to $4.6 million and operating margins improved to .8%. This improvement was driven by productivity gains and lower delivery and warehouse costs. Sales in the first quarter were $569.2 million, up 3%, on top of an 11% sales growth a year ago. Over all, we are pleased with the progress the distribution group is making. We continue to focus on initiatives, to enhance service levels, lower costs, and increase profitability.

Delivery and distribution expense as a percentage of sales improve 25 basis points, versus the same period last year. In addition, employee turnover is down and we believe a more stable workforce will continue to benefit us.

Volume in the sandwich segment increased 24%, which helped offset ongoing softness in the bending channel and the rationalization of accounts in the independent pizza segment.

Volume in the theater segment was up sharply as a result of a strong first quarter box office with the releases of movies such as "Spider-Man" and "Star Wars Episode II.". In summary, our fiscal 2003 performance is on track. We are building new core confidencies and investing in our brand and creating a strong foundation for a stainable, long-term profitable growth. Which clearly defined growth strategies and with stronger and more predictable performance, we will deliver on our commitments to our shareholders. Thank you for your time, now, let me turn the call over to Gary.

Good morning, everyone and thank you ,for joining us on the call today. I am especially glad to be here and to let you know that Multifoods is delivering solid results. Our performance today is a direct result of the actions, we began five years ago when we initiated a program of strategicly restructuring and transforming Multifoods.

With the acquisition of the Pillsbury Brands we completed last year and our decision to increase our focus on branded foods, we have set the platform to create long-term value for Multifoods shareholders. While a lot has changed at Multifoods, the senior leadership team knows that there is still much to do. As we see it, our priorities are to continue to move the transformational process along with an even greater sense of urgency. We are now going forward with a set of excellent businesses, strong brands, and terrific people.

These are the pieces that will move Multifoods to improved and sustained financial performance. Over all, as you heard from John, we had a very solid start on the year, and we continue to improve our execution. While we still have three quarters in front of us, we feel good about the prospects for the remainder of the year.

We will continue to emphasize basic strategies to drive growth in our food manufacturing businesses and let me remind you, some of these strategies now , first, we will invest in brand building, we acquire some highly recognized brand names at a terrific price. To enhance brand equity and grow, we are developing value-added marketing initiatives. We also were increasing promotion and concentrating on improving our merchandising execution.

Our second goal strategy , is to accelerate product and innovation. Innovation is the key goal drive, in the categories in which we compete. We are expanding our R&B resources and stepping up the pace of new product development. Our focus in the near term, will be on new flavors and varieties and product improvements. We are rolling out eight new offerings and nine product improvements in the second quarter, we will have more new items launched later in the year.

Our third growth strategy, is to expand distribution and target share gains in channels and markets, where our brands and products are under represented. In our U.S. Food service products business, we have analyzed the market segments and developed targeted plans by product and segment to capture share. We also intend to achieve deeper account penetration with the customers we already have.

In consumer products, we are focusing on increasing our presence in emerging channels such as Super Sanders, Drug and Dollar and Club stores. These are some of the strategies we are pursuing our that will allow us to achieve financial targets, this year and beyond.

Now, before I discuss the integration of the Pillsbury acquisition, I would like to take a moment to briefly comment on the status of our strategic review of the Multifoods distribution group.

The distribution group has made excellent progress improving its bottom lines performance. It is a sizable business and growing industry with market-leading positions in the segments it serves and good growth prospects.

With the Pillsbury brand acquisition, however, we have significantly reduced our dependency on our distribution business. We are continuing to look at various alternatives for this business, but have not yet reached a final decision. We plan to proceed with this process in a way that recognizes the various stakeholders, interest in the business and its value to Multifoods shareholders.

Now I would like to spend a few minutes updating you on the integration of the Pillsbury acquisition. Our overriding objective is to bring on board the new brands in a way that is positive to consumers and positive to customers and invisible to our consumers. We also are focusing on creating the framework, that will enable us to build and grow the businesses in the years ahead. The process involved a large cross-functional cross-company team of employees that is working hard to ensure that the transition goes smoothly, while at the same time, the day-to-day work of the company is not affected. I've asked John Byom to head the transition steering committee to make sure that this work gets management's highest attention. Let me share with you some of the work that is under way.

We are in the process of developing and building the management information system we need to operate the new U.S. Consumer products business. This system will use FAP software, which is the same platform we run in Canada. We installed FAP, In our Canadian facilities. The project came in on time, on budget, and it works. We have an experienced team of people working on this implementation. Many of our new IT employees are people who joined us from Pillsbury and General Mills. They have backgrounds with FAP, the team also includes employees from our Canadian foods business, and we retained the same consulting firm we worked with in our Canadian installations. We are on track with this project and expect to go live at the end of the fiscal year.

The conversion of the Toledo plant is moving along. As you know, this is a General Mills plant for Betty Crocker products were made and it is being converted to produce our Pillsbury mixes and frosting. We expect the conversion to be completed this fall. Once the plan is certified, we will purchase it from General Mills for approximately $11.5 million.

We also are expanding our Olerio, Ohio food service plant, to accommodate the production of the Pillsbury noncustom food service baking mixes, startup is expected this fall.

In addition, we are in the process of setting up a distribution network for our U.S. consumer products, the Pillsbury company operated out of 11 distribution centers nationwide. We will move to six , third-party facilities across the U.S. The Toledo plant will serve as one of the distribution centers for our customer consumer products.

Now, turning to our outlook for the balance of the year , we are both confident and cautious going forward. We believe our businesses are on track with their strategies. As know, you will recall, the about third quarter accounts for about 50% of our earnings. At this point, we remain comfortable with our previous full year, earnings estimate of $1.90 to $2 a share. We continue to expect second quarter earnings per share, for usual items to be in the range of 26 cents to 28 cents. In summary, Multifoods is taking the steps to ensure a bright future for the company and its shareholders. We believe that the combination of strong brands and great people, will benefit our shareholders in the years that come. And we are excited about the prospects of achieving higher levels of financial performance for our existing shareholders, customers, and employees. I look forward, as always, to with reviewing Multifoods, progressing over the coming year. So, with that, I would like to turn -- thank you for listening and I'd like to turn the call back to Jill.

That includes our formal remarks. At this point, I would like to turn the call back to the Operator, who will provide instructions for asking questions.

Thank you, at this time we are ready to begin our formal question and answer portion of the call. If you would like to ask a question please press star one on your touch-phone, you will be announced by your name and company prior to asking a question. Once again, please press star one to ask a question now. The first question comes from George Dahman, U.S. Banc Corp Piper Jaffrey, Mr. Dahman, please go ahead with your question.

Go ahead, good morning. How are you?

Good morning.

Good morning.

Back with the agreement with the FTC for General Mills, there was a provision that they would set aside money for you to hire a sales staff, if you were dissatisfied with the distribution system that was set up for your food products. How happy are you with what's there? Are you contemplating any changes?

Um, we have made some changes already, George, and we are -- we continue to evaluate the structure in the sales side with respect to some of the largest customers, and we -- the structure of that selling organization will probably be in a state of constant subtle revision. In my experience that's always the case, so, you are never really done putting a sales force in place because the customers move around on you, and you have to make adjustments in real-time. Generally speaking, though, we are satisfied and happy with the sales organization that we got, we have excellent people, cross-marketers doing a very good job. I would remind you of only one thing that you said, George, and that is the money that you talked about being set aside was not explicitly enmarked only for sales. It was for anything we found in the acquisition that was different than what we had thought it was. And we have found a few of those and we have utilized some of those funds.

Ok. Thank you.

Thank you. The next question comes from Matt Russman, Sage Asset Management.

Hi, Guys.

Good morning.

The [INAUDIBLE] consumer products business, if I just look sequentially back to the fourth quarter of '02, the revenues were down about $10 million, but the operating income was up about a million, so, you had a big jump in the margin. I thought maybe you could just explain, you know, what kind of items changed to account for the margin improvements sequentially?

Actually are you comparing the margin improvement of the fourth quarter versus the first quarter this year?

Correct.

Um, the fourth -- John and Jill you might come in and help me with some of this. The fourth quarter of last year was the first quarter we had that business.

Mm-hmm.

You will recall we didn't close that business until, sometime in November. A lot of the shipments for the baking season, occurs prior to that time. When we went into the fourth quarter it was our very first quarter of having the business. We had a lot of startup issues and shipments were very low in that quarter, principally because the trade had fairly very high levels of inventories coming out of that baking season. So I would suggest that the fourth quarter of last year, is an artificially low margin quarter. John, Do you want to add anything to what I said,?

No, I think that's right. There is nothing else, I don't think.

It is difficult to compare the two because you had a lot of -- you know, from what was actually generated. It is kind of a difficult comparison.

Ok. That's good. The other thing is, as I recall -- I can't recall the number, but you guys gave a volume number for the consumer products business for the fourth quarter, and you know, could you compare what -- remind me, what that was and if you have a number for what it was in the first quarter?

The volume in the first quarter was plus 11% --

Right.

Versus the first year over year comparison of the first quarter. If you take a fourth quarter and what would have been 2002/2001 versus -- I'm sorry, the first quarter of what would have been 2001 and compare it to our first quarter of 2002 --

Right.

Plus 11% on shipments.

Right. The fourth quarter was what?

The fourth quarter was what? Second.

I'll find it in just a

I'll have to get back to you on that, Matt.

It did improve? It did improve. In the fourth quarter, our fourth quarter in consumer products was very soft because it was year over year soft. If you compare our fourth quarter versus the fourth quarter, when the Ardioule had it, it was a negative business, so this business has turned around both in shipment volume and in market share. We had a four-week share ending May the 25th, in take-away that was plus 11% or, I'm sorry, 8% versus a 52-week share that was down seven. So when we got those brands in late last year, they were very soft on the consumer take-away, I think we've said that before principally driven by the very long process of getting the deal done. We're very pleased with the market performance and we've seen a year over year positive change in the consumer take-away.

So, when you look at the last 52 weeks for that business, it was down seven. If you look at just the last month, it was up eight?

That's exactly right.

Matt, this is John. I looked up the number for the fourth quarter. It was down eight.

So plus 11 versus down eight?

Right.

When we took the business, when you looked at the Nielson's, virtually every on a four, 12 and 52-week basis, virtually every number was negative.

Mm-hmm.

If you look at the Nielsons now, the take-away numbers, we have multiple lines of products that are up in the four-week and the 13-week period. We are still down 52 weeks but, in the shorter term, we're up. So we've -- we believe we've found the bottom, and we are crawling our way back out of it.

That's great. Thanks a lot.

Thank you. The next question comes from Eric Larson, U.S. Banc Corp, Piper Jaffrey.

Hello, everyone. Can you hear me?

Yes, can I.

Good morning, Eric.

Yes

Good morning, everyone. Could you give me a quick --- obviously, you are spending more money, building your brands and coming out to get some more innovation back in the category, which I think is terrific. How are some of the competitors reacting? You are not too far from beginning to sell into the key baking season. Is there anything in your marketplace, that looks unusual or something that disrupt the Apple cart a little bit on the selling?

On the second question, No!, there's nothing that looks unusual to us. The key baking season, you're right, it is right upon us. We're selling it now. That selling is just started. We've made excellent distribution gains. We put a distribution push in place, and we have made some excellent gains to get some distribution points back, and we'll be selling into the baking season with those distribution points in hand, which really should help us, we didn't have -- we had virtually no merchandising last year during the baking season because of the handover, so we expect to have a good baking season. Our competitors, uhm, I suspect that they will continue to be aggressive. Duncan Hines, continues to do a good job in the marketplace, and they continue to show year over year improvement, and I'm sure Betty Crocker will be there with both product improvement and merchandising. So we expect to have a competitive environment, but that's probably good for the category. If we bring innovation, and we all bring innovation, the category will respond. So we're encouraged.

Thank you.

Thanks.

Thank you. The next question comes from Robert Addler, I.N.G Pharmon Cells.

Good morning.

Good morning, Bob.

Given the fact that the Pillsbury and General Mills product names are so well known and nationwide, has anything happened or is anything likely to happen that will enable you as an expanded company to bring your older products into stronger positions as a result of having that connection? In other words, is there any spillover into what used to be the old IMC. From having acquired these two product lines?

I think the answer to that is, yes, we have a number of synergy opportunities. If you recall , a deal we put together, did not require any and we are very heavily focused on executing against the short-term objective of the transition. Having said that, having the national sales force in place and having the infrastructure in place to deal to sell into the trade, the Pillsbury products and the Martha White and Hungry Jack, provides us a clear opportunity to enhance the Robinhood business, and it clearly gives us the opportunity to do a better job of exporting consumer products out of Canada into the United States, because we have an infrastructure in the United States. It also gives us -- we have significantly more size and scale and in the baking aisle, which helps us against our existing products and on the food service side, we bought the 7--5-pound mix business.

That went directly into our food service operations, which again, increases our penetration ability with our existing customers, and those products are sold to the distributors, the Ciscos of the world, and we have very low business, very low penetration in that channel. Having those products under the roof gives us an opportunity to penetrate those channels with other food service products. Michael Willey, the new President of that group, is very focused on doing that and in branding across the various brands using the power of our consumer brands to leverage, Jim White's consumer business. So, I think that the [INAUDIBLE] of that is, clearly going to help the old IMC. And if that will begin to manifest itself in the not this fiscal year, but next fiscal year.

Agh, thank you. I hope you'll let us know in addition to just the standard breakdown of categories of consumer food service and so on, that you'll be able to let us know as and when those synergies actually show up.

Well, we certainly will. In opportunities like this when we do conference calls in the future and we make broad-based announcements about our business, I'm sure you all will be asking us what kind of synergy and hopefully, we'll see margin improvements, and we'll be able to explain where those margin improvements come from. So we will be able to communicate around that in these kind of settings I think.

Thank you.

Thank you. The next question comes from Steve Denault, U.S. Banc Corp.

Good morning, everybody.

Good morning, Steve.

Good morning.

Was there any top impact in your U.S. consumer products segment associated with the merging issues task force or the reclass marketing dollars?

Yeah! There was some, with the consumer business, we treated it that way at the beginning of the acquisition, so no, major impact [INAUDIBLE], we had some small adjustments in our base business, but it is not very significant.

In regards to -- what did you say in new product offerings for Q2? Was it eight new products?

Eight new items and nine product improvement , so, 17 total.

Wow that, sounds like a lot.

Mm-hmm.

Ok, great. Thank you.

Thank you. If there are any further questions please press star one now. At this time, I'm showing no questions.

With that, before we close, I'm going to turn the call back over to Gary, who will share a few final thoughts.

There are three things I would like to leave you with. We've exceeded our plans in the first quarter. We've-- we're very pleased with the progress we have made, we had great plans and great people and I would like to stress to all of the shareholders, is that this is a terrific group of Multifoods group, it is by far the best and deepest talent that Multifoods have had, if you combine our talent infusion with our brand infusion, we really are becoming a brand new company that's going to have a terrific future, and we're confident that we will deliver the earlier estimates they'll we laid out today so that, in the near term, we will deliver on our results. Thank you very much for your continues support and good-bye.

Thank you. That concludes today's International Multifoods, first quarter earnings conference call.