Brenda Barnes – CEO
Theo de Kool – CFO
Gerry Berryman – Chief Procurement Officer
Aaron Hoffman – VP IR
Sara Lee Corp. (SLE) Q1 2009 Earnings Call November 5, 2008 9:00 AM ET
Good morning and welcome to Sara Lee's, first quarter 2009 earnings conference call. We very much appreciate your time and your interest. Joining me for today's call are Brenda Barnes, our Chairman and CEO, Theo de Kool, our Chief Financial and Administrative Officer, and Gerry Berryman , our Chief Procurement Officer.
First quarter 2009 results were released this morning at 6:00 Central via press release you can find it on our website at www.saralee.com. If you have problems accessing the release, please call Gene William at 630-598-4966. The 10-K was also filed this morning.
I’d like to begin by cautioning you that our remarks this morning contain forward-looking statements about Sara Lee's future operations, financial performance, and business conditions. These forward-looking statements are based on currently available competitive, financial, and economic data, as well as management's views and assumptions regarding future events.
Such forward-looking statements are inherently uncertain and investors must recognize that actual results may differ from those expressed or implied in these statements. Consequently, I need to caution you not to place undue reliance on forward-looking statements. We have provided additional information in our press release and Form 10-K for fiscal 2008 that I encourage you to review concerning factors that could cause actual results to differ materially from these forward-looking statements.
With that out of the way, I will now turn the time over to Brenda.
Thanks Aaron, good morning everyone. We certainly know this is not a slow news day as we all woke up to a new President elect on a very historic day so thanks for being here.
As you know today we’re going to combine our first quarter earnings with our annual Meet The Management meeting, Analyst Day. I will limit my discussion of the segments and focus on the total company performance and our outlook this morning.
After I wrap up, I will ask Gerry Berryman to provide an update on our commodity risk management activities and our strategies.
Let me start by saying that we had a solid first quarter which built on a very strong fourth quarter. We continue to see the benefits of a robust product innovation pipeline, significantly improved marketing efforts, strategic pricing, integrated IT platforms, and various cost reduction initiatives just to name some of the drivers of our improvement.
And as we announced last week we made some minor changes in North America to better reflect how we report and manage these segments. These businesses all turned in very good adjusted operating segment income performances in the quarter punctuated by a massive jump in retail and very strong performance in fresh bakery and food service.
Across the board we saw very strong sales growth driven by pricing actions and mix improvements. And as you’ll hear later today, we are well on our way to achieving our fiscal year 2009 and long-term goals for these businesses and have concrete strategies to get us there.
Our international businesses were a little bit mixed in the quarter partly as a result of important marketing investments. International beverage MAP increased almost 16% in the quarter while household and body care spend was up over 9%.
This represents a meaningful increase particularly when compared to the first quarter of last year when MAP investment was up 10% and 35% respectively.
We have outstanding new product opportunities and geographic expansion that we’ll continue to fund knowing that these moves position us for success this year and for long-term. Again, we’ll go into much greater detail about these goals and our plans that support them in the guidance later today.
We’re also facing difficult economic and consumer environments in a number of geographies most notably Spain and the UK both of which are key countries for international organization.
One area I’d like to highlight is pricing, as you know in fiscal 2007 we took about $145 million to pricing and then another $350 million last year. We now expect to take another $420 million this fiscal year bringing us close to the $1 billion of pricing in a three-year period.
Our philosophy is to pass commodity increases along the form of pricing and we have generally met that goal. In the first quarter of 2009 we faced commodity cost increases of about $170 million and we increased prices by $180 million.
We have been managing pricing with our retail partners in these volatile times to ensure that we properly match commodity increases and pricing actions. And while we’re confident that our strategy is sound we’re also cognizant of the impact on consumers and carefully watch our price gaps and premiums as you’ll hear about later today.
Importantly though our shares volumes and sales trends remain positive in the face of these increases lending support to our view that we have first rate brands and world-class sales force.
Turning to financials, adjusted sales rose about 6% on the strength of our North American businesses and the substantial pricing I just mentioned. On the other hand adjusted operating income fell 4% largely as a result of investment in our international businesses, combined with a $35 million commodity mark-to-market loss in the quarter.
As you recall we had a $24 million mark-to-market gain last year so this is essentially the reversal of those benefits.
As you see with other companies over time these gains and losses tend to offset each other. The reported diluted earnings per share were $0.34 for the quarter. This number includes a $0.01 per share gain from significant items as well as the benefit from tobacco proceeds which is $0.21 for the full year.
This number is also reduced by about $0.04 per share as a result of commodity mark-to-market losses compared with the first quarter of last year.
And although our first quarter differs from consensus we are only changing our full year forecast to reflect currency and our suspended suspension of our share buyback. On a reported basis we’re forecasting diluted EPS in the range of $0.99 to $1.06 which includes a $0.21 gain from the sale of our tobacco business in fiscal 1999 and a $0.01 per share from significant items.
Our guidance does not include any additional significant items that may occur during the remainder of the year.
Our adjusted EPS guidance which excludes the tobacco payment and significant items is $0.77 to $0.84. This is a reduction of $0.13 to $0.14 per share. The sole reason is $0.11 per share from lower currency assumptions and the $0.03 per share from the suspension of our share buyback program.
As the credit crunch worsened, we made a decision to suspend the repurchase until we see some stability in the financial markets. Theo will talk more about this later today. However the bottom line is that while we have lowered guidance it is not a result of any deterioration in our business.
Today you will also hear about Project Accelerate, and aggressive cost reduction program that builds on our transformation, taking efficiencies to another level. After building a solid foundation of capabilities over the last several years, we now have the standardized processes and integrated IT infrastructure to further reduce our costs while increasing efficiency throughout the organization.
Theo will talk in more detail about this project but I’ll mention now that we expect about $150 million of one-time charges between fiscal 2009 and 2011 with the majority coming this year. This should yield about $200 million to $250 million of benefits when we achieve the full run rate at fiscal 2011.
We also expect $30 million of charges from our transformation related IT actions that are the final element of our original system conversions, and as we noted in the 10-Q, we will likely take a $20 million write-down in our fresh bakery segment as a result of withdrawing from a multi employer pension plan in one market.
As a reminder these items are not in our fiscal 2009 guidance as the exact timing and amounts are not certain.
Moving on, we anticipate sales to be between $13 billion and $13.3 billion for the full year which incorporates a very significant pricing increase in the face of what is likely to be another tough year for commodities. Similar to our earnings guidance we have reduced our sales forecast by $700 million to reflect lower currency assumptions.
We had previously forecasted that commodity costs would rise by $500 million this year and that pricing would increase by the same amount. We are now expecting $420 million of commodity costs, our assumptions and thus incremental sales are similarly $80 million less.
Thinking back on the successes of fiscal 2008 and the strong start to the year, I’m more confident then ever that we’re on the right road with the right plans to overcome any obstacles that may arise. We are also taking the necessary actions to deliver performance this year and for the future.
You’ll hear specific support plans later on today. Now, let me turn the time over to Gary and then we’ll all have time to answer questions.
Thank you Brenda and good morning, I will focus my procurement comments on three very timely and important areas; commodity management, the prior relationships, and procurement integration and alignment with the business units.
Let me first say that the past four years has been dedicated to the support of our business units, growth and performance improvements, as well as the further development of the procurement organization. The headwinds that we’ve been dealing with in terms of the historic commodity markets and the volatility and inflationary impact of those markets, has confirmed that our investment in the procurement capabilities, (1) to manage our commodity input costs; (2) to develop and manage strong supplier relationships for competitive advantage; and (3) to deeply integrate our commodity and general procurement knowhow into each and every one of our business units could not have been more timely and appropriate.
These three strategies are helping our businesses to compete and win with our customers. Not many if any in fact, were calling for the level of commodity inflation that we’ve experienced in the past two and a half to three and a half years. However we clearly saw the necessary requirements to build the core procurement capabilities to be successful in times exactly like these.
And we’ve done so. Let me take a look at the size and scale of our global spend. Ingredient, $1.1 billion; meat, poultry, beef and pork $1 million; coffee beans both Arabica and Robusta at $1.1 billion; packaging on a global basis $800 million; and energy supporting our factories and our vehicles $250 million, giving us a total commodity purchase of $4.250 billion.
We also have an indirect spend of just under $3 billion and includes such items as contingent labor, benefits, professional services, marketing services, MRO materials and others for a grand total spend of $7.150 billion.
Now the slide that you’re looking at here is a thoroughly year-over-year weekly market value index slide equalized on our fiscal year 2009 volumes indicates a particularly steep inflationary history. This information does not reflect our fiscal year ownership but rather the Sara Lee basket of commodities that we purchase valued at their reported cash market prices, week by week over the period of time that’s represented on the slide.
For fiscal year 2006 the inflation of 2.7% was driven primarily by energy, coffee, and wheat. For fiscal year 2007 the 8.7% inflation was a continuation of inflation in the coffee and wheat area with the growth in inflation for corn and edible oils. For fiscal year 2008 we experienced as others in our industry, a massive acceleration of inflationary influences on energy, feed grains and coffees.
The three-year inflationary trend continued across the board for the first three months of fiscal 2009 and then the financial credit crisis created a dramatic pull back particularly on energy and ingredients. We continue to see meat costs well above historic norms. We expect this to continue due to livestock producer input costs being higher and a reduction in their herds.
This is exactly why you see in fiscal year 2009 and index indicating a dramatic decline followed immediately by continued inflation in the back half of the year. We have not predicted a fiscal year 2009 inflationary position but are certain that by all reasonable measures commodity costs will in general be significantly above historic norms in nearly every area.
Including our procurement in business strategies, our some very definite processes, and practices regarding our commodity risk management approach. We consider all of these elements including commodity market assessment from internal and external sources. We look for buying trends that signal possible positions being taken by industry participants.
We consider ownership positions and how they would impact the marketplace and our customers and finally we consider our business units’ financial performance objectives particularly margin management.
All of these elements come into play as we manage our decisions for taking ownership on each and every commodity that we manage. Now I’ll look at our ownership performance, the three-year inflationary impact of commodity input costs as Brenda pointed out in her remarks, equal just nearly $1 billion, staggering from any measure.
In fiscal year 2007, the $145 million inflationary impact equals an implied inflation rate of 4.4% compared to the market index of 8.7%. Our ownership positions clearly allowed us to flatten the year trend line.
In fiscal year 2008 the $384 million inflationary impact equal an implied inflation rate of 11.1% compared to the market index of a staggering 18.2%. Another advantage for our businesses and our customers by delaying the full in-year impact through ownership positions that were taken ahead of the dramatic increases.
In fiscal year 2009, we are estimating an inflation amount of $420 million, 11.1%. The comparative to the market index is not possible because we do not predict markets. We actively manage our commodities and their ownership with full consideration of the strategies that I shared earlier.
The amount of $170 million of the $420 million fiscal year 2009 commodity inflation was incurred in Q1 with the remaining $250 million projected for the balance of the fiscal year. The fiscal year 2009 market drivers can be summed up as a diversity of two conditions; lower market positions and ingredients, energy and coffee being driven primarily by recent hedge fund liquidation, crude oil demand declines driving prices lower, and strengthening of the US dollar making our commodities more expensive abroad.
The higher market conditions for meat, proteins, and packaging are driven by the impact of feed grain costs for the livestock producers and feedstock prices that are increasing for resins, and [inaudible] board.
We work very closely with our critical suppliers in all of these categories to ensure we understand the dynamics surrounding each commodity and that we position ourselves competitively. Our commodity management approach encourages considerable resources including supplier relationships with powerful supplier players such as JBS/Swift, Cargill, and ADM. All three are very important examples of suppliers who are strategically significant in the management of our input costs.
Additionally we use JPMorgan Chase as our primary brokerage. We also use strategic inventory positions when appropriate for our meat proteins, feed grains, and coffee. And finally we stay incredibly close to our businesses in the management of national price lists, specific customer formula pricing, and customer negotiations.
All of these capabilities are critical to our success in managing in these commodity markets. Supply security is also a critical element of our strategy. We have strong reliable suppliers. Flour, vegetable oil and sweeteners from ADM; flour, vegetable oil, sweeteners, and meat protein from Cargill; pork and beef from JBS/Swift; Volcafe and Neumann Kaffee for our coffees.
In summary, we are confident in our commodity management approach including our supplier relationships and the business unit alignment all of which helps to provide predictable, stable and competitive input costs.
This concludes our prepared comments. We will now open the floor for questions.
Its difficult to reconcile that really interesting chart and then the $420 million number particularly given the $420 million is a bigger number then what you experienced in 2008, to what degree should we think about this as kind of expectation management with retailers, to what degree should we think about this as truly your forecast?
The $420 million is truly our forecast and as we look at our ownership positions combined with the hedging strategies that fundamentally allow us to buy ahead, and in doing that it pushes out current inflationary market conditions into future years. So the $420 million is in fact our forecast and what our expectations are.
So another way of saying that is you own an awful lot of 2009?
Theo de Kool
We typically hedge our positions three to nine months ahead of time to secure the supply, to lock in our margins so when the markets drop all of a sudden like they did, obviously there is a trailing effect on our cost price and I’d like to remind first, that we’ve [typically] estimated this to be $500 million, it has come down to $420 million but not all commodities have decreased in the same way. Like Gerry pointed out meat and packaging are still two elements that are increasing for several reasons. So it worked it way slower into our cost price and the markets of course and that means there is no reason at all in a lot of cases for us to decrease prices. This is what the market is.
Theo, you kept your cash flow from continuing operations flat despite the change in guidance, I would thought that the FX coming down would have had a cash flow effect, what am I not thinking about.
Theo de Kool
I think you think the right direction and we have looked at it, we think that we can stay within that guidance for the moment. There is uncertainty in cash flow always but we work all elements of the cash flow, very tight working capital management even more then before. There are some negatives in last year in terms of hedging impacts that turned probably into some positive this year so for the moment we kept the guidance where it was before. But you’re right, in principal we get a hit there of about $100 million but we are working hard to make up for it.
A follow-up to that, given that you’re going to be taking $150 million for charges for Project Accelerate, how much of that is going to be cash?
Theo de Kool
That is in principal only severance, so most of it will be cash but the majority will be taken in fiscal 2009 as a charge but the payout will probably be [inaudible].
I guess given the fact that you have the fiscal year ended in June, you didn’t have to make any pension, well you had to make pension adjustments but that was before the other markets have collapsed, so have you, are you proactively making a contribution to pension or is that factored in?
Theo de Kool
What we actually did is we did a quick scan at the end of September and it showed that our underfunding has not deteriorated and you may wonder why and the reason is that we had a very proactive and very advanced hedging management in place that protected our positions. So basically the $321 million underfunding that we reported by the end of fiscal year has not worsened, hopefully even a little bit improved on that and I’m very proud and thankful to a very corrective and capable Treasury management group who responded.
And these are the pension funds that we manage, that we are actively involved in.
Just to follow-up on the question regarding input costs, have you said how much, how hedged you are as you look ahead to throughout fiscal 2009, can you give a percentage or rough idea?
We simply don’t disclose that for competitive reasons.
And then regarding share repurchase and you are holding a pretty decent cash balance and you’ve got a fairly low debt to EBITDA ratio, is it just a conservatism that you’re taking there or, I know a lot of the cash has been sitting in Europe as well, is that something that’s supposed to be repatriated or its no available to you today?
Theo de Kool
The reason is exactly what you mentioned in that we are conservative at the moment. I just checked this morning with our Treasury department about the commercial paper market, we get close for three months, but you don’t get the money. So the markets are still very tight. We feel very comfortable and I’ll address it in more detail later in the Meet the Management part of today. Yes we repatriate money from overseas according to plan and actually since the IRS has relaxed the rules somewhat we benefit from that as well so we can keep the money that we didn’t plan to repatriate, keep it somewhat longer in the US before its supposed to be a deemed [dividend] and then [inaudible] and tap from another bucket.
We are very proactive there and I think we are in good shape and let me also say we have suspended the share repurchase program. We have not cancelled it, we just conservatively look at it and say, we need to, the market needs to work itself first through this big issue and then we’ll talk again.
Relative to Europe, and that’s been a very tough economic environment, you showed some strains with your volumes especially so your guidance didn’t contemplate it seems like any real change in those businesses, so what’s offsetting what seems to be a little weaker top line growth in those markets?
We’re taking some very tactical actions in the local marketplace where you maybe change the product that you’re offering to a different size, different value, different price point, so that the consumer can in fact continue to stay in our franchise but maybe not trade up as much as originally possible. We’re tightening up everything in terms of expense spending, taking a look at how we spend the marketing investment to make sure that every dollar is working very hard for us.
And trying to allocate the money where it will provide the most sense. Right now our issues in the UK and Spain more so then the rest of Europe. The other areas aren’t quite as effected so we’re keeping an eye on that but the outlook in Europe is challenging.
In terms of the currency, given what’s happened with the dollar has it caused you to make any changes in the way you think about translational hedging and also could you give us some indication of what transactional hedges are basically working for you in Europe?
Theo de Kool
Transactional hedging is in our terminology that we hedge commitments in foreign currency so if we buy coffee from Europe countries in dollars, that at the moment that we commit to buy those coffee beans, which are quoted in dollars, we lock them in and we do that basically across the board for all commitments that roll out.
So when we buy, we lock it in. Translational meaning earnings from overseas to hedge that, we have not done in the recent past and we have not changed our practice so far there as well.
I wanted to ask about the MAP spending, I know that the quarter is a little strange in that there’s a tough comp and a decline there, can you talk about have tough economies in Europe or other parts of your business changed your priorities around MAP spending and could you give us a sense will MAP spending grow organically let’s say ahead of the [inaudible] maybe some of the MAP spending that went with that organically grow in line or ahead of sales this year?
We’re not, we don’t give the forecast on the exact MAP spending but what I’ve said for the last three years really is that we will spend behind product news and there will be times and quarters where that news is a launch and we know that if you want something without MAP support the consumer doesn’t find out about it, doesn’t try it and then you don’t get the repeat trial.
So we’re going to continue to do that, we are changing the approach on how we spend MAP spending because the consumer behavior is changing over time and you have to hit them at the right place with the right value, the right price points and the right merchandising and I encourage everybody to look around the room because we have some illustrations of that.
So we work with consumer products that can’t stop spending MAP but we’re certainly going to be cautious and make sure we only spend it where we’re going to get the impact and usually behind new ones.
You highlighted the weakness in European economies particularly Spain and the UK as being critical markets for you, I’m surprised that you didn’t touch upon probably your largest single European markets, The Netherlands and overall situation in northern and the rest of continental Europe, what are you seeing there in terms of additional hard [discounter] penetration, consumer trade down to private label and the like and what gives you the confidence in being able to offset that. It seems that those markets are in aggregate a lot bigger then UK and Spain.
Rightly you point out, The Netherlands is crucially important for us. It isn’t mentioned in the quarterly results because it isn’t right this moment as severe as what we’re seeing in the UK and Spain where we have very large businesses. You’ll see in some of the presentations later on, the economics in Spain as an example and how that’s effecting our [inaudible] business there.
In The Netherlands there’s clearly some signs of consumers shifting to a combination of the discount side and the premium side. Its really a bifurcation of the consumer behavior and we’ll cover that later, but we very much are going to play in both sides of that, package size, brand offerings, price points, merchandising, distribution, in places where the consumer shops.
There is some slight movement going to the private label side as well. Its all about our pricing discipline making sure as I mentioned that we manage our price gaps and have the right offerings to compete and hold onto our consumer franchise.
I was hoping that you could focus a little bit on North American retail meats, the 5% price increase in July, you also said that you expect protein prices to be higher then normal, but there’s a big liquidation going on and I imagine there’s a lot of excess protein on the market. Have that 5% price increase held, is your pricing up 5% from a year ago and how do you expect competitors to respond to it?
I encourage you to look at the results for the quarter, the results on the retail side are stunning this quarter so we are actually reaping the benefits of that increase in price and I think if you dig deep on our share numbers we have excellent share trends. We’re gaining share in each of our categories, units are up.
I feel right at this moment we have in fact taken pricing, it isn’t reflected at retail for the most part and the consumer is staying with our brands. We really think its an indication of the brand strength that we have and all the marketing activity and product quality work that we’ve been doing over time.
I think there is, people read the newspaper but the actuality is the meat commodity as we pointed out are going to go up as that liquidation works its way through the system. So we’re still at very high prices that we certainly hope to hold on to. High costs rather.
The pricing for the quarter in the retail business which also includes the small piece of Senseo now and the frozen bakery piece which are really small, pricing was up 6.7% in the quarter compared to the previous first quarter 2008 so the pricing does seem to be taking hold.
And in the meat protein category if you look at historic norms on pork its still a price point today in terms of cost of those input materials that are at least 20% to 25% above those historic norms. If you look at beef the same thing is true there. So you’ve heard its being liquidated and the numbers being down are going to continue to keep the price of those proteins up.
Historically we’ve seen low private label penetration in your meat categories and your [price point] as well, given the recent deterioration are you seeing more in private label or are your pricing gaps increasing or changing from historical levels?
As I mentioned our share in North America we’re seeing great share gains and unit volume increases and price, holding onto the price increases. You’ll see later today there is some indication that there is a little bit of a movement to more private label on the fresh bread side, not so much the case on the meat side. And its price gaps in absolute penny terms are increasing so it’s a relationship that we’re keeping a close eye on.
There’s a significant premium the consumer pays for a Sara Lee loaf of bread then a private label bread. There’s also significant difference in quality and satisfaction so we’re just managing that market by market with the right value offering.
I guess in the previous discussions you’ve talked about a greater willingness to make acquisitions given the centralization efforts that you’ve made over the past few years, and I guess to the extent that companies do, that have cash it may be a buyers market but you’re suspending the share repurchase, it sounds like you’re going to have more cash costs because of restructuring so how should we think about your willingness to make acquisitions?
The way we think about it, we don’t believe that this credit crunch is going to last forever. So if we were ever to buy anything, we certainly would need to borrow some money to do so. So we’re keeping an eye on the credit markets, we have opportunities we’re looking at all the time but I think its safe to say for the near-term there’s not much going on on the acquisition side. However we are still working on ideas and we’ll be open to it when the marketplace changes. We’ll talk more about it later but its all behind depth in our core categories that make economic sense that add value to our total portfolio.
Just to finish the thought on input prices you obviously not expecting you to be able to forecast what those will be for this year, would you be disappointed if the Sara Lee inflation index wasn’t significantly below as it has been in the last couple of years, the overall market index this year.
I don’t think I would be. I think the normalizing of the commodity costs are going to occur over time. We’re competitively positioned we believe relative to the industry with where we stand today so we’re confident that we can manage where ever the market goes, up or down, in a very competitive way with our customers.
So the 11% number would be lower then the overall market index at the end of the year no matter how you view things.
We don’t predict the markets, we just don’t predict the actual markets, so I’m sorry I just can’t provide that kind of information.
I think its safe to say we always want to be in a position that we’re at least as competitive to the [peers] that we are in the marketplace with and hopefully with some advantage over time that’ll swing different places different times. But overall our strategy is to make sure we have adequate supply and can be at a cost competitiveness versus our peer companies.
I think the line that I really look at to Gerry’s point on that is the 2006 versus 2009 and to see what the real broad time period will bear out when we get to the end of the year because to his point the market, real real massive move should be fairly even over the long periods of time so I think as we see that number it’ll probably expect to move closer to zero should be the way I would think about it.
At the end of fiscal 2008 and when you gave your initial look around 2009 you made the comment that perhaps you can at least protect your EBIT margin structure in the year ahead, I’m assuming with sales coming off in terms of the guidance from an FX perspective that math alone helps you continue to be able to at least hit a margin like you did last year, at worst, I’m trying to get a sense of how much that sales line coming down kind of helps the margin argument and then if there are things that continue to work against it and can you still protect your margin.
Yes, we had it go the other way as you pointed out, just the math of the inflation so it should work in reverse. So a key for us is to really keep focus on our cost line and keeping the unit and volume going as we have planned and right now we feel very confident of that so the math should work in our favor for the year.
I know you don’t give quarterly guidance but perhaps you could comment on the general shape or flow of earnings for the remaining three quarters of the fiscal year. It seems like you’ve got probably your toughest comp in the fiscal fourth quarter. At the same time we’ve heard that perhaps some benefits from commodities coming down in the fiscal first half and then expectations of continued reversal of that trend as the protein side comes up in the second half of the year, any comments you could give around the flow of earnings for the year and which of the remaining quarters you expect to be the strongest would be helpful.
Theo de Kool
You mentioned all the considerations and I can’t be very specific on it. I can only say that the first quarter traditionally is not a very strong quarter for us although there is some improvement versus last year and I think you should take comfort from the fact that we reconfirmed our guidance for the total year, with the lower FX and the impact of the share repurchase.
Can you give us an idea what you think, if you’re off $100 million on your forecast of revenue is high or low, what you think incremental or decremental margins should be assuming its just a regular mix of your business.
Theo de Kool
I don’t think I will forecast much and in fact you can do the calculations yourself but there are so many variables that play. How quick will the markets come down and will they stay where they are is very early in the year and we cannot predict the commodities and the impact of that and on top of that the FX it has been very volatile. The first quarter we had an average of 151, we now predict 125 for the three remaining quarters. It has been up and down $0.10 in a day. So I’m not going to predict how that will play out. You can make the calculations how the margin will be impacted. We focus on dollar increases at the moment on the bottom line and the margin will fall how it will fall. The impacts are what you just said.
Taking FX aside for a moment, it’s a division in one of our units is falling short on their sales plans. They have to take every action possible to overcome that to still meet the bottom line so it’s a very active ongoing process and hopefully they have enough time to put the actions in place to offset it but there’s a constant ongoing how do we make it up so we don’t have the deterioration on the profit side.
Most of us have played this game for awhile and you’ve probably developed some sort of contingency when you put in your plans for your businesses, do you ever share with people what your contingency bucket is for any one year?
We don’t share that but certainly we would—
But given the economic uncertainty should the, I would think your contingency bucket should be a lot bigger the way you forecasted 2009 then probably what you thought about in 2008.
I think we would say that we’re very comfortable with the guidance as it is and we plan appropriately to get there.
On the taxes on repatriation of earnings, in your 10-K you said that you would have had to pay $420 million in cash in fiscal 2008 but then other factors helped mitigate that $420 and then this year I think the number is $150, but other factors could mitigate that, is there any way you could tell us what those other factors are and what exactly is the net cash impact that is resulting from repatriating cash?
Theo de Kool
We have not shied away from repatriating cash but the impact on cash taxes is different, (a) what we did in fiscal 2008 is shifting some of the tax burden to 2009 by repatriating very late in the year, you pay the quarter thereafter so some of the cash taxes moved to 2009, and there is another element and that is in the US for tax purposes our income is negative so part of those taxes did not need to be paid yet although there is in principal they will shift to another year as well.
And the same impact will play in 2009 as well. So we take a charge for the taxes from an accounting perspective in the year that the repatriate will make the decision but the taxes paid trail that repatriation of funds.
You laid out your input cost situation and you’ve made it clear that you still need to get some pricing into this year and we’ve been reading that retailers are starting to get more thoughtful about pricing as they see inputs come down and part of your issue that we discussed is that you have some favorable hedges in prior years, have some of your cost pressure been pushed over to this year, how are your conversations with retailers about pricing, have they changed at all in the last two months and I think generically people think about private label hedging and if they do hedge its to a much shorter duration then a branded player might so they might be seeing some cost relief earlier then other branded players might, so how are you thinking about managing the retailer to get your pricing but then also thinking about what private label might do as input costs come down.
I’ll take an example of a very change in direction with a very large retailer, retailers are competing in a marketplace that has radically changed in the last several months. Consumer confidence is down they’re each trying to get a share of the consumer purchase dollar, is the consumer going to be trading down, they’re struggling with the same things manufacture is. So the good news is that’s turning into a lot of conversations about how do we take our joint supply chain and our joint approach to going to market and the shelf space management, all those things that go with that and find a way to do it at lower cost.
Because in the end the best thing that can happen for both sides is you take extra work and non-value added activities, all the lean things that we talked about, take them out of the system and be able to offer the consumer an attractive price point without using strictly price as a lever. I can just say that the largest most successful retailers are approaching things that way.
I think making decisions on their own about how many brands you have to have, how much inventory you have to have, do you really need the selection as wide as it is and in the end we continue to believe this is going to help the strong big brands in each category which we’d be very supportive of.
There is pressure you can’t deny. Everybody is looking to try to maintain their revenue and unit movement.
It sounds like your answer would answer part of this question but obviously one of the things that retailers are facing is that as we look at the IRI data its becoming increasingly meaningless because of the channel shift to Wal-Mart and so that’s one of the things retailers are fighting against is trying to keep the consumers in the stores. Would that be factored into everything that you just said as well?\
We look at the total panel, not just the IRI. IRI panel plus Wal-Mart is the total market look but you have to look at it that way. And over time its like strong brands gain share, strong retailers are probably going to gain share too.
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