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Executives

Larry Bodner - Senior Vice President - Finance, Investor Relations and Corporate Communications

Richard G. Wolford - Chairman of the Board, President, Chief Executive Officer

David L. Meyers - Chief Financial Officer, Executive Vice President - Administration

Analysts

Reza Vahabzdeh – Barclays Capital

Farha Aslam – Stephens, Inc.

Robert B. Moskow – Credit Suisse

Timothy S. Ramey – D. A. Davidson & Co.

Eric Katzman – Deutsche Bank North America

Analyst Alton K. Stump – Longbow Research

Ann H. Gurkin – Davenport & Co. of Virginia, Inc.

Vincent Andrews – Morgan Stanley

Del Monte Foods Company (DLM) F3Q09 Earnings Call February 26, 2009 10:00 AM ET

Operator

Welcome and thank you for joining Del Monte Foods Company third quarter fiscal 2009 earnings conference call. At this time all participants are in a listen only mode. After the presentation we will conduct a question and answer session. Today’s conference is being recorded. Now, I will turn the call over to Larry Bodner, Vice President Finance, Investor Relation and Corporate Communications.

Larry Bodner

Thank you for joining us for Del Monte Foods fiscal 2009 third quarter conference call. With me today are Rick Wolford, Del Monte’s Chairman and CEO and Dave Meyers, our CFO. The call today will last one hour. In the interest of time we’d ask you to limit your questions to one per person.

Let me remind everyone that statements made during this conference call which are not historical facts including any statements about the company’s targets, beliefs, plans or expectations are forward-looking statements and are based on managements’ current plans, estimates and projections. The company does not undertake to update any of these statements in light of any new information or future events.

Forward-looking statements involve inherent risks and uncertainties and investors should not place undue reliance on them. There are a number of important factors that could cause actual results to differ materially from those contained in such statements. These factors are described in more detail in the earnings release we issued today and in our filings with the SEC.

In October, 2008 the company completed the divestiture of the seafood business including StarKist. Unless otherwise noted all of Del Monte’s financial information included in this press release excludes the seafood business which is reported as discontinued operations. [Inaudible] ash flow date includes the seafood business. [Inaudible] data we will discuss today our internal estimates based on Nielsen grocery share data and Nielsen all outlet panel data from 13 weeks ended January 25, 2009.

Additional all outlet share data has well as the basis for our share data are available in the appendix of the presentation which is available on the company’s website. Now, our chairman and CEO Rick Wolford will take you through our results.

Richard G. Wolford

I am pleased with Del Monte’s strong top and bottom line Q3 results. These results reflect the strategic pricing and productivity initiatives that we’ve put in place. This strategy was implemented to offset inflationary pressure that have negatively impacted our earnings performance and recoup some of the margin contraction that we’ve experienced over the last several years as our pricing actions have lagged the acceleration of cost inputs.

The volume elasticity from the pricing actions experienced both during Q3 and fiscal year-to-date have been largely consistent with our expectations. As a result, our pricing actions combined with our productivity savings were able to more than offset cost increases in Q3. Looking at the categories in which we participate, similar to Q2 we continue to see positive overall trends. Our consumer categories, particularly vegetables and tomatoes indicate that people are making and eating more meals at home. Also, positive pet food and pet snack trends continue. People continue to treat their pets even with the more discretionary soft n’ chewy snacks.

As a result of the current economic conditions, we continue to see consumer migration towards value channels and as well demonstrating an increased focus of buying on deal and in bigger package sizes. Del Monte’s broad distribution footprint ensures that consumers will find our products across all US retail channels and we are carefully managing our trade promotion strategy in light of increased focus of buying on promotion.

Similar to Q2 and largely as anticipated, we continued to see higher levels of competitive branded and private label promotional activity particularly with fruits, vegetables and tomatoes as consumers react to economic conditions and respond to this increased retailer activity. We believe the resulting volume dislocations are short term and we are actively monitoring the situation. I’ll discuss this in more detail when I address our business unit performance.

But first, I wanted to provide a brief update on our accelerated growth strategy with its three strategic initiatives targeted to grow EPS over the coming years. Our first strategic initiatives is to use pricing actions and productivity savings to neutralize cost inflation. In Q3 pricing and productivity actions more than offset operational costs which continued at levels higher on a year-over-year basis. We are on track to hit our pricing target of three times the level taken last year as well as our productivity transformation savings target of $50 million.

We remain committed to neutralizing cost inflation and announced for March a 7.5% price increase in our dry dog food business. This is consistent with pricing that’s been taken by the industry where we are pricing followers. This pricing action will combat costs that have continued to rise after our pervious price increase. As we have discussed, our pricing actions have been taken to reflect our higher costs and combined with our productivity initiatives are successfully addressing some of the cumulative margin pressures impact of inflationary cost increases that we have experienced over the past couple of years.

As we access our base pricing on shelf we believe our products both consumer and pet continue to represent a very good value with superior quality and consistent quality for each of our segments. Going forward we will also continue to aggressively pursue additional productivity initiatives. Ongoing cost reduction must be a key priority for us.

Our second initiative is to focus on growing our higher margin core businesses by increased investment in their associated brands. This means that we will increase marketing spend and drive innovation of these core brands beyond business as usual. A great example of this is our recent launch of a new $8 million national advertising campaign for our Pup-Peroni brand dog snacks. This first ever national television campaign for Pup-Peroni features 15 and 30 second television spots and is targeted to aggressively build trial and repeat from this brand.

Our third objective is to drive our packaged produce and pet product growth engines with category building innovation and marketing. These growth engines leverage our brands to fill unmet consumer and customer needs where there are attractive category and margin dynamics as well as white space growth expansion opportunities. In consumer package produce grapefruit citrus bowls launched in Q1 and super fruit launched in Q2. With our pet businesses we announced on Monday our spokes dog for Milk-Bone and this is celebrating our Milk-Bone 100 year anniversary.

As we have previously outlined to ensure successful execution of these key strategic initiatives we needed to implement three support actions at the beginning of the fiscal year. Two out of the three are completed increasing the marketing centric focus of our organization by centralizing marketing in San Francisco under a unified CMO leadership and upgrading our portfolio with the divestiture of StarKist Seafood. The third support action increased marketing investment is ongoing and is also tracking to plan as we work to drive consistent long term EPS growth.

For fiscal ’09 we continue to target a 30% plus increase in marketing investment year-over-year to support our plans to grow future earnings. Based on our Q3 and year-to-date results we continue to see positive momentum as a result of our investment as we exit F ’09 and enter fiscal ’10. In sum, I believe that we’re making good progress against our accelerated growth strategy and are pursuing the right steps to deliver consistent positive EPS performance.

Turning back to Q3, Del Monte’s strong top line performance was largely driven by pricing actions in new products across both consumer and pet. With our pricing actions we anticipated elasticity driven volume declines and similar to Q2 this decline in volume was largely consistent with those projections.

Our Q3 EPS was $0.30 compared to prior year of $0.24. We’re pleased that gross margins increased 280 basis points reflecting pricing and cost reduction actions off setting a 13% increase in year-over-year costs recupping some of the margin contraction experienced over the past several years. Importantly, this gross margin improvement helps to ensure our ability to reinvest in the long term health of our business.

The 13% cost increase primarily reflects the higher year-over-year ingredient and raw product cost similar to the first half. While many commodity and ingredient costs have declined from the historic highs reached earlier this fiscal year, overall these input costs remain elevated when compared to the prior years.

I’d now like to run briefly through the consumer and pet business unit performance. Turning first to consumer, we’re pleased with the performance of our consumer business with net sales up 3% and operating income up 15%. Q3 net sales primarily reflect pricing actions with Del Monte, a category price leader in fruit and vegetables. Net sales also benefited from new products particularly in College Inn, vegetables and center store fruit.

The majority of the reduced volume that we experienced was due to pricing related elasticity which came in largely as expected. The remaining volume decline primarily in vegetables and fruit was driven by higher than forecasted competitive promotional activity. The price points reflected in this activity do not reflect the higher cost levels the industry has incurred and is therefore we believe not sustainable.

As a category leader our Q3 promotional activity continued to reflect our pricing strategy and commitment to move category price points to levels that help offset cost increases. During Q3 Del Monte refrained from investing at lower promotional price levels as the expense of share to support our long term objective of delivering a margin structure that can support category growing innovation and marketing investments.

As predicted our Q3 share performance was impacted by our lower overall volumes as well as the tough year-over-year comparisons [VF ‘08] third quarter in which Del Monte promoted heavily. On a sequential basis, fiscal ’09 quarterly shares are relatively stable. Going forward, we expect an upward migration in overall category pricing reflecting higher costs that are being experienced by all players. We also anticipated branded and private label category shares to trend back to more normalized levels as higher price points are reflected on the shelves.

The 15% increase in consumer operating income primarily reflects pricing actions combined with productivity gains exceeding cost increases as we focus to recoup some of the margin contracts incurred over the last few years. In regards to cost, we increased marketing investment in Q3 in packaged produce our key consumer growth engine. Operating costs experienced year-over-year increases in Q3 primarily driven by raw products.

We negotiate price contracts with growers typically once a year for these raw products which include peaches, green beans, peas, table corn and tomatoes. This contrasts to our pet business where exchange traded field corn, wheat and soybean meal are hedged or purchased throughout the year.

Now, let me turn to our pet product business. Similar to consumer products we are also pleased with the performance of our pet business. Both top line and operating income increased 15%. Our pet net sales reflect pricing actions and new products. It also reflects strong Kibbles n’ Bits performance. We did experience a slight decrease in overall volume due to the elasticity of our price increases which were also in line with our expectations.

Our dry pet food business is extremely well positioned for the current environment and in the third quarter benefited from consumer migration to mainstream brands, value channels and larger sizes. With Kibbles n’ Bits we have successfully worked to position the brand as offering premium taste at mainstream price, This effectively meets today’s consumer trends resulting in a very strong third quarter performance particularly in non-grocery channels.

Meow Mix also continued its strong performance driven by improved product positioning and increased share in non-grocery channels. In addition 9Lives dry nutrition for the masses positioning resonated with consumers looking for premium nutrition at an attractive price. We believe that our dry pet food portfolio is uniquely positioned for continued growth behind a combination of motivated branding, distinct positioning, meaningful performance and competitive pricing. In total, this delivers a very strong and sustainable value proposition.

Our pet snack business saw no change in consumer treating habits when faced with the declining economic conditions. Pet parents are continuing to indulge their pets. Pup-Peroni and Milk-Bone showed strong consumption momentum and both soft n’ chewy and the biscuit category continued to show strong growth with both categories up near double digits. Additionally, our stable of products benefited from improved distribution and incremental merchandising as well as strong seasonal consumption from people increasing pet treating during the key holiday seasons.

Shares were stable with slight decreases in grocery offset by gains in non-grocery as consumers moved to value channels. The 15.5% increase in pet operating income reflects pricing and productivity savings ahead of cost increases. Cost increases were primarily from pet ingredient costs particularly grains, meat by products and fats.

With that I’ll turn the meeting over to Dave.

David L. Meyers

In Q3 EPS from continuing operations of $0.30 is favorable relative to our expectations. Our EPS results reflect strong execution across key levers coupled with the benefit of delayed timing of certain market activity to better match new product launches and lower operational costs. In Q3 net sales growth of 8.4% was strong.

Looking at Q3 top line drivers in greater detail pricing increased net sales by 14.4 points which was partially offset by 6.7 points of pricing related volume elasticity. New products contributed 2.4 points while existing product volume reduced net sales by 1.7 points. As discussed by Rick, we realized lower promotional volume in our vegetable and fruit businesses due to competitor promotional activity as well as a tough year-over-year comparison. In Kibbles n’ Bits however, we saw a strong dry pet volume behind solid execution.

Gross margin for the quarter was 30% an increase of 280 basis points versus last year. Net pricing drove a 9.6 point increase, higher commodity and ingredient costs including grains, fats, oils and meat and other raw product increase drove a negative 6.6 points of margin contraction. As expected, we gained pricing momentum in Q3 as we realized the benefit from cumulative pricing actions aimed at regaining some of the margin contraction we experienced over the past few years. In addition, volume mix was relatively flat, a negative .2 points.

Q3 operating income increased 21% with operating margins increasing 150 basis points. Operating income growth was driven by the $46 million increase in growth profit as margin growth reflected affective pricing coupled with strong top line growth. We also realized higher SG&A driven by strategic investments in marketing as well as the absence of the prior year $10 million gain on the sale of the S&W trademark and absence of transformation expenses in the prior year.

Interest expense in the quarter was $7 million lower driven by lower debt levels and lower interest rates. During the third quarter we spent $16 million on capital projects versus $21 million a year ago. Capital spending decreased year-over-year due to the absence of transformational investments in the year ago period. We incurred $25 million in depreciation and amortization costs which includes $1 million of fee amortization included in interest expense.

On a year-to-date basis cash flow, operating less investing was $199 million versus -$50 million a year ago. This increase in cash flow is driven by the sale of our seafood business. Excluding the impact of the seafood sale, adjusted cash flow on a year-to-date basis was -$111 million versus -$50 million a year ago. The decrease in adjusted cash flow is primarily driven by higher inventory levels primarily due to a large vegetable and fruit pack in the consumer products business and higher input costs across the portfolio which increases the value per case. We also have higher prepaid assets reflecting approximately $30 million of additional commodities future positions that we have taken for hedging purposes.

Now, I’d like to discuss guidance for full year fiscal 2009. We are increasing our expected EPS from continuing operations range to be $0.64 to $0.68 from the previous range of $0.58 to $0.62. We are also increasing our top line growth to be 9% to 11% over prior year which compares to previous guidance of 8% to 10%. The increase in expected EPS primarily reflects lower operational costs, stronger top line growth and lower interest cost.

Looking at cash flow we are increasing our adjusted cash flow guidance to be the midpoint of $150 to $170 million an increase from the lower end of that range with both previous and current guidance excluding the impact of the StarKist divestiture. The Slide illustrates additional key guidance metrics including D&A and cap ex.

In looking at our cost buckets in greater detail, we are reducing our expected gross inflationary and other cost increases to be approximately $290 million, $10 million lower than the previous expectation of approximately $300 million we discussed in our last conference call. The $10 million change primarily reflects lower diesel prices as well as lower other transportation costs. Looking at our $290 million of cost increases in greater detail, you can see that the changes are not significant across any of our cost buckets other than logistics relative to our last estimate.

I should also note that as a result of our hedge positions and sudden pull back in commodities and energy, our third quarter EPS includes a $0.02 mark-to-market loss. In Q3 we released the benefit of our pricing as pricing and productivity savings more than offset cost increases for the full portfolio. You can see on this chart our recently announced price increase in our pet business.

Looking to Q4 we expect solid top line growth across both consumer and pet. EPS is expected to benefit from our accumulative pricing actions which will be ahead of cost pressure as we recoup some of the margin contraction realized over the last few years. As discussed, we are expecting to significantly accelerate our marketing spending relative to prior year’s fourth quarter of fiscal 2008.

Overall, we expect EPS to be slightly above prior year’s fourth quarter of $0.23 EPS on a GAAP basis. Many of you have asked for our perspective on F ’10 guidance with a particular focus on the pullback in commodity costs. We will provide a complete picture of F ’10 guidance during on our next conference call in June. That said, we are cautiously optimistic about the overall health of our base business as we look ahead in to the next fiscal year.

I would however, like to touch on some cost issues we are seeing as we begin to look towards F ’10. On the key hedgeable commodity cost inputs, as a reminder, they represent approximately 15% of our $2.8 billion operational cost base while key commodities such as diesel, natural gas, corn and soybean meal have pulled back we are also seeing indications of higher tin plate costs which also represents approximately 15% of our operational cost base.

In addition, we are experiencing higher meat costs in our pet business. We are also concerned about draught conditions in California as rain fall totals were only about 70% to 75% of normal through mid February and most reservoirs are at only approximately 35% of capacity after two years of below average precipitation. A key water source for the agricultural industry is the Sierra snowpack which was estimated in mid February at approximately 60% to 70% of normal. We are managing the water situation in both fruit and tomatoes to assure supply for this season and expect to get our desired tonnage levels of both fruit and tomatoes though cost may end up higher.

With that, I’ll turn it back to Rick.

Richard G. Wolford

In conclusion, I’d like to say that we’re very pleased with the company’s quarterly performance which reflects a companywide focus on our accelerated growth plan. The positioning of our brands, effective pricing and keeping costs in line have all enabled us to deliver this strong quarter. We also believe that we are very well positioned for future growth. Our strategy is working, the trends are in our favor and the categories are healthy.

Going forward we will remain focused on driving our higher margin core brands and key growth engines with strategic investments in marketing and innovation. Importantly, we will also redouble our efforts to continue to successfully reduce our costs and improve productivity by driving manufacturing and energy efficiencies as well as continuing to improve our network optimization and sourcing savings. We are confident that combined these efforts will drive long term sustainable EPS growth for the company and its shareholders.

With that I’d like to thank you all for joining us and of course we’d like to take all of your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Reza Vahabzdeh – Barclays Capital.

Reza Vahabzdeh – Barclays Capital

Just on the last topic of the fruit packs, I mean you’ve experienced ebbs and flows in the fruit packs in the past I’m sure many times. If the fruit pack ends up being somewhat short in a hypothetical scenario, what are the options that you have deployed in the past to deal with that. Is that a cost issue? Is it a volume issue? Can you somehow offset any headwind from that?

Richard G. Wolford

What we do typically in those circumstances Reza is we will move volume from lower margin businesses to higher margin businesses so in many respects it results in a positive margin impact for the business and that is typical of what we have done in the past. At this point I’m not sure we really would expect to have a real supply issue but we’re indicating here are some of the risks that we may see in this coming year but at this point the bloom is set, the bloom looks good, the chilled nights have been adequate and those are all key precursors to a good yield. As I say we’re concerned about water in the valley generally for both fruit and tomatoes and California is worried about it broadly. But, for our fruit business we should be okay in terms of total supply and the extent that we’re short we move it up the margin chain and should be fine.

Reza Vahabzdeh – Barclays Capital

If I could just ask one follow up, how do you feel about inventory at retail and have you seen any inventory adjustments by retailers?

Richard G. Wolford

We haven’t in our business scene any inventory adjustments with our retailers. In fact, I think one of the areas that we feel pretty good about is that we have been working really hard with our customers, with our supply chain to reduce inventory across the entire system ours and theirs. Actually, we’ve had some recognition here in the last quarter, very positive recognition as supplier of the year of a major customer that reflects the efforts that we have successfully made.

As I said earlier, we’ve taken 20 million miles out of our distribution system and that has been done in combination with careful, careful monitoring controls and systems that we’ve put in place to control our inventories and at this point we feel good about the overall inventory levels that we have, our customers have and we’ll continue to try and make those more efficient.

Operator

Your next question comes from Farha Aslam – Stephens, Inc.

Farha Aslam – Stephens, Inc.

You had talked about your commodity hedges, kind of could you share with us where you are with those hedgeable commodities?

Richard G. Wolford

I think what we’ve said is we’re about 90% to 95% hedged for fiscal F ’09 and we will provide an update on the June call in terms of what our F ’10 position is.

Farha Aslam – Stephens, Inc.

One follow up, on your inventory positions that you had coming at the end of the fiscal third quarter you were saying that they were higher than last year. Kind of how are those inventory positions relative to historical levels for fruit, veg and tomatoes?

Richard G. Wolford

Our fruit and vegetable inventory are higher than we anticipated. However, we feel good about our fourth quarter and we expect our inventories to come in pretty well balanced and our cash flow to come in as we projected.

Operator

Your next question comes from Robert B. Moskow – Credit Suisse.

Robert B. Moskow – Credit Suisse

I also think it’s a good sign that you’re continuing your market investments 30% up from a year ago, I think that’s a sign of health and commendable. Let me ask you about pricing, you were up three times the level you were in ’08. How much spill over should we expect in fiscal ’10 from these price efforts?

Richard G. Wolford

Spill over you mean in terms of additional pricing or you mean the ongoing benefit?

Robert B. Moskow – Credit Suisse

Like the ongoing benefit just in terms of easy comparisons. For the sake of argument let’s say you’re kind of done with pricing now on a list basis, should we expect kind of an easy overlap in to fiscal ’10?

Richard G. Wolford

Yes, we’ll continue to see benefits of higher pricing as we go in to fiscal ’10. We have a chart that’s available to you on the presentation that shows the pricing and when we took it and that will better and specifically indicate when the lapping will be occurring.

Robert B. Moskow – Credit Suisse

So you’re up 7.5% in the first half of ’09 from a year ago so does that mean you’ll be up – it doesn’t tell me how much pricing you’re taking – oh, I guess it does second half you’ll be up 7.5% for fiscal ’09, is that right?

Richard G. Wolford

You can see on that chart that the pricing increases that we took in Q1 and Q2 of fiscal ’09 and get a sense of the impact. I think the major pricing we took for veg and tomatoes was effective 8/1 I think of this fiscal year.

David L. Meyers

I think we will provide pricing guidance on our June call. We’ll provide that guidance but as Rick said you can see that pricing affect that we’ve taken year-to-date and there will be a lapping affect in F ’10 and we’ll provide that on our June call.

Richard G. Wolford

And we are focused very aggressively as a company on cost reduction programs and that’s key for us and we’ve got a good history of that Rob and we plan to redouble our efforts there and that’s going to be important for us going forward. Our target is 2% to 3% of COGS and we’d rather see a three handle on that and so would all of our operating guys.

Robert B. Moskow – Credit Suisse

Do you care to reiterate kind of your long term growth model? Are you still around 8% to 10% EPS?

Richard G. Wolford

Yes, our long term guidance is high single digits for EPS, mid single digits for NSV.

Operator

Your next question comes from Timothy S. Ramey – D. A. Davidson & Co.

Timothy S. Ramey – D. A. Davidson & Co.

A couple of nitpicks to follow up on, you would anticipate, I don’t think so, but would you anticipate any sort of buy in or load occurring as a result of the dry dog food price increase that occurred?

Richard G. Wolford

We would not at this point.

Timothy S. Ramey – D. A. Davidson & Co.

I mean it would have occurred in the 3Q and you don’t think it was in there?

Richard G. Wolford

No.

Timothy S. Ramey – D. A. Davidson & Co.

Then also I mean I just have to ask about 6% net volume declines being kind of in the range of expectations, that’s still a fairly scary level of decline. Understandable with a 14.4% increase in price, why is that within the range of expectations?

Richard G. Wolford

I think first if we look at this on a year-to-date basis it provides a little bit of context. On the year-to-date basis the overall company is down about 1% and consumer for the first half was largely flat. So, what you see in the third quarter is elasticity impact that reflects the pricing but importantly also reflects the aggressive promotional activity that our competitors fielded for the holiday season.

The price points at which they promoted we believe are price points that are below sustainable levels given the cost increases they have incurred. We believe our cost increases are actually probably less than the cost increases incurred by our competition both private label and Green Giant and that as a result the pricing in the overall category promotional and regular is going to have to move up to offset these costs.

As a price leader in the category we are attempting to make sure that the categories are healthy enough to support innovation and marketing programs that drive volume, that drive these categories with our retailers. If our brand doesn’t drive volume center store for our retailer, they will not have the volume that we hand drive without boost programs so we believe as we move our pricing up that the categories will follow and that those prices reflect actual cost increases that we and the industry have incurred.

It is not a number that we take likely. We clearly are watching this very carefully. Clearly, as I have said in the course of the last six months or so this is the area that we need to watch very closely. We need to manage our way through it. We are comfortable with the elasticity levels at levels that we’ve forecasted. We understand where these price points are from a promotional standpoint and we need to make sure that we manage them carefully so we’re not taking it lightly.

As we do look at Q4 and going forward we tend to see some positive momentum. We need to look carefully at our Easter promotion but as we see things going forward they tend to be tracking where we expect them to go from a competitive category standpoint. I would also – this is an overlong answer but I would also point out that the issues really our in our fruit and vegetable business, tomato volumes are essentially flat and pet volumes are also essentially flat. So, it’s two categories and we really need to focus on those. We are and it reflects the various factors that I’ve just gone through.

Operator

Your next question comes from Eric Katzman – Deutsche Bank North America.

Eric Katzman – Deutsche Bank North America

I guess my follow up is while it is a good quarter on its face, there’s no question about that and the market likes it today, it seems as if you basically made a decision to give up some share as your competition promoted aggressively. I think in Dave’s comments or slides there was also a push of the advertising and promotion from the third quarter in to the fourth quarter. So, it seems like you kind of benefited from those two things if I’m reading it correctly.

Then, my second question is I don’t understand how volume is down 6% and yet on a gross margin basis the volume mix component was barely changed. That would seem to indicate greater productivity or is it maybe something else in terms of restructuring to take out capacity that I don’t understand.

Richard G. Wolford

First, in terms of the implication of share, you’re right we proactively decided to promote at levels we believe are sustainable long term levels for the category and it worked with a portion of the market and a portion of the market went deeper than we promoted. We would expect as I said, that those promotional price levels will tend to migrate up to fully reflect the cost that our competitors are seeing.

So, we believe that is a prudent move over the long term but it is one that we need to look, and watch, and monitor very carefully. And, as I said initial forecasts as we look in to Q4 would give us reasons to believe that those trends are okay and we’ll talk about that in Q4. In terms of the advertising shift to Q4 why don’t you go ahead David.

David L. Meyers

Yes, we did have some programs that were scheduled for the end of the third quarter that were moved to the end of the fourth quarter some Pup-Peroni advertising that we’re very excited about as well as some packaged produce advertising. We’ve also said that we will have a significant increase in our marketing spending in the fourth quarter. So, we’re comfortable with that flow.

Additionally, the other key point in terms of the third quarter is that we continue to have significant cost savings to the tune of about $19 million in the third quarter with our cost reduction programs that were effective. So again, we feel very good about our third quarter.

Eric Katzman – Deutsche Bank North America

Did you say $19 million of cost savings?

David L. Meyers

Yes.

Eric Katzman – Deutsche Bank North America

And that’s the bridge between the volume decline on the top line and the fact that it barely hit gross margins?

David L. Meyers

Yes, we had a very good mix on our dry pet where we had a very good quarter as Rick said in Kibbles n’ Bits as well as snacks and obviously volume doesn’t affect margin in terms of the margin calculation. It does affect absolute dollars.

Eric Katzman – Deutsche Bank North America

But it doesn’t seem like that was a big shift either way though?

David L. Meyers

Not the volume mix, no.

Operator

Your next question comes from Analyst Alton K. Stump – Longbow Research.

Analyst Alton K. Stump – Longbow Research

I guess real quickly I just want to get a quick, I don’t think you touched on it before but just an update on your 2009 COGS guidance. On the last call you gave us a range of $300 million COGS inflation. What is it looking like for now that things have changed?

Richard G. Wolford

It’s approximately $290 million and there’s an actual chart in the exhibits that we send out that you can see the makeup of the $290 million.

Operator

Your next question comes from Ann H. Gurkin – Davenport & Co. of Virginia, Inc.

Ann H. Gurkin – Davenport & Co. of Virginia, Inc.

I just wanted to review again your priority uses of cash flow and also your comfort level if that exists to use your balance sheet for any kind of acquisitions if they should arise?

Richard G. Wolford

We’re comfortable with our cash flow projection. We said the midpoint of $150 to $170 million. We’ve increased it a little bit based on our increase in EPS and we will continue to focus on debt reduction as we’ve said for F ’09. Again, acquisitions are opportunistic, we have very specific criteria that we look at when we look at an acquisition however, again for F ’09 we’re very focused on bringing our leverage down.

Ann H. Gurkin – Davenport & Co. of Virginia, Inc.

Then have you completed contract negotiations with farmers for your fruits and vegetables for 2010?

Richard G. Wolford

No, we have not. It’s in process right now.

Operator

Your next question comes from Vincent Andrews – Morgan Stanley.

Vincent Andrews – Morgan Stanley

I just wanted to follow up and ask about your confidence from a pricing perspective in a couple of respects: one, if you’re going to be able to hold your pricing given what’s going on with the consumer and everything we hear from retailers is they’d like to see pricing come down; and two, would be on competitors pricing while you commented that that’s going to go up beyond – you feel like it’s not attractive from a margin perspective for them at the same time you’re giving up significant share which over the long run might be worth the cost in the short run. Can you just stress those?

Richard G. Wolford

In terms of pricing we believe that the price levels of our products in the market a) reflect the cost and as a result these are the cost of our products and our competitor products need to be sold at in order to have a sustainable margin. So, what gives us confidence is a historically strong competitive view about where the cost in our fruit and vegetable and tomato businesses are, we believe that we have some competitive benefits because of a variety of different reasons. So, if anything we believe our cost are equal to or possible lower than competition.

So, looking at the cost issues we believe that the prices both regular as well as promoted reflect a sustainable price point. We think our competitors will get there. In terms of a retailer I think the retailers understand that. We have traditionally taken very careful pricing actions which have always reflected true cost increases and that’s a practice which we need and will continue to follow.

In terms of promotional activity going forward, as I said we need to make sure that we carefully monitor and interact with the consumer and with our customers. We have the ability to have more frequent promotional activity which would certainly enable us to be more aggressive in the promotional front. We want to be sure that we maintain price points that allow us to have a margin that allows us to innovate and support programs for center store. As I said, if we don’t drive traffic there will be a reduced rate of growth and performance from all these categories.

That’s why we believe the prices we have will hold. We are very sensitive to our customer’s issues. We will work with them the best we can as we always have to make sure that the reality of the costs of these products reflect what their needs are with their customers. We believe at the end of the day that will result in price levels that reflect the economics of particularly the consumer business today.

Vincent Andrews – Morgan Stanley

Just as a follow up, do you expect volume to be up in the fourth quarter and going in to fiscal 2010?

Richard G. Wolford

Yes, we anticipate as I mentioned, we see positive momentum going in to the fourth quarter and we see that momentum carrying forward in to F ’10. Further on to a question that was asked earlier, I think that it’s important – from our view it’s clear that Q3 was not any unique movement of shares or advertising expense or investment or lack of investment. It really did reflect the business conditions as we see them in the quarter and we believe those are leading to strong business conditions in Q4 hence the guidance change that we provided.

Operator

Your last question comes from Robert B. Moskow – Credit Suisse.

Robert B. Moskow – Credit Suisse

Maybe it’s too early to ask these question but can you give us for fiscal ’10 kind of a heads up on pension expense? Then also, advertising, do you think you need another investment year for advertising for fiscal ’10? Or, are you at the level you want to be at now?

David L. Meyers

We’ve stated that from a pension expense perspective we anticipate the expense or EPS to be increased by approximately $0.03 and we’ve also said that the actual cash flow will probably see an increase by approximately $20 million. That was consistent with what we said last time. We haven’t seen any dramatic changes but we will give an update on our June call as to exactly what we see from a pension perspective.

We’ve also said consistently that we do expect to step up marketing again in F ’10 and on our June call we’ll give the specifics as to what that increase will be.

Richard G. Wolford

I think that marketing investment reflects what we believe is a significant benefit that we’ve realized this year with the consolidation of marketing here in San Francisco and with unifying both our pet and consumer business under a single leadership structure with our chief marketing officer Bill Pearce and the team work that he and Nils are putting together to drive that part of our company with operations and marketing and the strategy that looks beyond just the quarter.

We believe that the marketing spending that we are incurring is a lot more efficient given the benefits we’ve realized with the consolidation of our marketing efforts and centralization of our marketing efforts here in San Francisco.

Larry Bodner

That wraps up the call in segment. We appreciate you tuning in and discussing the quarter with us and look forward to talking with you in the future.

Richard G. Wolford

Thank you all very much for attending. We’ll talk to you soon.

Operator

That does conclude today’s conference call. You may disconnect at this time.

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Source: Del Monte Foods Company F3Q08 (Qtr End 1/31/09) Earnings Call Transcript

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