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Diamond Foods, Inc. (NASDAQ:DMND)

F2Q09 Earnings Call

March 11, 2009 4:30 pm ET

Executives

Robert Philipps – Vice President, Investor Relations

Michael Mendes – President and Chief Executive Officer

Gary Ford – Chief Operating Officer

Andrew Burke – Senior Vice President Marketing

Steven Neil – Chief Financial Officer

Analysts

Tim Ramey – D.A. Davidson

Mark Argento – Craig-Hallum Capital Group

Kenneth Zaslow - BMO Capital Markets

Heather Jones - BB&T Capital Markets

Sarah Lester – Sidoti & Company

Operator

Welcome everyone to the Diamond Foods fiscal 2009 second quarter earnings conference call. (Operator Instructions) At this time I would now like to turn the call over to Mr. Robert Philipps.

Robert Philipps

Good afternoon everyone. Welcome to the Diamond Foods investor conference call and web cast to review the financial results of our fiscal 2009 second quarter which ended January 31, 2009.

Before we get started, let’s cover a few housekeeping items. First, a printed copy of our prepared remarks will be available on our website www.diamondfoods.com under the section titled Investor Relations followed by Earnings Releases within one hour after the call’s conclusion.

Second, we've arranged for a taped replay of this call to be available via telephone beginning about three hours after the call’s conclusion through midnight Eastern Time on March 16. The toll free dial-in number to access the replay is 1-888-203-1112. Otherwise use 719-457-0820 elsewhere. The conference ID is 9395904. In addition, this call is being web cast live and a replay will be available on the website.

Third, we want to remind you that during the course of today’s call we will make forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995 including projections of our results. Since actual results may differ materially from these projections, we encourage you to learn more about the risks and uncertainties that affect our business by reviewing our SEC filings under the heading Risk Factors.

Note that our forward-looking statements are based on factors that are subject to change and therefore these statements speak only as of the date they are given. We do not undertake to update forward-looking statements.

Now I'd like to turn the call over to Michael Mendes, our President and Chief Executive Officer.

Michael Mendes

Thanks Bob. Goof afternoon everyone. Thank you for joining us. On our call today will be Steve Neil, our Chief Financial Officer and Administrative Officer and Andrew Burke our Senior Vice President of Marketing. Gary Ford, our Chief Operating Officer will join us for the Q&A session.

During the last few quarters the deteriorating global economy has resulted in many companies reporting constricting margins and a pessimistic view as to when conditions might improve. Diamond Foods has not only weathered these conditions but has prospered. Our focused business model and ability to rapidly adapt to change have enabled us to post year-over-year EPS growth for six quarters in a row.

This quarter was another example of our ability to deliver strong results. North American retail sales grew 27% led by performance of Emerald and Pop Secret. These trends are continuing as we begin the third quarter as Emerald set a new market share record of 8% for the month of February.

For the fifth quarter in a row gross margins grew over the prior year as our mix of retail sales improved to nearly 90%. In fact, our gross margins increased even though we spent significantly more in promotions in order to deliver a greater value to consumers. In the second quarter we earned $0.37 per share, 118% above EPS of $0.17 for the same period last year. Earnings were $0.03 above the top end of our guidance range which we had just raised by $0.05 at our Analyst Meeting in late January.

During the current economic environment we are increasing our investment in our brands as we look to sustain and expand market share. Andrew will now provide some more detail on our efforts to enhance brand value in order to stimulate sales and distribution growth.

Andrew Burke

Thanks Michael. Our retail brands are well positioned to grow. Diamond culinary nuts are benefiting from consumer trends to prepare more meals at home and the brand resonates strongly with retailers and consumers especially in today’s economy. Emerald offers consumers nutritious, innovative snacks that are a convenient source of dietary protein. Pop Secret has also benefited from recent consumer trends favoring in-home entertainment and the category has begun to grow as the two national brands have stepped up investment.

We have worked hard in proving the distribution of our core Emerald items in grocery over the last year. While Emerald’s brand level distribution has remained steady at just under 90% its higher velocity items have gained shelf space and are driving sales growth. For example, Emerald’s almond sales have increased 32% over the last 12 weeks in U.S. grocery while our whole cashew business is up 49%. This resulted in Emerald driving double digit growth while the category declined.

In the mass merchandiser channel Emerald’s 100 calorie pack items began shipping nationally in the second quarter and continue to perform well. We anticipate an expansion of additional items by the end of the summer. In Club, Cocoa Roast almonds started selling in 150 stores last quarter and will be expanding 550 nationwide this spring.

In December we began shipping two new Emerald Dry Roasted peanut items to select retailers in the northeast. Initial sales are encouraging and we will continue to expand the roll out to new markets in a disciplined manner so we can properly support this program. This is an important initiative for us since these items target a segment of the market, peanuts, which represent about 30% of the dollars and 50% of the volume in the snack nut category. We believe our product quality and 16 oz Clear PET package offer an attractive value for both the retailer and consumer.

We remain committed to investing in our brands. It is especially important in today’s environment to demonstrate the unique value and role our brands can play in consumers’ every day lives. This spring Diamond culinary nuts will run a recipe contest asking consumers to submit their favorite recipes. The grand prize is a trip to Napa’s Culinary Institute of America and the winner gets his or her recipe printed on millions of bags of culinary walnuts. This is our first spring promotion in years and comes on top of new distribution resulting from being named the Category Manager in one of the top three grocery chains in the U.S.

This month we launched print and out of home creative in support of our Emerald Cocoa Roast Almonds. Our proprietary dry roast process delivers a rich, satisfying flavor without adding any calories. Consumer response to this item has been strong and we look forward to the results of our added investment.

On the retail activation front where we bring our brands to life in store we will be partnering with both Miller and Corona to develop end-market programs around NASCAR and the Cinco de Mayo holiday. These are two great brands which we can align Emerald with to provide meaningful snack solutions that our retail partners are seeking.

In April we will debut our next generation Emerald Natural Energy creative campaign. It is a series of three television commercials that will run during the NCAA March Madness Final Four and championship games. The campaign is called Flashback and depicts the bad things that can happen when you don’t eat Emerald nuts at 3 p.m.

Finally, we continue to develop our positioning and our creative idea for Pop Secret. We have been conducting category research with popcorn consumers and are finalizing our creative content. We expect to have a national campaign ready by summer.

Now I will turn it over to Steve.

Steven Neil

Thanks Andrew. Good afternoon everyone. Please note that the press release and 10Q were filed today. Overall net revenues grew 13% with retail sales up 27% and non-retail sales down 36%. This reflects commodity price deflation and our continuing strategy to reduce the mix of low margin SKU’s.

Gross margin was 22.6% for the quarter, an improvement of 580 basis points over last year. Gross margin benefited from the inclusion of Pop Secret in this year’s results, continuing strength of our retail nut business, lower input costs and manufacturing efficiencies. At retail, declining input costs are largely being offset by higher promotional spending designed to spur greater unit velocity and consumer value.

SG&A expense totaled $15.9 million about level with the amount spent in the first quarter. This puts us at $31.7 million half way through the fiscal year. There are two primary factors that should cause spending to run at a lower level during the next two quarters. The first is that transition services agreement we had with General Mills ended in February, one month ahead of schedule. We are now fully responsible for all aspects of the Pop Secret business including supply chain, ordering, invoicing and collections. The second is that broker commissions are a variable expense tied to net sales and typically decline in the second half of the year due to the seasonality of our business.

Year-to-date advertising expense of $12.1 million is slightly ahead of where we were through two quarters last year. Full advertising guidance remains $26-29 million compared to the $20.5 million spent last year and we expect to see more spending in the second half. As a result, operating margin grew 450 basis points to 7.9% in the quarter.

Interest expense was $2.2 million benefiting both from attractive rates and lower borrowings. We finished the quarter with $135 million in debt; $71 million lower than at the end of the first quarter. The resulting leverage ratio of 1.9 was a dramatic improvement from the 3.2 ratio we posted in the first quarter. It also means we will benefit from a lower credit spread on our borrowings during the third fiscal quarter.

Our cash flows, like our sales, are subject to seasonality and our focus remains on optimizing our leverage position. As a result of our favorable sales mix and cost efficiencies EPS was $0.37 beating the high end of our guidance by $0.03. Included in the quarter was a small discrete tax expense item which benefited EPS by about $0.01.

Finally, while many companies have reduced or eliminated their dividend, we have sustained our $0.045 per share dividend which was paid on January 29. Today we are raising fiscal 2009 non-GAAP EPS by $0.02 per share to a range of $1.27 to $1.34. This represents between 40-47% growth over last year’s $0.91. GAAP EPS will be $0.03 lower due to net non-recurring charges recorded in our first quarter.

On the CapEx front we had initially guided to between $10-13 million anticipating capital needs at Pop Secret which are not required this fiscal year. This will lower our CapEx to $6-8 million which is more typical of our past spending. One project we have initiated this year, however, is to install an integrated roasting and packaging line in our Fisher’s Indiana plant to support our new peanut items and drive further supply chain efficiencies.

For the third quarter of fiscal 2009 we expect EPS of between $0.11 and $0.14 compared to $0.07 last year. Now I will turn it back to Michael.

Michael Mendes

Based on the strong performance of our business we have raised full year earnings guidance twice already this year. $0.05 in January and $0.02 today. Diamond’s earnings growth has been fueled by our retail expansion, greater skill in our snacks business, input cost normalization and efficiency projects which have helped streamline our operational cost structure.

We have adjusted our full year sales guidance to $535-565 million primarily due to a sales reduction in our bulk walnut business where we generally don’t realize a significant brand premium. This is one of the reasons why we have been downsizing this business since the IPO.

This fall California produced a record crop and [carry] inventory will exceed the largest in history. In light of this environment we have determined we can best maximize the crop value by shifting a portion of our sales from the fourth quarter to the first quarter of next year as has been our historical practice in this type of a market environment.

We expect that our retail sales will grow 18-22% for the year. The modest reduction in our sales growth rate reflects increased promotional spending enabling us to pass on a portion of the favorable input costs to consumers in order to sustain and expand market share.

In closing, let me address our longer term outlook. Normally we provide earnings guidance at the beginning of our fiscal year. However we recognize we are in an unprecedented period of economic volatility and that for many of you it is more difficult than ever to assess investment prospects over the next 12-18 months. Accordingly, today we will share our current outlook for the fiscal 2010 earnings and provide more specifics during our fourth quarter earnings call.

Through fiscal 2008 we experienced a 2-3 year period of margin compression as input costs rose to historical highs and more rapidly than we could pass these cost increases at retail. Now that markets are normalizing we are confident that we can sustain an appropriate brand premium while delivering greater value to our customers.

We can further leverage our cost structure as we maintain a disciplined focus on the growth of our product portfolio. We believe that in the current economy interest rates should remain low. This when coupled with our ability to generate cash will help us reduce interest expense as we rapidly pay down our debt. As a result, we currently project our fiscal 2010 earnings in the range of $1.55 to $1.70 per share, approximately 25% above our current fiscal 2009 guidance.

One final comment, in early 2006 we established five-year financial targets that implied a dramatic transformation in the profitability of our business. These targets included improving gross margins from 10% to 20% by 2011 and improving operating margins from 3% to 10% in that same period. Due to the progress that we have made in building our retail franchise we are now on track to exceed our gross margin target this fiscal year which is actually two years earlier than we had planned and to approach our operating margin target next year which would be one year earlier than planned.

At this time we would like to open the call to questions.

Question-and-Answer Session

Operator

(Operator Instructions) The first question comes from the line of Tim Ramey – D.A. Davidson.

Tim Ramey – D.A. Davidson

You talked a little bit about using some of the incremental margin from lower nut prices to ramp up promotion and I’m sure the question on all of our minds is how do we really think about that for the next 12-18 months? Your product is benefiting from lower input costs and you are a relatively high priced product. Should we be thinking about shelf price declines? Are you just going to try and hold the line and get it all on promotion? What are you going to do?

Michael Mendes

We have quite aggressively tackled the challenge and opportunity by planning for example the culinary side some promotion through this spring that will really we hope bring some better shelf price to consumers in the spring in the culinary nut segment but also stimulating off take off the shelf. The good thing about our business is we really feel our basic model is very complicit with our retail partners. We know they are making a percentage off the sale dollars that go through the register. So on its face for every manufacturer to reduce prices and the total sales dollars to go down is not a way to easily improve profitability. What they would like to do is find a way we can partnership together and bring more value to the consumers but hopefully have them maintain or increase the amount of dollars they are spending in this area.

Some of the examples are this spring we are promoting multiple unit purchases in smaller pack size in the culinary segment. Instead of promoting a discount price off of a larger 1 pound bag we may be promoting a certain discount off of purchasing two or three smaller sized items like a 2 oz or a 6 oz pack. We think that is the kind of strategy that wins for the consumer, wins for the retail partner and works well for us as a manufacturer.

We do think because we are coming off of historical high commodity prices and because our fixed cost is a relatively smaller part of our cost of goods sold than say most more value added CPG products at retail we can pass on some of that commodity price deflation not at a detriment to our earnings power as a brand. I hope that gives a little bit of color. I would say when you look at something like microwave popcorn that is actually a category that I think is going to do quite well in this type of an economy as people are looking for a good value snack. A pouch of microwave popcorn may cost $.25 to $0.40 a unit depending on the size and the pack you purchase. That is a pretty low cost single serve, multi person snack at home versus other opportunities.

Our culinary line sells that baking needs area. What we have found is as people are looking for more at home meal occasions baking is an opportunity. If you look at the lead indicators the current Nielsen data shows the culinary net category up in the most recent 4 and 12 week period and the most recent 4 week period our growth is more than double the category growth.

Finally on the snack nut category, the snack nut category on the 4 and 12 week period is down a bit but Emerald as a brand within the category is growing quite rapidly. We actually in the last four week period Emerald enjoyed a 19% dollar sales growth and 22% volume growth. A lot of that is because we are bringing a lot of innovation and we have a lot of expansion of new products. So I think when you go segment by segment I think we have got a strategy that is going to help us prosper and succeed in the environment but maybe we are not growing as fast as we would have grown otherwise.

Tim Ramey – D.A. Davidson

With the Pop Secret being lumped in with snacks this year it is a little harder to deduce maybe what is happening with snack nut business and you just gave us some great metrics there. How close are we to kind of the magical moment of transitioning to real profitability there?

Michael Mendes

We are growing quite rapidly on the snack nut category. We are getting ready to air three new national television commercials this quarter and we are going to have a lot of media behind that with the March Madness. We are investing and spending against that business in proportion to our growth expectations. So quite clearly if we didn’t do national television this next quarter that would make that business much, much more profitable given the volume we are against. So we are still spending against that segment to fuel the growth that business can drive which would make us less profitable than we would be otherwise. I will say that our profit improvement this year is a significant contributor in that is the improved profitability of Emerald snack nuts in our portfolio as that business is gaining scale.

Operator

The next question comes from Mark Argento – Craig-Hallum Capital Group.

Mark Argento – Craig-Hallum Capital Group

A couple of questions around the CapEx. Can you talk about what…I know you took your guidance down from the capital you are going to deploy back into the business in terms of CapEx? You mentioned on one project the integrated roasting line. What projects have you put up on the shelf that maybe we could see come off of it some time in the future?

Michael Mendes

What our guidance reflected was our plan to potentially spend some capital on the Pop Secret business as we made that acquisition. I would tell you we put things on the shelf. I did think that we forecasted sort of the unknown of what we would have to do on the capital front there. We did acquire as part of our acquisition a production facility and a lot of equipment with our Pop Secret business and once we got to know the business we didn’t deem a need for significant capital spend this year. We did mention this project, this dry roasting and packaging process at Fishers which maybe Gary can take a moment to put a little color around that project.

Gary Ford

We are in the middle of the engineering and design stage right now as we speak. So that CapEx will actually be most of that money will be spent in fiscal year 2010. We are very excited about the project. It is going to be a totally integrated processing and packaging operation that we believe will give us efficiencies well under the industry average.

Michael Mendes

One thing about the capital spend on that is that when we put out our guidance on our CapEx spend we had thought we might be a little bit further along with that project. When Gary challenged our operations team to really have a breakthrough design in terms of integrating the roasting and the packaging line to really have a low cost facility we decided it would be prudent to take a little more time to have a much better final product. I would just say that capital is going to be deployed a little bit later in terms of when it is going to hit the financials on that project.

Mark Argento – Craig-Hallum Capital Group

Shifting gears over to Emerald, you mentioned the Nielsen data with 19% dollar growth and 22% volume growth. Can you give us a little bit of color on new doors growth versus SKU penetration growth? Talk a little bit about maybe some recent wins you have had with the product and just give us a little granularity there?

Michael Mendes

Let me start and then I’m going to let Andrew give a little bit of color there. Our Sea Salt and Pepper Cashews and our Cocoa Roasted Almonds are two items that are helping us build out our positioning in that cashew and almond set and the Nielsen data supports our strong growth there. Those two new items where grocery distribution has been quite broad throughout the country are two big contributors to our growth. We have a regional program with our new peanut items in the northeast which while it is on a small base we saw some significant growth in peanuts in the 4 week period. Our peanut grew over 30% in a period in which peanuts were down. That is some within the product component. Our major gains on a one-off distribution front is more in the mass merch side where one of our mass merch customers have taken in 300 calorie packs and they are going to take another five items in the back half of the year.

Andrew do you want to go ahead and add more color to that?

Andrew Burke

I think it is a continuation of the investment in advertising that we continue to do in the category. So we spoke about the fact we are investing behind Cocoa Roast Almonds and we are continuing to invest in promotional support of the Emerald Snack line. Michael talked about some of the new products wins whether it be our dry roasted peanuts, our 100 calorie items and then again I think the other thing that really is starting to take place now is this transition of ours where we have moved to our core items which are more broadly appealing, turning faster and we are getting those into more distribution and that has really ended up really driving our sales growth.

Mark Argento – Craig-Hallum Capital Group

In terms of the guide down on the revenues it sounds like the pricing you are getting on the wholesale side of the business it makes sense to keep more product in the warehouse for longer so kind of a shift from Q4 into Q1. Is that the best way to think of that?

Michael Mendes

That is the largest contributor. Just to give you a little bit of history, most of our premium ingredient customers that are looking for more service and a little more value added project is where we tend to try to sell most of our bulk ingredient products. They have needs usually 12 months a year. Last year was a very unusual situation in that prices accelerated in the summer, supply was very low and we were in the good fortune that we could actually contract and sell most of our ingredient bulk product by the end of July. This year we are more in a normalized window where there is ample supply and the buyers are looking to buy more on a hand to mouth basis and for their needs in August, September and October they are not contracting forward here in June and July.

They are basically buying what they need, looking for processors to hold the inventory and sell to them on a spot basis. So as we determine how we can best optimize our remaining inventory we felt it would be more prudent to sell a larger portion of our remaining inventory in August, September and the first half of October. Keep in mind that the harvest doesn’t really take place until October and shelling of the new walnut crop doesn’t really start in earnest until the back half of October. So usually as the crop gets closer to the new crop you can see a little better demand cycle. That is why we made that choice.

Operator

The next question comes from Kenneth Zaslow - BMO Capital Markets.

Kenneth Zaslow - BMO Capital Markets

Last quarter you told us that Emerald sales were up over 20% for the quarter. What was it for this quarter?

Andrew Burke

For the quarter?

Kenneth Zaslow - BMO Capital Markets

Yes, year-over-year. Last quarter you said it was over 20% growth in Emerald snack nuts. I just want to keep what your sales growth is at Emerald.

Andrew Burke

We have the Nielsen data that we commented on the call. We really haven’t broken out Emerald from a pure sales dollars but it is up double digit growth. I don’t have the exact number in front of me.

Michael Mendes

What we share, again, on our most recent Nielsen data is we are up double digits and in the last four week period we are up 19.4% on dollars and 22% on volume. That is in a time when the category is down 6.5% and the national brand is down double digits.

Kenneth Zaslow - BMO Capital Markets

You just gave it last time. That’s why I was asking. My other question is can you help…I understand the guidance for fiscal 2010 it seems lower than I would have thought. Here is my thinking. Interest expense is coming down. You are doing a great job on the snack nut business. The integration seems like it is going well and commodity costs are going down. So if I just look at lower interest rates and kind of do what you did it looks like that is $0.10 to $0.15 addition and then accretion call it $0.20 or so? It seems lighter. What am I missing? It seems like this number is a lot lower and you are doing a much better job then that EPS number indicates. I feel like there is something better going on there then that number.

Michael Mendes

I will say as a guy who has a market perform on us and when we are projecting a 25% earnings growth in the second quarter I don’t know how many of your CPG companies at the end of Q2 are projecting a 25% earnings growth into the next fiscal year at this stage of the game. I’m not apologizing for that number. I would agree with you though. I am happy to hear you say that. I agree with you. I think we are doing well. I do think in this kind of environment we need to have a firm recognition of the headwinds we are coming into and I think that we have performed extraordinarily well in light of the pressure. Again, when I talk about we are seeing single digit decline in the snack category and we are driving double digit sales growth. I think that part of that sort of healthy respect for what you don’t know is reflected in our numbers.

I do think that it is does reflect continued investment in our brands and continued investment in our platform and positioning ourselves for greater growth in the future and we are not going to be cutting back on spending. I think that when you look at that Pop Secret business we are pretty excited about that business. We have got a new consumer campaign we are teeing up for next year so we will be on air with national television, consumer support against that brand. We are going to be working on new products and if we can have some success on the new products front they will be slotting dollars that we will be having to pay against that. As we have modeled it out, and we have modeled out the year. We have assumed the degree of investment that we plan as we look to be growing.

I definitely feel that we are in a period that if we can invest in the market we can gain disproportionate market share versus a more healthy market environment. So we are going to aggressively try to put ourselves in a better market position. So those projections I think reflect good performance and reflect nothing bad happens that we don’t know about and I think that it does reflect that we are investing quite heavily.

Kenneth Zaslow - BMO Capital Markets

I was paying you a compliment in terms of your business. You can give whatever guidance you want. It is fine with me. It just seems like I add up a lot bigger numbers. That’s all I was looking at.

Michael Mendes

My only thought was that we want to try to frame people’s thinking. I think people kind of look…I think particularly when you see some of the [optics] of our top line number the underlying…anyone who is close to the business will know there are some underlying issues here that when you see that commodity deflation on the ingredient business that the business is very healthy. So we are trying to be helpful to maybe those people who maybe aren’t that familiar with the details of the business to get a sense that we are looking healthy on our out period.

Kenneth Zaslow - BMO Capital Markets

I just thought you would be able to recapture some of the lower commodity costs, lower interest expense…what I understood the Pop Secret acquisition was going smoothly. The Emerald business as you said is up 20% in the first quarter and double digit in the second quarter. It just seemed like things were starting to click. I don’t know. That is fine.

Michael Mendes

We will be revisiting our assumptions in Q4. We will have again normally we are doing this in September to again if you can kind of frame your thought process we are trying to give you an early look at that.

Operator

The next question comes from Heather Jones - BB&T Capital Markets.

Heather Jones - BB&T Capital Markets

On your Nielsen data, the latest four weeks you just mentioned, sales up less than volume and I’m just wondering if that is the introduction of the peanut which is I guess a lower price mix?

Michael Mendes

That would be right in terms of our mix. It is a modest differential. We are talking 19.4% in dollars and 22% on volume so it is a modest differential but I think you can attribute a bit more on that side.

Heather Jones - BB&T Capital Markets

As far as you talking about commodity deflation and your more commodity type businesses like an in-shell, etc. I am wondering if looking out to 2010 if volume growth has been strong in snack and pretty strong in culinary but I’m wondering if initial expectations do you believe that price deflation will offset volume so that dollar sales match may be flat in 2010? Or would you anticipate volumes offsetting any price deflation?

Michael Mendes

I think your former comment could be the case. It is just very difficult to know what is going to happen on that part of the business. I feel very comfortable and confident about its nominal impact on our earnings. The back end part of that business, the last third of our ingredient business with commodity is in ample supply, has a very marginal earnings contribution for us. As a matter of fact it may just modestly contribute to overhead. So while that may impact and deflate the top line and could have the impact as much of an impact as having sales volumes being flattish towards next year that should not have any impact really on the earnings driving potential of the business.

Heather Jones - BB&T Capital Markets

Going back to Ken’s question, I don’t mean this in a confrontational manner I actually mean it in a complimentary manner as well, looking at Pop Secret how well it is going and interest expense I’m just wondering…it sounds as if your earnings projection is conservatively estimating either significant reinvestment in the business or conservatively estimating you are not going to get any benefit of cost deflation. I’m just wondering if you could speak to that?

Michael Mendes

Again, it is a 25% increase versus the current year and in the economy we are in, in terms of the global economy we are in and kind of factor in sort of the unknown reaction of the competitive market I think it is a prudent guidance two quarters into the current fiscal year.

Heather Jones - BB&T Capital Markets

It is very strong growth. I wasn’t trying to imply it wasn’t strong growth. I was just getting to higher numbers and I’m just trying to get a feel for how much conservatism is baked into that guidance given how early it is.

Michael Mendes

I would say there is more conservatism in the bottom than in the top end.

Heather Jones - BB&T Capital Markets

On Planters, we haven’t seen an increase in the competitive activity and I’m just wondering what you are just seeing there? If they ramped up competitive activity?

Michael Mendes

Again they have a great franchise and we are trying to grow the category and trying to bring younger snackers in. We are very focused on this 3 o’clock day part mindset kind of natural energy approach to very different demographic and attitudinal direction of our brand so we are hoping that there won’t be that much cannibalization. But I would say the data has borne well for us. Again, you look at this most recent period the most recent 4 and 12 week period they have been reflecting double digit declines, declining more than the category and we are reflecting double digit growth. So we are pleased with our performance on that front and we feel like the key that has helped us define a category trend is bringing new value to the set.

Think about something like a Cocoa Roast almond with the idea of giving somebody a snack nut that has a chocolate flavor that is not a melt in your hand type chocolate that has no more calories than a winning almond that is a winning play. We are very confident in that item and it has performed well for us. I think our Sea Salt and Pepper cashew is not exactly rocket science but we were the first one out there with it and we have had a very good reaction to that item. I think as we can keep trying to differentiate our convenient packaging, product types it is going to have less tendency to commoditize our items. I would say that on a competitive front we have not seen a ramp up on the nut side any more so than what we have seen over the last year.

Operator

The next question comes from Sarah Lester – Sidoti & Company.

Sarah Lester – Sidoti & Company

I wanted to ask about your retail promotions what you are expecting for the next six months or so. Is this specific to culinary walnuts or are you looking also at Emerald and Pop Secret?

Michael Mendes

I’m going to take the first half of this and then I’m going to have Andrew give a little more color. I was referring to the culinary side in my earlier comments mainly because we felt that was an area that we could get some incremental sales activity and then also help our retail partners by bringing them more value by helping them basically scan down the price at the register in the spring holiday. So we quite rapidly this fall formed plans for the spring for our Easter promotion. But we also have intensified the depth and frequency of our promotional activity on the snack side for both microwave popcorn and snack nuts.

Let me have Andrew just give a little more color on that.

Andrew Burke

If you kind of break up the business and you look at our snack business we will continue promotions into the spring and summer for both Emerald and Pop Secret. I think the nice thing is in terms of as we expand the breadth of our offerings, so we talked about this peanut offering representing 30% of the dollars and 50% of the volume as we start to roll that out that just gives us more breadth that we can go and do more promotions with our retail partners which is again very exciting for us and very exciting for the brand going forward.

Then as Michael talked about on the culinary side we are going to be doing a spring promotion and a spring overlay via a recipe contest for the first time in many years as we look to spend some of those promotion dollars back to help drive the category.

Operator

At this time there appear to be no further questions. I would like to turn the conference back over to management for any additional or closing comments.

Michael Mendes

Thanks everyone for joining us. Just as a final comment I just want to remind you we are sponsoring the Emerald Across the Bay 12K run in San Francisco on March 15th. The run this Sunday is across the Golden Gate Bridge and was recognized by Runner World as the best bridge run in the United States. So if you are interested in joining us we welcome you to visit our website and get some more information about the run.

We also are going to be attending some investor relation conferences this next month so please visit our Investor Relations site to get some more information. That will conclude our remarks and thanks for joining our call.

Operator

Again, that does conclude today’s conference call. You may now disconnect.

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Source: Diamond Foods, Inc. F2Q09 (Qtr End 01/31/09) Earnings Call Transcript
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