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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

Nils Lommerin - Chief Operating Officer

Analysts

Karru Martinson - Deutsche Bank

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

Sara Uslim - Analyst

Eric Serotta - Consumer Edge Research

Reza Vahabzadeh - Barclay's Capital

Ann H. Gurkin - Davenport & Co. Of Virginia, Inc.

Vincent Andrews - Morgan Stanley

Bob Cummins - Shields & Company

Bryan Hunt - Wells Fargo Securities

Del Monte Foods Company (DLM) F1Q10 Earnings Call September 3, 2009 10:00 AM ET

Operator

Welcome and thank you for joining Del Monte Foods Company first quarter fiscal 2010 earnings conference call. (Operator Instructions) Now I will turn the call over to Larry Bodner, Senior Vice President Finance, Investor Relations and Corporate Communications, Del Monte Foods. Thank you, you may begin.

Larry Bodner

Thank you. Good morning, everyone. Thank you for joining us for Del Monte Foods fiscal 2010 first 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 management’s current plans, estimates and projections. The company does not undertake to update any of these statements in light of 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.

The all outlets share data we will discuss today are internal estimates based on Nielsen grocery share data and Nielsen all outlet panel data for the 13 weeks ended August 1, 2009. Additional all outlet data, as 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

Thank you very much, Larry. Good morning, everyone. I am extremely pleased with Del Monte's first quarter performance, which includes strong double-digit top line growth, driven primarily by pet, a significant improvement in gross margins and record first quarter earnings. The strength of our top line reflects the full quarter over quarter benefit of fiscal 2009 pricing actions that we took to recoup margin contraction driven by inflationary cost increases experienced over the last several years. This performance also reflects the benefit of increased brand strength, which is driven by the higher marketing support that we initiated in the beginning of fiscal ’09. The quarter’s gross margin and earnings reflect the year-over-year benefits of wrap-around ’09 pricing, which significantly impacted the first quarter of fiscal 2010 and as well, strong productivity gains and lower costs, all of which combined drove the exceptional first quarter performance. Importantly, these results also build on the momentum that we have developed from actions taken over the past few years to increase Del Monte's competitiveness.

These actions include: one, our realigned and strengthened brand portfolio; two, the significant investments we have made to upgrade our systems to improve supply chain forecast accuracy and upgrade promotional planning; and finally, our action to ensure our solid execution against the strategic initiatives of Del Monte's accelerated growth plan. We are proud of the first quarter accomplishments, including our record EPS and continue to execute our AGP strategy to drive sustainable long-term EPS growth.

As we look forward to the rest of 2010, we anticipate that we will continue to strengthen our business fundamentals and as well, we expect to benefit from positive year-over-year net costs.

We also anticipate our earnings for the remainder of the year to reflect reduced impact from the wrap-around benefit of 2009 pricing, as well as higher marketing investments in both Q2 and the second half. Combining all of these factors, we are increasing our fiscal 2010 EPS guidance to about 20% above year-ago, which is well ahead of our long-term guidance of 7% to 9% and the peer set average.

During the quarter, Del Monte's consumer and pet categories continued to experience healthy growth on a dollar basis, reflecting category wide pricing while unit volume trends tracked largely as we had expected. As we go forward and lap the industry-wide aggressive pricing actions taken in fiscal 2009, we will expect unit volumes in our categories will improve with performance returning to the more historic norms experienced prior to fiscal 2009.

As anticipated, Del Monte's first quarter market share results reflect solid performance in dry pet and snacks. In consumer, we experienced the anticipated short-term dislocations which continued to reflect the aggressive price leadership actions that we took to ensure that price points reflect the impact of higher cost levels.

Now, let me turn to our accelerated growth plan -- we continue to successfully execute against each of our plan’s three strategic initiatives. Our first strategic initiative is to use pricing actions and productivity savings to neutralize cost inflation and maintain margins. We do not currently plan any material pricing actions in fiscal 2010. The back half of fiscal 2010 should see minimal top line contribution from pricing.

On the productivity front, we continue to make great progress, achieving approximately $17 million in productivity savings during the first quarter. For 2010, we remain on track to deliver approximately $80 million, or our targeted 3% of costs of goods sold in annual savings, which should more than offset our current gross cost inflation estimate, which Dave will discuss more in a moment.

Our second initiative is focused on driving our higher margin core businesses and increasing our marketing investment in our pillar brands. Initial results from our fiscal 2009 key equity investments have been very encouraging, leading us to increase fiscal 2010 estimated marketing spend to 40% to 50% above fiscal 2009 levels as compared to our previous target of 30% to 40% growth.

During the first quarter, the timing of certain marketing investments was delayed, primarily in pet, to ensure that we optimized execution. As a result, marketing increased by only 11% during the quarter but will clearly accelerate throughout the remainder of the fiscal year.

Our third quarter objective is to drive our growth engines, including packaged produce, with category building innovation and marketing. In packaged produce, Del Monte experienced solid net sales growth, reflecting volume gains from new products and expanded distribution. The strong volume performance led to a 4 point share gain during the quarter.

In sum, I am extremely pleased with the progress we have made against our accelerated growth plan and remain confident that it will continue to drive performance in F10 and importantly beyond.

We are pleased with the performance of our consumer business, which delivered net sales growth of 5% and operating income growth of over 200%. Q1 net sales growth largely reflects the benefit of fiscal 2009 pricing actions taken to offset costs and recoup margins.

Net sales also benefited from new product volume, particularly driven by Fruit Chillers Tubes and our new packaged produce items. These gains were partially offset by volume-related elasticity, which was consistent with expectations.

Looking at consumer market shares, during the first quarter Del Monte's market share declines in consumer were largely as we had expected. The quarter’s planned consumer promotional activity was lower in Q1 than activity levels that we have planned for the remainder of the year, largely reflecting the seasonal consumption patterns of our business.

As well, during the quarter expanded year-over-year price gaps across all three businesses impacted our share performance. These were driven primarily by greater branded competitive promotional activity in tomatoes and private label customer margin compression in vegetables and fruit.

Importantly, heading into the second quarter, we anticipate improving relative market share performance in our consumer business, reflecting its underlying health as we begin to lap the vast majority of our fiscal 2009 pricing actions, including two double-digit increases in vegetable and tomatoes and a high single digit increase in fruit.

In addition, our promotional activities are largely locked in at key customers for the upcoming holiday season.

We expect the success of these plans to become more evident during the second quarter and we expect this momentum to continue into the back half of fiscal 2010, supported by our value without sacrifices Del Monte brand media campaign, which will be rolled out later this month.

Turning to operating income, the significant increase primarily reflects net pricing and cost reduction actions, which more than offset the moderate cost increases which occur primarily in commodities and packaging. Increased marketing investment behind packaged produce and the Del Monte brand also impacted the quarter.

Now, pet products -- we are extremely pleased with the performance of our pet business, with Q1 top line growth of 20% and record operating income of over $100 million. Our Q1 net sales reflect strong base unit volume growth, particularly in pet snacks, and the benefit of fiscal 2009 pricing actions, partially offset by elasticity.

Growth in new products, primarily from the recent Milk Bone Essentials Plus platform also contributed to our top line.

During Q1, we experienced strong market share gains in dry cat while maintaining share in pet snacks. In dry cat, increased distribution and improved velocities for both Meow Mix and 9 Lives led to strong volume and share gains. In pet snacks, where the category grew 13% in Q1, our marketing investment continues to pay dividends with Pupperoni gaining over one share point and Milk Bones strengthening further its leading share. As we are the number one share leader in the snacks category, these investments behind our brands help to grow the category.

Dry dog and wet cat did experience market share declines in Q1 and dry dog shares reflected reduced kibbles and bits promotional activity as well as aggressive discounting during the quarter by competition. Overall, we are pleased with the trajectory and the health of this business. We expect that our planned upcoming promotional programs will have a positive impact on our share performance as we go forward in the year.

In wet cat, share reflected some distribution losses and lower levels of promotional activity in our lower margin 9 Lives wet brand. We expect that our planned activities will regain share momentum in the back half of our fiscal year.

As we look at our pet business, we expect to continue to gain momentum, driven by the strength and the scale of our portfolio of brands, the role that each of those brands play in their respective categories and importantly from the significantly increased support provided by our successful marketing initiatives.

We will continue to strengthen these equities as we increase our marketing investment.

The extraordinary increase in pet operating income reflects the benefit of net pricing actions, productivity savings, and lower costs. Also contributing to operating income was the benefit of positive volume mix, primarily from dog snacks, as well as lower SG&A, driven in part by the delay of marketing investment into the balance of the year.

Dave will now provide the financial details of Q1 and fiscal 2010. Dave.

David L. Meyers

Thanks, Rick. In Q1, EPS from continuing operations of $0.30 was favorable relative to our internal expectations of $0.11 to $0.15, driven by both ongoing business results and timing. Our Q1 results reflect stronger-than-anticipated momentum in pet, driven by lower operating costs, volume strength in pet snacks, and better pricing realization. We also delayed the timing of certain marketing investments by approximately $0.05 EPS for the second half of fiscal 2010 in order to optimize execution. In Q1, net sales growth of 12% was very strong.

Looking at Q1 top line drivers in greater detail, pricing increased net sales by 11.9 points, which was partially offset by 6.1 points of pricing related volume elasticity. Existing product volume was strong, 4.6 points, and new products contributed 1.6 points. As expected, our overall top line growth benefited from the absence of promotional related activity at the end of our last fiscal year.

In looking at the pricing impact on our business in more detail, it’s important to reflect on the fiscal 2010 quarterly impact from fiscal 2009 pricing action. This is a chart that we’ve covered at our investor day in July. It’s important to reinforce that we expect pricing will clearly have a large benefit to our first half fiscal 2010 results with the most impact on our first quarter.

First quarter gross margin was 31.9%, compared to last year’s 21.9% gross margin. Net pricing drove an 8.6 point increase. Costs were favorable compared to Q1 of last year, driven by lower commodity costs, including fats and grains, as well as lower energy related costs. This was partially offset by higher metal packaging and raw product costs, particularly tomatoes. Volume mix was also positive at 0.7 points.

The outstanding gross margin gains reflect the cumulative impact of fiscal 2009 pricing actions, successful execution of our productivity initiatives, and lower operational costs which resulted in regaining some of the margin contraction we experienced over the past few years.

Q1 operating income increased $108 million, with operating margin at 14.9%, up significantly versus last year’s 1.8% operating margin. Operating income growth was driven by the $100 million increase in gross profit, as margin growth reflected net pricing, coupled with volume growth. We also realized lower SG&A, driven by lower customer delivery costs, reflecting the pull-back in diesel prices and effective cost savings in our line haul costs.

Conversely, we continued to increase our marketing investments in Q1, which were up approximately 11% versus the same quarter last fiscal year.

Interest expense in the quarter was $3 million lower, driven by lower debt levels and lower interest rates. Our tax rate in the quarter was 37.9%, versus 39.4% in the year-ago quarter. The relatively lower tax rate in the current quarter reflects the recognition of foreign tax credits.

During the first quarter, we spent $24 million on capital projects versus $19 million a year ago. Capital spending increased year over year as we invested in high economic return, low risk projects in pet manufacturing to drive down long-term costs. These savings were contemplated in our overall $80 million F10 productivity savings initiatives. We incurred $24 million in depreciation and amortization costs, which includes $1 million of fee amortization included in interest expense.

For the first quarter, cash flow operating less investing was 0 versus a negative $59 million a year ago. This increase in cash flow is driven by much stronger earnings for the quarter versus year-ago. Working capital came in about where we expected, including the normal build of Q1 inventories in our consumer business, offset by higher payables.

The first quarter reflected continued strong execution of our accelerated growth strategy. On our June call, I highlighted three main themes that we expected to drive our results in F10. First, strengthen our key brands with an increase in marketing support. Second, strong productivity savings to help mitigate inflationary cost pressures. Third, gross margin expansion from our cumulative pricing actions in fiscal 2009, which in turn will fund our marketing investments. Our Q1 results clearly reflect strong progress on all three themes.

Now I would like to discuss guidance for full year fiscal 2010 -- we continue to anticipate net sales growth of 4% to 6% and will provide further updates on our top line after we progress through key consumer holiday promotional activities in Q2. While the Q1 top line was extremely strong, we will experience much less pricing impact in Q2 and minimal pricing impact in the second half of our fiscal year. Volume and new product components of the top line continue to be the same as we shared with you at investor day.

We are increasing our expected EPS from continuing operations range to $0.88 to $0.92 from the previous range of $0.76 to $0.80. The increase in EPS guidance reflects approximately $0.10 over delivery in Q1 related to strong pet business momentum, which I mentioned earlier. The remaining $0.02 increase in F10 EPS guidance reflects the impact of lower operational costs and lower interest expense, partially offset by incremental marketing investments.

As a result of strong initial consumer results from our marketing investments, we plan to further support key brand equities and full gear marketing investments are now expected to increase 40% to 50% over prior year versus our prior expectations of 30% to 40%. We firmly believe that these investments will strengthen our long-term business health and our ability to take pricing when inflationary pressures return.

Operating margin is now expected to be between 10.2% and 11.2% of net sales, compared to our previous guidance of 9.5% to 10.5%.

Looking at cash flow, we are increasing our cash flow guidance to be $180 million to $190 million, an increase from $160 million to $170 million, reflecting the increase in our earnings guidance. As a reminder, our cash flow guidance continues to include an approximate $40 million pension contribution, which is an increase of $15 million year over year. Interest expense is expected to be between $105 million and $115 million, reflecting lower interest rates versus our previous guidance, as we continue to evaluate refinancing alternatives. I will comment more on this later.

The slide illustrates additional key guidance metrics, including D&A and CapEx.

As we look to our longer term targets, we anticipate that F10 EPS guidance of approximately $0.90 establishes a new earnings base for future growth. As part of our long-term guidance, we now expect to maintain roughly a 10.5% operating income margin, reflecting our expectation that our strong momentum in 2010 will be maintained long-term. This is roughly 50 basis points higher than the level we discussed at investor day in July.

All other components of our long-term guidance that we shared in July are being maintained at previously stated levels.

In looking at our cost buckets in greater detail, we anticipate approximately $65 million in gross inflationary pressure, a $25 million reduction from our previous guidance. This level of inflation translates into a gross cost increase of approximately 2% over prior year. We believe this reflects a realistic projection of a moderating cost environment. We have clear visibility to large cost inputs on our consumer business for raw products, such as peaches, tomatoes, and vegetables. In addition, we are now over 60% hedged in our commodity basket, including traded commodities and energy inputs, which are approximately 15% of our operations cost base. The $25 million change in our cost outlook is primarily driven by lower expected tin plate inflation as negotiations for F10 are now essentially complete.

In addition, we now anticipate lower commodity and energy related costs.

From a productivity standpoint, we have a very strong set of identified initiatives which continue to be on track to generate approximately $80 million in savings, which more than offsets the gross inflation increases we are projecting.

Now I would like to comment on our refinancing plans. First, we continue to benefit from our focus on debt reduction and expect to drive F10 net debt to EBITDA below three times. Our debt has historically traded more akin to an investment grade issuer, reflecting our solid track record of strong cash flow and focus on debt reduction. As a result, we believe we have many alternatives to refinance our term loans and revolver well in advance of the initial maturity in Q4 fiscal 2011.

In addition, we continue to monitor the bond market for attractive opportunities to optimize our overall capital structure. Given the significant alternatives and variability on timing and rates, we have not reflected the potential impact of any refinancing in F10 in our guidance. We will update you as we progress through F10.

Looking to Q2, we expect positive top line growth with balanced growth across pet and consumer and a more moderate pricing benefit relative to our Q1 results. EPS is expected to benefit as we realize the pricing actions which will be ahead of our cost pressures. Importantly, our full fiscal year pricing benefit versus year ago will be largely realized by the end of the second quarter. As discussed, we are expecting to significantly accelerate our marketing spending relative to prior year second quarter and well above the increased investment in Q1 relative to year-ago. We expect Q2 EPS to come in above the prior year second quarter EPS of $0.14 on a GAAP continuing operations basis.

Overall, we are extremely pleased with our first quarter results and full-year outlook. Looking at the first half, second half flow, we expect first half F10 to strongly outperform first half F09, due to the wrap-around impact of F09 pricing actions, coupled with favorable year-over-year operating costs net of productivity savings. As a result, we believe that our guidance has a lower risk profile compared to previous years, given the pricing and cost visibility.

As we look to our second half, our primary focus is to drive strong business momentum for F11 and beyond. To accomplish this goal, we are further increasing marketing investment in our business, which will drive lower year-over-year earnings in the second half F10. Second half EPS will also be impacted by a moderate year-over-year increase in net operating costs and the absence of a 53rd week.

In total, we project F10 EPS to be approximately 20% above F09, which is well above our long-term guidance and peer set average.

With that, I will turn it back to Rick.

Richard G. Wolford

Okay, Dave, thank you. The company entered fiscal 2010 with strong momentum and confidence in our ability to continue to execute against the key strategic initiatives of our accelerated growth plan and to drive long-term sustainable EPS growth. Our record Q1 earnings reflect delivery on all aspects of our strategic plan.

The company’s Q1 performance and our plan for the entire fiscal 2010 reflect the strategy that we initiated at the outset of fiscal ’09. We anticipate, as we continue to deliver against that plan, that we will deliver strong year-over-year EPS growth.

More importantly, as we deliver F10, we are continuing to build a stronger foundation for F11 and beyond. With the investment that we are making and have made in our company and in our brands, we are stronger, our competitiveness is heightened, and our team is focused.

With that, I would like to thank you for joining us this morning and we would now certainly like to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question is from Karru Martinson.

Karru Martinson - Deutsche Bank

As the market leader on the consumer segment side, are you seeing private label follow you up on pricing or are you seeing an expansion of that price gap as the consumer continuing to trade down?

Richard G. Wolford

We’ve seen the price gap begin to narrow and we have seen the private label pricing begin to follow our price lead up and we would anticipate that that would continue to be the case. We certainly know that the private label manufacturers have experienced the same if not more aggressive cost increases than we have, and we would expect that -- and we know that that’s being passed on through. One of the issues at present with private label pricing is, as I had mentioned in the comments, that we see private label pricing being used as a strategic tool by select customers who are using the private label pricing to achieve their competitive goals of bringing customers in in the current economic environment and we anticipate that will continue but we believe that our promotional programs will provide our customers an alternative to that objective of attracting and driving good traffic.

Karru Martinson - Deutsche Bank

Thank you very much, guys.

Operator

Your next question is from Tim Ramey.

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

You were pretty explicit about what to expect on sales drive for pricing in the second half. Can you give us any sense of how you think volume will do once you don’t have the wrap-around effect of the price increase? Should we expect kind of the -- in your term, the elasticity to not be a factor?

Richard G. Wolford

Yeah, our elasticity will not be as big a factor and as we said on the investor day, we expect new product volume to contribute 1% to 2%.

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

Okay, and would your -- this increased level of marketing spending, should we think about that as mostly a 2Q event, or is it reasonably spread through the rest of the fiscal year?

Richard G. Wolford

It is spread throughout the fiscal year, Tim and one of the main objectives of that spending as we go through not just the second quarter but very importantly the second half is to ensure that we are setting up our brands and our products for strong growth in F11 and beyond. Our objective is not just to deliver this year but to ensure that we are investing in our brands to drive, to build our equity and drive growth and drive relevance to our consumers beyond the current fiscal.

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

Terrific, thanks.

Operator

Your next question is from [Sara Uslim].

Sara Uslim - Analyst

Good morning. Congratulations as well. My question relates to marketing. Could you just provide some more color around the decisions to delay the marketing in the first quarter on pet foods, what caused it, and give us more color on what back half spending is going to look like, and in terms of what form that marketing is going to take?

Richard G. Wolford

There was not -- the decision to delay the first quarter consumer messaging was done to ensure that we optimize our execution. We want to make sure that when we go out with our consumer messaging that it’s effective, that it is right on in terms of building brand equity, and that it is very productive going forward. I think if you look at the kind of progress and success we’ve had with Pupperoni, it’s that kind of success that we would like to continue as we go forward.

So that is one of the elements for the lower spending in Q1 versus the rest of the year. The second is that the timing and the new media year really begins in September when viewership significantly increases and we believe that that also will provide us with a better return.

As we go forward, our investment in marketing will be against specific brands with specific equity objectives and the specific growth objectives and so as we look at our overall marketing, of course we build it up brand by brand across our portfolio.

David L. Meyers

[2Q’s and Q4] marketing will be up approximately 55% or $60 million year over year, so a significant increase.

Sara Uslim - Analyst

Thank you, that’s helpful.

Operator

Your next question is from Eric Serotta.

Eric Serotta - Consumer Edge Research

There was a comment that you made regarding the second half that you are looking at a moderate increase in year-on-year net operating costs. What’s the primary driver there?

Richard G. Wolford

We see just a moderate increase in some of the grains and diesel going into the back half.

Eric Serotta - Consumer Edge Research

Okay, so that’s commodity costs driven?

Richard G. Wolford

Yes.

Eric Serotta - Consumer Edge Research

Okay, and could you comment on the timing of the productivity savings for the year? I think it was $17 million this quarter versus $80 million for the year. How should we think about the remainder being spread over the remaining three quarters?

Richard G. Wolford

For modeling purposes, I would just do it evenly, the $80 million put evenly over -- you know, 17 in the first half and the balance split evenly over the last three quarters.

Eric Serotta - Consumer Edge Research

Okay, and then lastly, clearly your categories seem to be benefiting now from the overall consumer environment and consumers realizing the value that canned provides and seeing some trade-down from higher end brands into more mainstream brands on the pet side.

I guess given some of the share losses that you have seen this quarter, and I realize that there were -- that part of it was attributable to timing differences, that part of it was attributable to timing differences and the timing of your merchandising plans, I guess what sort of gives you the confidence that the improved performance has been driven by an improved competitiveness by you versus the overall category just doing better, the overall categories?

Richard G. Wolford

Well, in terms -- I’m not quite sure, Eric -- and by the way, good morning -- if you are talking about our consumer business, we feel very good about the underlying health of that business. If you look at the categories, we see and the industry broadly sees very positive consumer trends to more eating at home. As we see that, we see very positive benefit for our vegetable and our tomato categories and being a share leader in those two categories, we believe we will continue to benefit. And as we see that taking place, we will -- and we see that taking place and we see our promotional activity continuing, we see our promotional activity leveraging that in the coming holidays, so when we look at our categories this year in consumer, vegetable and tomatoes are strongly tracking with consumer trend eating at home. Our share position in that will allow us to benefit and we think we will particularly benefit when you look at our holiday promotion and the resulting shares from that. Our base, as we look at our base business volumes, they look quite healthy.

The fruit business does not benefit precisely from the -- does not benefit from precisely the same trend. It is more snacking, more consumer, and that business we also expect to see positive performance as we address promotional programs that we have laid out in the holiday season, and we have those promotions, as I said, largely in place right now.

In terms of our pet categories, here also we see very strong trends and in those trends, we have seen our brands do quite well. One of the areas that there’s been expressed concern about was snacks and as indicated by the category, people are continuing to treat their pets and find -- and that category is responding to that ongoing consumer trend as well as to the advertising support that we and others are providing for the category.

So when we step back and look at the trends impacting our categories, we feel good. Pet ownership and the importance of pets and families is driving that category for us and our brands are benefiting from that.

When we look at our consumer business, the meals at home is a trend that we expect will continue. I think largely the industry believes it will continue for a significant period of time. That will also drive the majority of our consumer business and we believe that a branded product with the quality of Del Monte plays very well there. I think that’s one reason why we see the success that we expect to see with our promotional activity this coming holiday season, so we feel good about the trends that we see impacting our categories and we feel good about our products and our brands being able to play well against those trends.

Eric Serotta - Consumer Edge Research

Okay, I’ll pass it on. Good luck.

Operator

Your next question is from Reza Vahabzadeh.

Reza Vahabzadeh - Barclay's Capital

Just on the promotional environment, can you just comment on what the environment looks like sort of versus your expectations and what is your outlook for promotional intensity going forward in your various categories?

Richard G. Wolford

We see the promotional environment as being very positive from our point of view. Our products, if we look at consumer specifically, our products are very important. Our brand and our products are very important to driving center store growth during the holiday season. We believe that we have promotional programs in place with our major customers that they feel good about and that we feel good about and we believe that those will drive their business very importantly as well as ours and with that kind of expectation, we see that the programs we have deal well with the developing and emerging competitive environment and so our perspective would be that in the consumer business, promotional actions are very important for our customers, they are very important to driving traffic, they are very important for our customers to leverage the more meals at home trend that is, I mentioned earlier and we see our promotional activities working very well to drive our customers’ business and ours.

Reza Vahabzadeh - Barclay's Capital

But you are not seeing competition increase promotional levels or just discount more than they have in recent times?

Richard G. Wolford

Well, as I mentioned earlier, we have seen in the consumer business we have seen that with select customers using aggressive private label pricing levels, are part of what they are using to drive traffic and to meet their customers’ needs for value. And that’s part of what we have seen in 9 and we expect that to continue in fiscal ’10.

We have promotional programs of our own in terms of depth and frequency that also meet that need to provide value to our customers’ consumer and that program is -- we believe will work well in the second quarter and the holiday season.

Reza Vahabzadeh - Barclay's Capital

Got it, and then Dave, if I can --

Larry Bodner

Reza, we need to move on to the next caller, if we could.

Operator

Your next question is from Ann Gurkin.

Ann H. Gurkin - Davenport & Co. Of Virginia, Inc.

I was wondering if you could comment on the consumer product sales in the quarter -- was any of that due to launching new products?

Richard G. Wolford

We had some new product growth in Q1 and particularly in our children’s business as well as in packaged produce but the majority of it was driven by pricing.

Ann H. Gurkin - Davenport & Co. Of Virginia, Inc.

And the improvement in pet operating margin, what is your long-term objective for that operating margin in the pet segment?

Richard G. Wolford

As you know, we don’t provide OI margin guidance by business but in Q1, it was somewhat unique in that we benefited from aggressive pricing while at the same time, we realized year-over-year key cost inputs that were lower, so it was a unique situation but again, we don’t give guidance by segment or business.

Ann H. Gurkin - Davenport & Co. Of Virginia, Inc.

Okay, great. And then can you -- do you expect to keep the FY09 price increases intact for the full year of 2010?

Richard G. Wolford

Yes, we do and I think that we are well-passed the point of that being a risk. I think that what the most important thing for us to do going forward is making sure that our promotional programs work to drive our customers’ business as well as ours, and as I mentioned earlier, capitalizing on the positive trends in the consumer business, capitalizing on a promotional strategy that has been developed with our customers and addresses their frequency and depth needs and is incorporated into our guidance, we believe that we will be very successful at driving business.

Ann H. Gurkin - Davenport & Co. Of Virginia, Inc.

That’s great. Thank you.

Operator

Your next question is from Vincent Andrews.

Vincent Andrews - Morgan Stanley

My question would be with the year-over-year share losses accelerating sequentially, I mean, I know the IRI data but can you kind of help us from an all outlet perspective -- where is the share going? Is it purely going to private label or overall the outlets or some of the branding competitors also taking share from -- I guess that’s primarily related to consumer.

Richard G. Wolford

I think when you talk about share, first you have to talk about consumer and our pet business and I presume that your question is primarily on consumer, so let me address that. When we look at our vegetable and our tomato share -- well, our vegetable share is essentially flat quarter over quarter, down on an all outlet basis, down five-tenths of a point but it’s essentially flat during a period where we had virtually no vegetable promotional activity. If we look at our fruit business, there the share loss that we had in Q1 basically reflects price gap to private label. That also is a period where we have had very little promotional activity and as a result, as you would expect, our average price gap will widen. As we look at our holiday season and beyond with our consumer promotional programs that we have in place, that we have in the field, we see that average price gap narrowing and as that average price gap narrows, we expect to see shares to improve as we go through the year.

With tomatoes, in the tomato business is a combination of some good branded competition that we have with Hunt’s, as well as regional brands as well as private label, so that picture is a little bit more clouded. We do believe that as we look forward through the rest of this fiscal year with our promotional programs combined with our marketing support with our value without sacrifices, that we will see positive share momentum going through the entire year and we believe that the health, the underlying health of our business will support that building share progress and we believe that the promotional programs that we have in place will also deliver better share as we see the average price gap narrow on an all-outlet basis.

Vincent Andrews - Morgan Stanley

Okay. Thank you very much.

Operator

Your next question is from Bob Cummins.

Bob Cummins - Shields & Company

I have a little different kind of question -- obviously the company has come a long way in terms of not only improving profits but just generally strengthening the business, and I am wondering if you are beginning to think about resuming your acquisition efforts. Are there product lines and items in the consumer or the pet area that might be attractive to you, might be available? And beyond that, I wonder if there might be on the horizon somewhere the prospect of a third leg to your business.

Richard G. Wolford

Well, I think we are going to just focus on the current quarter, Bob. No, thank you for that question but I think, Bob, the great opportunity the company has is, as you know as well as anybody does, with all of the tracking you’ve done with the company, we’ve really worked hard to get our portfolio aligned with strong brands that are meaningful in all of the individual segments in which they play. The additions that we have made to our pet business with Meow Mix and Milk Bone have substantially increased the role that we play at meeting our customers’ needs in the pet category. And it’s a role that is -- one that is productive for the pet category overall. A lot of the competitive brands we see fill different consumer needs and so we look at our pet portfolio, believe we have strong brands, believe they play a role which is important in the category and one which builds the category overall in a strong underlying matter. When we look at our consumer business after having sold the Starkist business, we believe our earnings there are also at a level which we have much more control over and much more predictability. As we look forward to our future, we feel very good about building on this portfolio. We feel very good about the investments we’ve made to make the portfolio work better and we feel very good about our strategy, which is focusing on, as I said, pricing, investment of our core brands, and driving internal growth, organic growth with growth engines. So when we look at our future, the good thing is we can build on investments that we’ve made and we can be captain of our own future as a result.

M&A is always very opportunistic and it’s not included in our guidance and our focus at this company right now is to make sure we build on the pillars of strength that we’ve laid as a foundation for the company and focus hard on that, and have a good time doing it.

Bob Cummins - Shields & Company

Okay, thank you and I’ll see you soon.

Operator

Your next question is from Bryan Hunt.

Bryan Hunt - Wells Fargo Securities

I was wondering if you could talk about in general terms what is going on in the premium side of the business relative to discounting, as well as what your outlook is for your competitors’ promotional activity because it sounds like from what I am hearing from a lot of your competitors, there will be a significant amount of acceleration in their promotional dollar spend as well, and then I’ve got one follow-up. Thank you.

Richard G. Wolford

In regard to the competitor question, we have seen in our categories strong competitive actions in both consumer and pet over the last six to 12 months. We would anticipate that those -- and those actions, particularly in consumer, tend to be more aggressive than they have been in the past. We anticipate the competitive landscape to continue to be a very aggressive one and we’ve laid our plans accordingly. I don’t think that we would expect any greater increase in competitiveness than what we have already seen because we have seen some pretty tough competition out there.

We believe that we will be able to continue to deliver against that and as I said, we believe that that’s further reinforced by the fact that we have high confidence in the promotions we have in the field right now and the fact that they have been accepted by the market generally, which would imply that they are competitive. So we have them fielded and we expect positive results from them.

That was your competitive question. You had a first question -- what was that?

Bryan Hunt - Wells Fargo Securities

You can skip it -- here’s a more important question, in my opinion -- you know, looking at your ratings, both Moody’s S&P and [inaudible] raised their ratings in the last 12 months. One probably -- what is your opinion of your current ratings? Do you feel like there is some upside? And then second, what is really the trigger in your mind for a refinancing? I mean, your bonds are trading tight, the bank debt market, it looks like it is improving. Can you just give us an idea of maybe what the catalyst is for you to re-fi?

Richard G. Wolford

Well first of all, our ratings, we’re not in control of those. We figure our performance will speak for itself. We think our performance in F09 was excellent. We think our performance in the first quarter of F10 is excellent and we believe we will deliver a very robust F10, so we are very pleased with our performance.

In terms of refinancing, we evaluate all alternatives. We are obviously looking at the bank refinancing. I think our bank term A and revolver are due in February of 2011, so we’ve got plenty of time to figure out what the market is going to do and hopefully go into the market when it’s appropriate and when it’s beneficial to the company. We monitor that on an ongoing basis and when we think the time is right, then we’ll enter the market.

Larry Bodner

We need to move on to the next question, please.

Operator

Your next question is from Tim Ramey.

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

This may be venturing too far into pop psychology but with the at-home consumption trend, is that incrementally benefiting pet snacks? You only feed your dog twice a day no matter what but if you are at home, you might be using more pet snacks. What are you seeing there?

Richard G. Wolford

Well, even I haven’t thought about that as one of the drivers, Tim, but I think generally what we see with pet snacks, clearly we see and the entire industry sees more meals at home and that is a trend. We just had the annual GMA executive conference and that’s a trend that you see across the industry and it’s a very real trend and there are a lot of people who believe that that’s a behavioral change that will stay in place. In terms of -- for a significant period of time. And as I say, that’s benefiting our vegetable and our tomato market as people are looking to having high quality ingredients with a strong brand to provide a meal at home.

One of the behavioral elements that you always see is that when someone goes to the trouble of preparing a meal at home, they want to make sure that they can be proud of it and use ingredients that are high quality. That leads to a good opportunity for a branded business.

In terms of pet snacks, I think a big part of driving the pet snacks is the effective advertising that we have put I place with Pupperoni and a lot of the work that we are doing with Milk Bone. We would anticipate doing more of that.

I also believe that a pure behavioral standpoint that in today’s world, treating your pet is a pretty good way to have an awful lot of self-reward when the rest of the world looks pretty bleak. The response of a pet with one of our snacks makes it seem a lot less bleak and so I think it’s a continuation of the humanization of pets and an increasing role that pets play in our families and it is a place where you can have a lot of enjoyment for a very low cost.

Larry Bodner

We need to move on to the next caller, please.

Operator

Your next question is from Eric Serotta.

Eric Serotta - Consumer Edge Research

Just two quick follow-ups -- one in terms of your -- Dave, has there been any change in your assumption regarding the impact of refinancing? I seem to remember that you had included the impact of issuing a high-yield note in fiscal 2010 in your guidance previously. Is that included in the guidance today?

David L. Meyers

No, we included -- we originally included an increase in interest expense thinking that we needed to replace some of our term D with a bond. We now believe the bank market will be much more receptive to refinancing our entire existing bank loan in the bank market so we don’t believe we have to replace bank loan with bond.

Eric Serotta - Consumer Edge Research

Okay.

Larry Bodner

Eric, we need to move on. We have one more caller. We want to get it in within the hour.

Operator

Thank you. Our final question today is from Reza Vahabzadeh.

Reza Vahabzadeh - Barclay's Capital

On the cost front, Dave, it sounds like at this point in time, you have pretty good visibility on your input costs, either [inaudible], raw products, or [have hedged what you can hedge]. Is that accurate?

David L. Meyers

That is correct.

Reza Vahabzadeh - Barclay's Capital

And so what is open? What is -- what can change from now on?

David L. Meyers

Well, I think the biggest issue is probably what diesel is going to do in the future. We’re pretty comfortable on the balance of our cash. Also some of the cash commodities that were totally not hedged, I think I said we were hedged 60%. Some of those cash commodities in grains, depending on what they do in the next six months but again, we’re feeling pretty comfortable right now.

Reza Vahabzadeh - Barclay's Capital

Thank you.

Larry Bodner

Thank you, Reza.

Richard G. Wolford

Okay, well, thank you all very much for attending the call this morning. We certainly appreciate your interest in the company and we look forward to speaking with you next quarter if we don’t see you between now and then. Thank you very much.

Operator

Thank you. This concludes today’s conference. Thank you for participating. You may disconnect at this time.

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Source: Del Monte Foods F1Q10 (Qtr End 8/2/09) Earnings Call Transcript
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