Del Monte Foods Co. F3Q08 (Qtr End 01/27/08) Earnings Call Transcript

Del Monte Foods Co. (DLM)

F3Q08 (Qtr End 01/27/08) Earnings Call

February 28, 2008 10:00 am ET

Executives

Larry Bodner - SVP Finance and IR

Rick Wolford - Chairman and CEO

Dave Meyers - CFO

Analysts

Reza Vahabzadeh - Lehman Brothers

Jonathan Feeney - Wachovia Securities

Ken Goldman - Bear Stearns

Vincent Andrews - Morgan Stanley

Grencha Montgomery - Deutsche Bank

Ann Gurkin - Davenport & Co.

Bob Cummins - Shields & Company

Robert Moskow - Credit Suisse

Farha Aslam - Stephens

Tim Ramey - D. A. Davidson

Presentation

Operator

Good morning and welcome and thank you for joining Del Monte Foods Company's third quarter fiscal 2008 Earnings Call. (Operator Instructions)

Now I will turn the call over to Larry Bodner, Senior Vice President Finance and Investor Relations, Del Monte Foods. Thank you. You may begin.

Larry Bodner

Good morning everyone. Thank you for joining us for Del Monte Foods fiscal 2008 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 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. 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 grocery share data we will talk about today is for the 13 weeks ended January 26, 2008. In some cases, we will discuss all outlet share data which are internal estimates based on Nielsen all-outlet data. Additional grocery share 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.

Rick Wolford

Good morning, everyone, and thank you, Larry. Q3 reflected solid top-line growth, underscoring the continued progress that we are making in the marketplace. Cost increases continue to pressure margins.

In Q3, we delivered solid double-digit top-line growth with both our consumer and pet businesses contributing. The 10% growth in top-line reflects sound fundamentals. It was fueled by strong volume growth, solid performance from new products and as well from strong share performance.

The full benefit from the top-line growth was impacted by continued cost pressures, primarily from higher pet ingredient and fish costs.

The company delivered GAAP EPS of $0.26 at the high end of its guidance range. This quarter's top-line growth was driven by three contributing factors. First, our positive revenue trends reflect continued share strength even with the pricing actions that we've taken across the portfolio.

In Q3, we saw strong all-outlet shares gains in pet, vegetables, fruits and seafood, which collectively represents approximately 90% of our business. As well, we are pleased with our merchandising and promotional results during the quarter which contributed to our top-line sales.

Finally, and importantly, new consumer and pet product innovations primarily focused on higher growth categories also contributed to Q3 top-line and share strength performance. We must address margin pressures and we remain squarely focused on the cost issue.

Our cost reduction and transformation efforts are central to our operations and we continue to successfully execute against our VIP program.

We are on track to capture $70 million in cost savings by the end of fiscal '08. We also continue to successfully implement our transformation plan, which remains on budget and on schedule to drive the $40 million in run rate transformation savings by the end of fiscal '08.

Pricing actions are a critical lever required to offset rising costs. In consumer, we lead pricing with our branded leadership. And in fruit, vegetable and tomatoes collectively, we expect pricing to fully offset costs in fiscal 2008.

During this quarter, we have announced and implemented vegetable and tomato pricing actions and earlier this week announced a 4.5% average price increase in fruit which will be effective in the first quarter of the next fiscal year.

In seafood, as we have discussed the extreme increase in fish costs has outpaced the categories ability to match with price increases.

And turning to Pet, in Pet the industry and Del Monte have progressively priced to combat escalating costs of grains, fats and oils. However, commodity cost increases have outpaced industry pricing actions in fiscal '08.

In Q3, we announced a second round of pricing in pet food and snacks of 4% which will be effective in the fourth quarter, in the category where players usually only take pricing once a year.

Very importantly, year-to-date, we have announced pricing across approximately 70% of our portfolio.

In sum, Del Monte remains committed to accelerate top-line growth, drive cost out of all aspects of our company and to implement aggressive pricing actions required to offset higher costs.

Further, we remain confident in our ability to generate strong cash flow and to realize its value potential for the company. In Q3, we utilized our strong cash flow to repurchase shares of our stock under our three-year $200 million share repurchase authorization.

Now let me turn to our Consumer Products business. Here net sales were up over 13%, as every business posted higher year-on-year sales including StarKist seafood. The strong sales increase was due primarily to another outstanding quarter in fruit, which accounted for about half the gain and strong performance from vegetables. Third quarter operating income increased 25%.

Strong top-line results overcame higher fish costs and as well we benefited from the gain on the sale of S&W trademark in the Eastern Hemisphere. In the third quarter, fruit sales were driven by strong performance across all major segments including single serve and produce. As we have discussed, fruit is a key strategic source of growth for our consumer business.

It's a category in which we have a branded leadership role and one that we believe benefit strongly from the powerful health and wellness consumer trend.

During the quarter, group performance reflected the strength of new products, well received Thanksgiving and holiday promotional activities and as well higher non-retail volume due to full pitch supply.

Also contributing to year-over-year sales increase was lower fruit volume in Q3 of '07 as customers had worked off inventory from our Q2 '07 price increase.

New products, including single serve, no sugar added fruit items and fruit natural line extensions, contributed to sales growth. Our Packaged Produce business, which includes Fruit Naturals and which we believe provide significant growth opportunities, has delivered strong growth performance, which continued in Q3 as it demonstrated very solid double-digit growth.

Vegetable sales were strong across all major channels and reflected strong share gains. Solid price gap management, promotional activities and a buy-forward in advance of Mid-January price increase also contributed to our net sales growth.

In seafood, strong performance in value-added pouch and specialty led to positive year-over-year sales growth for the first time in six quarters.

Operating income from our overall consumer business was negatively impacted by cost pressures primarily in fish as average skipjack prices remained as we previously discussed elevated during Q3 and year-over-year represent an increase of approximately 70%.

In addition, Consumer Products experienced higher logistics costs, primarily related to diesel as well as higher year-over-year raw product costs associated with the increased demand for alternative fuels.

As we assess the overall Consumer Products business health and performance in the marketplace, it is important to note that year-to-date we have not seen consumers trade down to private label in response to higher price points. This is evidenced largely by our share results and as well by pricing elasticity levels which are consistent with our expectations.

Turning to StarKist, Del Monte continues to address the unique aspects of seafood which is a business model distinct from the rest of our portfolio. The seafood team did a great job this quarter to maximize performance given the input cost issues and to enhance the long-term strength and value of the business.

During Q3, we saw improving top-line trends and we continue to believe that we have a strategy in place to reap margin benefits from anticipated fish costs moderation in the long-term.

Now, looking Consumer Products fourth quarter for fiscal 2008, the top-line, we anticipate moderate growth. We expect another strong quarter of fruit sales, benefiting from strong base volume, innovation, and as well a customer buy-forward ahead of our April price increase.

We anticipate some softness in vegetables, reflecting customers having bought-forward in advance of our Mid-January price increase and as well Q3-Q4 promotional timing shifts, as Q4 Consumer Products operating income is expected to post moderate growth, driven by the increased top-line, the continued benefit of pricing actions and the absence of Pacer arbitration results from the prior year. These gains should more than offset continued cost pressure from fish and logistics.

Now turning to Pet Products, I am pleased with the Q3 top-line growth of 5.6% which reflects healthy Pet business fundamentals including continued momentum of new products and ongoing positive category trends. While Pet top-line performance was solid, operating income declined 10% as expected. The Pet business was impacted by ingredient-related cost pressures.

At the top-line, Pet benefited by a positive share performance across our portfolio, with all-outlet shares up in seven out of eight categories. Growth also reflected effective merchandising activity and important new product growth during the quarter.

Contribution to top-line was performance acceleration of Meow Mix and Milk-Bone over prior year. Combined, they represent 40% of our Pet portfolio and both were strong net sales contributors during the quarter.

Milk-Bone, in particular, is starting to see the momentum of our increased investments in the Milk-Bone SteakChew, new products introduction and expanded distribution.

Turning to Meow Mix, here we're extremely pleased with the performance of our base Meow Mix product line as well as January introduction of new flavor extensions of Market Select Cups which target the high growth, high margin premium Wet Cat market. In January, we launched Meow Mix Wholesome Goodness dry cat food which leverages the Meow Mix brand equity with a simpler ingredient focus.

Innovation in the Pet category is fundamental to current and longer-term competitive performance. During Q3, we benefited not only Meow Mix and Milk-Bone innovation but as well from successful new product growth across our strategic focus categories, particularly dry pet and snacks.

In Dry Pet, 9Lives Daily Essentials continue to perform well during the quarter. In January, we launched Kibbles ‘n Bits Wholesome Medleys. Also in January, in our Pet Snack category, we had some important snack introductions as well. These included Pup-Peroni 50 Calorie Pack and a repositioned Jerky Treat product line, both of which are driving positive volume.

Higher input costs, however, negatively impacted our Pet Product's operating results, as higher commodity driven ingredient costs have outpaced the industry's pricing actions response. We and others in the industry took a second round of pricing across the pet portfolio effective February 2008.

Looking at our fourth quarter, we expect pet products top-line results to increase double-digit, reflecting healthy pet business fundamentals, continued momentum of new products and a continued strong performance of Meow Mix and Milk Bone.

In addition, the top-line is expected to reflect solid category and Del Monte performance absent the negative impact of prior year's Pet Food Recall.

Turning to operating income, we expect the pet business to significantly grow operating income as volume growth, pricing, and the absence of the prior year Recall cost and Pacer arbitration result more than offset higher costs.

Now I would like to hand this over to Dave.

Dave Meyers

Thank you. In Q3, we delivered very strong top-line growth of 10.4% which exceeded our expected range. Consumer Products delivered stronger than anticipated results, primarily in vegetables due to stronger than anticipated promotional lifts and the narrowing of competitive price gaps.

In addition, we continue to gain market share in fruit. Pet Products net sales also reflected stronger than expected growth behind stronger promotional lifts in dry pet food as competition pulled back on promotional activity.

We are pleased with our EPS of $0.26 which compares to our guidance range of $0.22 to $0.26 as very strong volume tampered the impact of higher cost.

Looking at the 10.4% increase in year-over-year net sales, base unit volume growth driven by fruit, vegetables, pet food and seafood contributed 9.5 points. Volume growth in new products particularly in pet food and fruit, as well as price increases contributed 1.9 and 1.4 points respectively, which was partially offset by 2.4 points of pricing related volume elasticity and other spending.

Gross margin for the quarter was 25.3%, a decrease of 2.6 points versus last year. Cost increases drove a 3-point reduction in gross margins with increases in grains, fats, and oil as well as fish accounting for 2.5 points of the total. Net pricing reflects a negative 0.3 points which includes an increase in trade spending of 1.3 points and pricing actions of 1 point. Volume mix drove a 0.7 point margin improvement.

Looking at nine months to-date, you can see the same factors. Namely, that gross margin is down 1.8 points versus last year, cost increases impacted gross margin by 2.5 points, net pricing reflects a positive 0.4 points which includes an increase in trade spending of 1 point and pricing actions of 1.4 points. Volume mix contributed 0.3 points.

For context, we establish our pricing actions to reflect the future cost expectations at the time, coupled with the competitive environment, particularly where we are price followers in parts of the pet business.

Given the historically unprecedented pace of commodity cost escalation, in both directly hedgeable as well as other related ingredients, costs have outpaced our pricing actions recently in pet.

On pet, for example, soybean meal has increased 28% over the last three months since we set pet pricing. Further, soybean meal has increased 10% over the last month with minimal change in total acreage or weather expectations.

Looking at F09, broadly, in Consumer Products excluding seafood, we anticipate our pricing actions to largely cover projected cost increases. In Pet, we had expected our February 2008 pricing actions to begin to get pricing and cost back into equilibrium.

However, the seemingly unending spike in commodities will be a challenge as we look into F09. We will continue to assess this industry dynamics to determine the feasibility, the magnitude and timing of additional pricing where we are the price leader in snacks and price follower in Pet food.

Turning back to Q3, operating income increased 8%, while operating margins decreased by 0.3 points. Gross profit was flat with lowered SG&A driving the increase in operating income. The $8 million SG&A reduction was driven by the $10 million gain on the sale of the S&W trademark for the Eastern Hemisphere and absence of integration expenses, partially offset by higher energy driven customer deliver cost.

Marketing spending was flat year-over-year as we shifted funds to tactical trade programs.

Interest expense in the quarter decreased $3 million, primarily due to lower rates versus last year.

GAAP EPS from continuing operations of $0.26 included $0.02 of transformation, compared to $0.22 a year ago, which included $0.04 of transformation, integration and purchase accounting.

A very strong net sales growth, our pricing actions, lower SG&A and lower interest in common shares outstanding were partially offset by higher operating cost and higher trade spending.

During the third quarter, we spent $21 million on capital projects versus $17 million a year ago. We incurred $27 million in depreciation and amortization costs, which included $1 million of fee amortization included in interest expense.

On a year-to-date basis, operating cash flow was zero versus a positive $20 million a year ago. The decrease in operating cash flow is primarily driven by incremental pension funding which is not expected to recur in future years as well as higher inventories driven by higher costs as well as better fruit yields and a very good tomato harvest partially offset by favorable timing of collections from receivables.

Now I'd like to discuss guidance for fiscal 2008. We are expecting our sales growth to be 7% to 9% an increase versus our previous guidance of 5% to 7%. The higher top-line expectations reflect a very strong performance during the Thanksgiving and holiday promotional periods in Q3 as well as expected continued strength in Q4.

From an operating cost perspective, we are increasing our estimated gross cost increases to be approximately $185 million, up $15 million from our estimate at the end of Q2 and up $75 million from the start of the fiscal year, driven primarily by fish, commodities, fats and oils.

While the incremental $15 million in cost headwinds is challenging, we are pleased with our marketplace performance which is driving us to increase our expected net sales growth, which, in turn, is expected to offset these incremental costs.

As a result, we are reiterating our fiscal 2008 EPS from continuing operations of $0.64 to $0.68 including $0.08 for transformation costs. To reflect the higher operating costs, we are reducing our gross margin guidance to 24.5% to 25.5% from the previous guidance of 25.2% to 26.2%. In addition, operating margin is now expected to be between 9% and 10% versus the previous guidance of 9.5% to 10.5%. The rest of our fiscal 2008 guidance remains the same.

As you can see on slide 16 including our cash flow guidance of $180 to $200 million, as you know we typically generate the vast majority of our cash flow in our fourth quarter. Looking at last year, for example, we generated approximately $170 million of cash flow in Q4. Relative to last year's Q4 results, we expect to generate higher Q4 EPS and realized favorable timing of tax payments. Net, we reiterate our expected $180 million to $200 million of cash flow for fiscal 2008.

Looking at cost in more detail, we continue to grapple with higher gross operational cost increases, up about $185 million for the year, up from the $170 million provided in our previous guidance. The $15 million increase is driven by commodity and fat costs, higher logistics and higher fish costs and other ingredient costs.

The higher commodity and fat costs are primarily due to higher dry pet food annual sales, which require unanticipated spot purchases in a rapidly accelerating market. On Fish, skipjack cost did moderate in Q3 and tracked very close to our expectations.

As we purchase most of our fish for Q4 during Q3, the impact of the higher current market cost has a more moderate impact on Q4 financial results as mentioned on our Q2 conference call. Accordingly, we expect to be roughly in line with our prior Q4 guidance.

To provide some perspective on the magnitude of the increase in market prices, our F08 fish purchases correspond to an approximate $50 million year-over-year increase.

I will now walk you through our guidance for Q4 fiscal 2008. We expect sales to increase 6% to 8% compared to Q4 last year, based on drivers already covered by Rick.

Importantly, we expect lower levels of promotional spending relative to prior year's across the portfolio. This reflects continued baseline volume momentum across key businesses, strong anticipated new product performance and distribution gains in key businesses.

Gross margin is anticipated to be between 24% and 25% versus 25.2% last year, driven primarily by higher grains, fats and oils, fish costs and higher diesel prices, partially offset by pricing. Inflationary costs increases will be particularly acute in our Pet business.

Operating margin is expected to be between 10% and 11% including 1 point of transformation cost. We expect to realize transformation expenses of approximately $12 million. We expect interest expense to be between $32 million and $36 million versus $39 million last year. This lower interest expense is expected to be driven by lower rates and lower average debt levels.

Our tax rate for Q4 is expected to be between 34% and 36%. Our Q4 reported EPS from continuing operation is expected to be in the range of $0.23 to $0.27 and includes approximately $0.04 of transformation-related expenses. We reported EPS from continuing operations of $0.18 in Q4 a year ago, including $0.04 of transformation, integration and purchase accounting.

Capital expenditures in Q4 are expected to be between $37 million and $41 million versus $44 million a year ago. Depreciation and amortization is expected to be between $26 million and $28 million. This includes approximately $1 million of amortization for financing fees which is expected to be included in interest expense.

In order to facilitate understanding of the anticipated year-over-year increase in Q4 GAAP EPS, I wanted to provide more texture on key drivers. First, Q4 should benefit by approximately $0.03 due to the absence of the Pet Products Recall and Pacer arbitration which occurred in Q4 F07, as well as from insurance proceeds anticipated in Q4 F08 related to the Pet Product Recall.

Second, we anticipate higher EPS from solid net sales growth with better mix, lower levels of promotional spending, impact of incremental pricing actions and relatively flat overhead cost, which collectively will more than offset higher operational cost.

Finally, we expect lower interest expense and lower common share count to offset a higher tax rate. Net, we believe the building blocks are in place for us to deliver our year-over-year increase in Q4 EPS.

Rick Wolford

Thank you, Dave. To conclude, our brands continue to performance well in the marketplace demonstrated by strong top-line growth and continued all-outlet share gains. Importantly to support current business and to build future strength, we continue to improve our innovation capabilities and our flow of new products to our consumers. This brand-based market performance has supported the pricing actions that we've outlined.

We will continue to build on our market-based progress and to respond to the unprecedented cost pressures with aggressive pricing, strong productivity and transformation cost savings.

Over the longer-term, we expect these actions supported by the strength of our brands and a very positive category dynamics for both our Consumer and Pet business to successfully combat margin pressures, improve overall profitability and to drive cash flow.

Importantly, we will continue to create value through our cash flow generation capabilities as demonstrated by our share buyback program and dividend.

With that, I'd like to thank you for joining us this morning. And we certainly now will be happy to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Reza Vahabzadeh with Lehman Brothers. Your line is open.

Reza Vahabzadeh - Lehman Brothers

Good morning.

Rick Wolford

Good morning Reza, how are you?

Reza Vahabzadeh - Lehman Brothers

Good, thank you. You mentioned that you haven't seen a consumer trade down so far. Have you seen any change moderation or intensification in competitive and promotional activity versus prior expectations of preceding quarters?

Rick Wolford

We certainly haven't seen any of that in our consumer business at all. Q3 demonstrated certainly a certain lower level on the year-over-year basis in Pet, but we believe that is more a timing of promotional activity rather than any definite trend. So, we see little evidence of reduced promotional activity.

Reza Vahabzadeh - Lehman Brothers

Okay. And then Dave, price impact to gross margin in this quarter seem to be actually slight negative, and I am sorry I didn't make your comment. Was that offset with higher pricing offset by higher promotions?

Dave Meyers

Yes.

Reza Vahabzadeh - Lehman Brothers

Okay. And is that going to be, was that just a one quarter event, or is that a continuing development?

Rick Wolford

No, we see Q4 as I said in the context of my speech here that promotional activity will be reduced in Q4.

Reza Vahabzadeh - Lehman Brothers

Got it. And then as far as uses of free cash?

Rick Wolford

Reza, just one amplification on that. The pricing that we are talking about, the trade promotional activity, that we are talking about in Dave's comments. Those trade promotional activities are normal, ongoing promotional activity a key part of driving the top-line for this company.

The pricing, we do not associate with the pricing that was also included in that bucket, and it reflects strong holiday activity in Q3 of full supply of fruit as well as very aggressive new products support that we had in Q3 when you look at that trade promotional number for Q3. So all knows that we are factored driving trade promo in Q3, a number of those will be absent in Q4.

Reza Vahabzadeh - Lehman Brothers

I appreciate it. My last question is, in terms of uses of free cash flow, are we still looking at a third for share repurchases, third dividends and third debt repayment?

Dave Meyers

I think what we have said is our objective is to obviously with the use of free cash flow is to continue to do the dividend based on obviously Board approval. Look at our $200 million of share repurchase over a three-year period and then debt reduction.

Reza Vahabzadeh - Lehman Brothers

Thank you.

Larry Bodner

Next caller please.

Operator

Next caller is Jonathan Feeney with Wachovia Securities. Sir, your line is open.

Jonathan Feeney - Wachovia Securities

Good Morning and thank you.

Rick Wolford

Good morning, how are you?

Jonathan Feeney - Wachovia Securities

I am just great. Rick, could you estimate, I want to know how you estimate the elasticity impact or in fact Dave in your presentation you said you have added 2.5 points of elasticity. Where do you get the doubt to sort of calculate that?

Rick Wolford

I am not sure, I mentioned the 2.5% number, but basically our elasticity models are models that come out of Nielsen. They are fairly standard in the industry and we use our historical data with Nielsen as well as our own proprietary assessment of that to really customize it to our own categories.

The pricing that we have taken over the last two years in both Consumer and Pet, we have been very pleased with the accuracy of those models and they are different for each one of our categories. And they have met the essentially the expectations.

We based our pricing on those. As we have said before, the pricing impact of all of our actions over the last couple of years has been very positive to our bottom-line and takes into account the elasticity. Broadly speaking, if you look at elasticity in our categories, that will tend to modify somewhat as you have more and more players in the category taking pricing which has been the case in our categories in recent times.

And I think that that elasticity factor is impacted by that. And from our point of view, that's a positive impact. I think the other component when you think about elasticity across our categories, as I said it is very important to look at them on a business segment by business segment basis, where we do use different elasticity factors or let's say net, net they've all been pretty on target and what we expected.

I think if you look at it from a validation perspective on that Jon, you probably won't look at our share gains, and as well as the brand health and our ability to price and the pricing we've taken and the share gains that we've realized which I think is somewhat of a tangible and fairly good external perspective on the fact that these models work as we expected them to.

But the elasticity is from our point of view well anticipated and performing within bounds that we expected.

Larry Bodner

Tom, we need to move on the next caller to make sure we get everyone in. Thank you for you questions.

Jonathan Feeney - Wachovia Securities

Thank you

Operator

Next question comes from Ken Goldman with Bear Stearns. Your line is open.

Ken Goldman - Bear Stearns

Good morning

Rick Wolford

Hello, Ken, how are you?

Ken Goldman - Bear Stearns

Doing well.

Rick Wolford

Good.

Ken Goldman - Bear Stearns

Question, I realize you're not giving guidance on fiscal '09 yet, but one way of looking at it is that maybe sales flattened up because all other acquisitions have left, they should be positive but maybe not as much as '08. Gross margin looks like it will be pressured by cost again. So much of the earnings growth could come from non-operational items, debt pay down and share buyback. Is that the correct way of looking at it for next year? Or is there something else that we should maybe point ourselves to it?

Rick Wolford

Well, the one thing I would consider and we don't want to get too much into '09 discussion here because to do that we are fully focused on it. But I don't think that you could really look at our sales in Q3 and what we expect in a full fiscal year of '08 and anticipate that we would have flat sales in the following year. So I think we believe that.

Ken Goldman - Bear Stearns

Not flat but flatter.

Rick Wolford

Well as I just said we don't to get into discussions of '09 guidance number, but certainly we expect to continue. We believe that the drivers reflecting our top-line growth are positive drivers. We believe that they are drivers and we will continue to focus on and grow.

Innovation, strong promotional activity, strong share performance and as well our categories, our strong categories, our pet categories continues to demonstrate positive growth, 40% of our revenues in that category and as well in the consumer business. We've got -- those categories are more mature. They don't have the same rapid growth, that Pet does, but they have solid performance.

And as we look across our consumer business, we look at the fruit category and see growth potential there. So when we look forward, we look at positive categories and working in. We look at positive new product developments that we have in the pipeline. We look at our ability to compete in our categories and we would point to the experience this year and say we think we've got a strong position in our marketplace with our brands and would expect that to continue in terms of the top-line.

In terms of the gross margin earnings, Dave, I know you have something to add within the context, you can talk about '09.

Dave Meyers

Again, we will provide that guidance at our next conference call, but I think it will be a combination of what Rick said as well as debt pay down and share repurchase, so it will be a combination of top-line and what I just said.

Larry Bodner

Ken, thanks for your question and we will move on to the next caller.

Operator

Next caller is Vincent Andrews with Morgan Stanley. Sir your line is open.

Vincent Andrews - Morgan Stanley

Thank you very much. Good morning everybody.

Rick Wolford

How are you doing?

Vincent Andrews - Morgan Stanley

Good. I might have missed it, but did you actually quantify the exact skipjack cost in the quarter?

Rick Wolford

No, we didn't.

Vincent Andrews - Morgan Stanley

Okay. You gave a nice outline of how you think costs are going to play out in fiscal '09 based on where we are today. But you said ex-fish costs, I am just curious if you have any thoughts on fish costs? Or any just kind of update on what's going on from a macro perspective in the skipjack environment, whether its catch rates or what have you or how different oceans have improved versus others?

Rick Wolford

Yeah. I will give you sort of general comment about the catch rates as a general comment, Vince we see prices right now are higher than we expected and they remain higher because the catch rates in the Indian Ocean as well as Eastern Tropical Pacific had not picked up at the same rate that historically had after a slow period.

If you step back and you look at the conditions as we see right now, the Western Tropical Pacific is strong, has strong performance in catch rates, or average to strong closing months of '07. They were actually strong in terms of categorization. We see strengthening catch rates taking place in the Eastern Tropical Pacific as well and still slow catch rates in the Indian Ocean.

So, a general improvement over where the catch rates worldwide have been, and we would hope that trend would continue to improve. They said no body is viewing any of the catch rate issues, the sustainability issues. They are looking at more as cyclical trends. If you look at pricing today and what the issue is, with our pricing today, while you are seeing catch rate improvements taking place in fisheries, you got the industry still needing to catch up with its finished goods inventory.

The extreme shortage that took place at all three fisheries at one time depleted the worldwide inventory for the inter-tuna category, and that inventory level needs to be built backup. And when you do that, is with one or two of these fisheries really having very strong catch rate performance over a period of time to sort of replenish inventory levels.

And as that takes place, we would expect to see significant moderation of cost returning to the ranges as we have said before, we would expect them to return to ranges that are more consistent with history than the last 12 to 18 months have been.

So top-line, fishing rates have improved and very much so in the Western Tropical Pacific to actually being quite strong at the end of the calendar year. They are strong in the Eastern Tropical, and have recently picked up there. And in the Indian Ocean, they are still soft, and the inventory levels in the worldwide tuna market are low, and that is a primary factor given that catch rate background it is impacting fish costs.

Larry Bodner

Vince, thanks for you question. We will move on to the next caller.

Operator

Thank you. Next caller is [Grencha Montgomery] with Deutsche Bank.

Grencha Montgomery - Deutsche Bank

Good Morning, everyone.

Rick Wolford

Good morning and how are you?

Grencha Montgomery - Deutsche Bank

I am doing well. There has been a lot of media speculation recently about the StarKist business. And I was just wondering if you could tell us what your long-term strategic plans are with respect to that business?

Rick Wolford

Yeah. We don't comment on those kinds of stories. And I think as you can see from our discussion, we are pleased with the kind of progress the team is making and building that business. We've got a great group of fellas and gals who are working on that business and doing a nice job, that is driving strong top-line growth.

They have some very effective executional actions in place. They are delivering on the strategies, strategic objective that they set out. Two very important ones of those are pouch improvement and specialty improvement. Those are high margin businesses for us in the tuna category. We are test marketing some new products in both the club as well as in regional grocery markets.

The regional grocery markets reflect a value-add products similar to the European model. And so far we had positive reactions to those. So, they have a very strong team running that business. They have made some real progress in terms of execution in the marketplace and are implementing a strategy that is building the strength of that business and the value of that business and we are pleased with it.

Grencha Montgomery - Deutsche Bank

Okay. Thank you.

Operator

Our next question comes from Ann Gurkin with Davenport & Co.

Ann Gurkin - Davenport & Co.

Good morning.

Rick Wolford

Hello.

Ann Gurkin - Davenport & Co.

Questions of the pet food business, prices went up effective February, did you price to protect retailers and are you able to get prices through more aggressively on certain Pet channel versus others?

And then secondly, what's the likelihood that Del Monte will raise prices across the good percentage of its portfolio in the back half of calendar 2008?

Rick Wolford

Well, I guess, the first point is that we increase prices and we increase prices in a standard way in terms of making sure that we do it to have standard professional manner consistent with the industry, consistent with our practices. We increase price cost channels as you would anticipate. In terms of any pricing actions in the back of calendar '08, that I think didn't impact our '09 guidance.

Dave Meyers

We will provide that next quarter.

Rick Wolford

And as Dave is reminding me, he will provide that next quarter.

Ann Gurkin - Davenport & Co.

Okay, thank you.

Operator

Our next question is from Bob Cummins with Shields & Company. Your line is open.

Bob Cummins - Shields & Company

Thank you very much and good morning everybody.

Rick Wolford

Hi, Bob, good morning.

Bob Cummins - Shields & Company

First, I want to be sure that you have 200 fish families on my desk waiting to be eaten at lunch time, so I am doing my part for your business.

Rick Wolford

We appreciate the 200 fish families and if you could please incorporate it into your dinner at home that would make.

Bob Cummins - Shields & Company

Secondly on the Pet Products here again, I wonder if you could shed a little light on the behavior of your chief competitors there in the difficult environment. So you are having an unusual situation because one of those competitors is European based and presumably suffering in addition from the weak dollar, and the other doesn't report any numbers at all because they are private company. Do they seem to be responding to these costs in a rational way, or is there an issue there?

Rick Wolford

I think Bob that, one I think that the industry itself is a brand-based industry with some pretty responsible action and if you look over the last 5 to 10 years, and so I think that is history in the category in the market. It's something that we would anticipate continuing.

It is an industry that where the only people have to talk about this publicly and specifically. And so that creates a certain unique situation from our point of view and I suspect from an investors perspective. But at its foundation, a rational brand-based business and we would anticipate that over time, we will continue to operate in that regard.

When you look at the drivers of the business, it tends to be innovation, it tends to be brand-based actions. But importantly I think if you look at the cost challenges of the industry that we have and the industry has right now, those are challenges not only of the absolute cost of commodity levels, but also this rapid, rapid rise.

I think that when anybody looks at soybean meal market which is one of our major purchases and looks as a 10% increase are no news over four weeks. That would certainly imply a certain amount of specular product in the competitive markets.

At the very at least it demonstrates a rapid, rapid increase which is likely not at increased rate, sustainable over for a prolong period of time. And the industry need to meet the challenges of rapid increase in the cost rate, but at the same time over time I suspect that I would believe that the industry will return to its historic performance and meet its margin objectives and that would be our expectations.

I think we believe that we will be operating in a higher cost environment. I think we believe that commodities, fuel, and grain based commodities are going to stay at a higher level. We are making all of our plans accordingly. We are looking at our future strategy, believing we have to deal in this higher cost environment. We are going to meet that challenge, but what we don't expect is that you will have repeated period of time where we have commodity running up as I say at 10% increases over four weeks with no news.

Bob Cummins - Shields & Company

Okay. Thank you.

Rick Wolford

Thank you, Bob.

Operator

Our next question is from Robert Moskow with Credit Suisse. Sir, your line is open.

Robert Moskow - Credit Suisse

Hi, thank you. A question about pet snack, I was wondering you described yourselves as the snack, pet snack leader and that will determine how you set your pricing. Do you think that there is more elasticity in pet snacks with respect to pricing just because it seems more like kind of an impulse buy? And then secondly, could you took a look slide number 24, it says that your pet snack market share is 5.7%, I seem to remember it being at, the share is a lot higher than that?

Rick Wolford

Yeah, a couple of points. One in terms of the share itself, this is Nielsen and it doesn't reflect all-outlet share, but half of our business is in non-measured channel. So to get the clear picture, it isn't all-outlet market and that is one where we do see growth.

The point I would make there in terms of our pet snack business on slide 24, that softness, 5.5% versus 5.7% on a quarter actually reflects an offset in terms of the pet, dog treats where we have strong performance and cat treats where we've had a slightly weaker performance.

Robert Moskow - Credit Suisse

Rick, is this slide reflective of your true market share, 5.7% in pet snack?

Rick Wolford

No, not, and I am not sure exactly what the number is.

Robert Moskow - Credit Suisse

I think it is in the 30s, isn’t it?

Rick Wolford

Yeah, it's in the mid-30s. Exactly, it's in the mid-30s and substantially higher than our, it's around 35.

Robert Moskow - Credit Suisse

Could you please reissue the slide for us, with correct numbers?

Rick Wolford

We will reissue the slide for you for sure, it's in the mid-30s and by way of comparison if you look at the number compared to the following individual, following company would be 10 points lower than that. So our share performance is substantially high. But in all-outlet basis, this number not being an accurate one, we are up year-over-year in that category.

Robert Moskow - Credit Suisse

Move on to the elasticity part of it. Do you think that there is more elasticity in this category because this is an impulse purchase?

Rick Wolford

We may see a little bit more in the category, but I don't think it is something that we believe is an extreme. I will put this way, in terms of elasticity; we've incorporated that in all of our pricing expectations and believe that we have the strong pricing power there which has been demonstrated in our recent experience.

In terms of issues of the category in light of an inflationary environment, we have not had evidence in prior slowdown of the pet snack category softening. It clearly is more of an impulse items in foods. Food is really an obligation for your pet, not much of an alternative getting around it with the exception that we do see some decline in wet dog as a reflection of the Recall where they don't amplify or supplement the dry feed as much as they are used to.

But food on the whole is a stable requirement, snacks a little bit more discretionary but historically the category has not seen any real reflection in recessionary times in terms of slowdowns. But certainly something we'll keep a close eye on as we go forward.

Larry Bodner

Rob, we need to move on the next caller to get the rest of the folks in.

Robert Moskow - Credit Suisse

Thank you.

Rick Wolford

Thank you, Rob.

Operator

Our next caller is from [Eric Gatleb] with Stephens. Sir, your line is open.

Farha Aslam - Stephens

Hi, actually, this is Farha Aslam from Stephens.

Rick Wolford

Hello, Farha, how are you?

Farha Aslam - Stephens

Thanks Rick. Could you review for us the details of kind of what pricing you've taken on your various products? I know you've taken several rounds and others over the last 18 months kind of where you are in fruit, tomato, veg and your pet products?

Rick Wolford

Yeah, well if you look at the pricing that we have previously announced, we announced a 3% average price increase in Pet in May '07. We announced a 2% to 3% average price increase in StarKist in September of '07.

And then recently, what we have announced in the course of the comments today were a 9% average increase in our veg business, a 3% average increase in tomatoes, both veg being effective in January and tomatoes in December of last year. A 4% increase across our pet snacks effective from the 1st of February in '08.

And as I mentioned that we announced last week a 4.5% increase in fruit, which will be effective on the 28th of April. So as I mentioned in my comments, we have taken pricing across majority of our portfolio and those are the percentages we take.

Farha Aslam - Stephens

Do you think you've now caught up with your commodities or are these still kind of catch up?

Rick Wolford

Well, as we said we are not really going to be talking about our '09 numbers, but as we said in the comments our pricing for our consumer business for the year has offset our cost increases in that respect.

And when you look at with the exception of seafood and when you look at our pet business, there we took price increases at a point in time when we had prices in a forward curve at one level and those prices of course seemed to have changed since that point hence the subsequent pricing actions that we are taking that were announced in effective on 21.

Farha Aslam - Stephens

Okay. And my final question is do you find additional cost savings opportunities at Del Monte, you have done a great job so far, do you think there is more to come?

Rick Wolford

Yes. We are very aggressive in our cost savings actions. We believe that we can continue to drive savings in our business. If you think about some other drivers of our VIP savings program to-date, a key driver is our lean manufacturing that is a program that was instituted as we've discussed with a number of you early, I think last year or so. It was an initiation of program where we sent people off to a couple of Japanese based plants and learn the technique. We've hired people in to train our people across our plants and we've just begun to realize the benefits of lean manufacturing.

We believe that will be a driver of continued cost savings in the future. Our CapEx opportunities continue to be strong as we go forward. We have taken 15 million miles out of our logistics categories we have set and we continue to drive towards a more optimal distribution network.

So as we look across our company to drive cost out in operations, lean is a major driver as well as CapEx program, as well as the fact that in our entire company today and I mean our entire company for me right on through this company, we need to take cost out and that's we are going to do. We are going to do it in cost and we are going to do it everywhere else we can, while we still maintain the health, the strength of our company. We've got a great team. The team is up to that kind of a challenge and we are going to take cost out.

Larry Bodner

All right, thank you for your question. If we can move on to the next caller please.

Operator

Next question is from Tim Ramey with D. A. Davidson. Sir, your line is open.

Tim Ramey - D. A. Davidson

Good morning. The price or the trade load that you discussed for the 4Q, does that relate only then to the fruit business, the 4.5% price increase you just discussed there?

Rick Wolford

Tim, good morning to you. I am not sure exactly, you are talking about fruit trade loads, what?

Tim Ramey - D. A. Davidson

I think you mentioned that you expected to have a buy-in, I may have, I am using a different term relative to the price increase in April for the benefiting of 4Q?

Rick Wolford

Yes. And we would expect typically we have, when you have 4.5% price increase we would expect some buy-in in Q4. it is our objective to try to minimize that. We tend to, try not to go more in a couple of weeks and that is important for us, as you know as well as anybody, that's not good practice, it doesn't help you run your business in the right way, and that's our goal.

Tim Ramey - D. A. Davidson

Okay.

Larry Bodner

Ti, thanks for you question. We need to move on. I think we have one more caller out there.

Rick Wolford

Tim, Thank you.

Operator

Our last question comes from Farha Aslam with Stephens. Your line is open.

Larry Bodner

I think Farha has already asked the question, so that should be the last question.

Operator

That is our last question.

Rick Wolford

All right. Well, I guess there are no more questions out there. It's 8 O'clock here in California. That is our Q call. Thank you all very much for joining us and we look forward to visiting with you all in your individual markets and offices as effectively as we can. Thank you very much.

Operator

That does conclude today's conference call. Thank you all for participating and have a great day.

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Comments

[Kunst:]

It's nice that we have these transcripts, but breaking them into 10 pieces pretty much wipes out the usefulness.

2008 Mar 03 12:12 AM

[User 105165:]

Thank you for the feedback. If you'd like to view the file in one page, please click on the 'single page view' button above. Thanks!

2008 Mar 03 12:53 AM

[Kunst:]

Thank you for your reply. I missed that. As usual, Seeking Alpha does it right.

2008 Mar 03 01:00 AM