Del Monte Foods Co. F4Q08 (Qtr End 04/26/08) Earnings Call Transcript

Del Monte Foods Co. (DLM)

F4Q08 Earnings Call

June 5, 2008 10:00 am ET

Executives

Rick Wolford – Chairman, Chief Executive Officer

Dave Meyers – Chief Financial Officer

Larry Bodner – Senior Vice President Finance and Investor Relations

Analysts

Farha Aslam – Stephens Inc.

Gretchen Montgomery - Deutsche Bank

Jonathan Feeney - Wachovia Securities

Ken Goldman – JP Morgan

Vincent Andrews - Morgan Stanley

Alton Stump – Longbow Research

Reza Vahabzadeh - Lehman Brothers

Eric Serotta – Merrill Lynch

Ann Gurkin - Davenport & Co.

Robert Moskow - Credit Suisse

Presentation

Operator

Welcome and thank you for joining Del Monte Foods Co. fourth quarter and full year fiscal 2008 earnings conference call. At this time all participants are in listen-only mode. After the presentation we will conduct a question-and-answer session. Today’s conference is being recorded.

Now I will turn the call over to Larry Bodner, 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 fourth 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.

Some slides in our presentation will show both Q4 fiscal 2008 and fiscal 2008 full-year results. In the interest of time we will only talk to Q4 fiscal 2008 results. In response to investor feedback this quarter we are providing all-outlet share data which incorporates Nielsen all-outlet panel data in addition to the Nielsen grocery share data we have provided historically. The all-outlet share data will discuss our internal estimates based on Nielsen grocery share data and Nielsen all-outlet panel data for the 52 or 13-week ended April 26, 2008.

Additionally, all-outlet share data as well as the basis for 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

Thank you. I’d like to start out this morning by addressing our Q4 results. We are largely pleased with our Q4 results. These results as we exit fiscal 2008 represent the cumulative impact of the pricing and productivity actions we have executed during the year and are combined with the strong volume performance across our portfolio as well as efficient trade management.

Fiscal 2008 saw a very challenging cost environment worsen as the year progressed. This situation continues and we anticipate that the 2009 input cost challenges to be significantly greater. Similar to fiscal 2008, we will continue with pricing and productivity actions and we expect similar successful execution.

As we have seen this rapid acceleration of costs particularly in recent months we have taken pricing and as well plan to take actions in addition to those we have announced. We anticipate the cumulative impact of these actions combined with productivity gains will offset costs in the second half of fiscal 2009 but as a result of the rapid increase in cost levels it will not do so in the first half of fiscal 2009.

We’re going to address fiscal 2009 in more detail but now let me turn to Q4 in a little bit more detail.

Looking at Q4 business performance in the marketplace Del Monte realized successful execution as we delivered double-digit top line growth. Our consumer and pet businesses grew 8% and 16% respectively. The 11% growth in top line is based on healthy fundamentals and reflects strong volume growth in both our consumer and our pet products.

Effective pricing actions and solid innovation performance from new consumer and pet products also contributed. Importantly the full benefit from the top line growth more than offset continued operational and other cost pressures.

We delivered GAAP EPS of $0.25 in line with the mid-point of our guidance range.

Looking at the full year Del Monte also realized solid growth performance with top line growth of over 9% and similar to Q4 this growth was based on sound fundamentals. Both our consumer and pet businesses delivered strong gains of 8% and 12% respectively. For the full year the Company realized record sales from new products. Further, share gains drove strong volume performance and we enjoyed the benefit of pricing actions across both consumer and pet.

Our strong share performance is particularly significant considering our pricing actions. We announced pricing in all five of our major categories in fiscal 2008 and gained all-outlet share in four of those categories. This top line growth was particularly vital in light of the significant cost headwinds which have negatively impacted earnings growth.

Specifically, in fiscal 2008 we experienced approximately $195 million or a 7% increase in operating costs which is significantly higher than in prior years. To offset these costs we have taken pricing actions reflecting 2.4 points of top line growth. Also we achieved our $70 million productivity target with a large part of these savings reflecting the implementation of lean initiatives.

Additionally we completed the two-year investment against our transformation plan and achieved $35 million in run rate savings or an incremental $15 million in fiscal 2008.

Very importantly during 2008 the Company continued to build sustainable platforms for ongoing growth. Innovation was a key top line driver contributing record new product sales of over $100 million. In consumer we continued to leverage the Del Monte mega brand equity into new areas including shelf stable healthy deserts with Fruit Chillers, microwaveable meals with Harvest Selections and we further expanded upon our leading position in packaged produce with the introduction of additional Fruit Natural flavors.

Fruit Naturals which are a key growth driver for our packaged produce business delivered strong performance gaining over 20% year-over-year. In pet products not only did we leverage our important Meow Mix and Milk Bone equities but we also launched several natural pet food and snack products designed to capitalize on the consumer migration to natural pet offerings in the post-recall environment. These include Meow Mix Wholesome Goodness, Kibbles-n-Bits Wholesome Medley and Milk Bone Natural Snacks. Each of these innovation platforms we believe will provide an effective base to support future growth.

In sum, during fiscal 2008 we effectively executed successful pricing and productivity actions. However, pricing taken lagged the impact of rising cost levels and overall resulted in flat rather than increased EPS.

Looking to fiscal 2009 input costs are now expected to increase double-digit which we also plan to meet with aggressive pricing and productivity actions. We have announced new price increases in pet, vegetables and tomatoes effective the first quarter of this year in addition to the fruit pricing increase that we announced on our last call. We are planning additional pricing later this year which is incorporated into our 2009 guidance.

Critically, during fiscal 2008 we realized successful progress on the important platforms for future growth with the innovation that I have referenced. In fiscal 2009 we will further sharpen our focus on innovation and marketing. Also it is very important to note that in 2009 we will also, to support our brands in this environment, increase Del Monte’s 2009 marketing spending in support of our plans for fiscal 2009 and for future growth.

Now I’d like to run briefly through our business unit performance.

Q4 net sales in our consumer products business were up 8% driven by another quarter of strong growth in fruit. Fourth quarter operating income increase 27% and a strong top line more than offset higher costs. As expected, Q4 fruit sales benefited from customer buy-forward ahead of our April price increase. Importantly new fruit products including new flavors of Fruit Naturals as well as increased volume due to whole fruit supply contributed to the upside.

Strength in fruit more than offset a modest decline in vegetables which was anticipated given the customer buy-forward in the third quarter ahead of our January price increase. During the year we led pricing with our branded leadership and in Q4 those actions helped to offset rising costs.

In seafood as we have discussed the extreme increases in fish costs since spring 2007 have outpaced the category’s ability to be matched with price increases. Cost pressures continued in Q4 across the consumer business primarily in fish as well as in energy and transportation related costs. Fish costs remain high driven by poor catch rates and higher fuel costs.

Turning to our pet products we had a very good Q4 top line of over 16% growth which reflects healthy business fundamentals including the ongoing momentum of our Meow Mix and Milk Bone equities as well as other new products and effective promotional activities which drove dry dog sales. As expected, pet operating income posted a solid double-digit increase and the top line benefit aided by pricing actions more than offset higher costs.

Contributing to the top line was performance acceleration of Meow Mix and Milk Bone over the prior year. Both were strong net sales contributors during the quarter and the year reflecting new products and increased distribution. Milk Bone momentum reflects both our increased investment as well as expanded distribution to the key customer. With Meow Mix we are pleased with our Market Select Cups performance and very encouraged by early reads on our January 2008 launch of Meow Mix Wholesome Goodness dry cat food.

Innovation in the pet category is fundamental to a successful competitive performance. During Q4 we benefited not only from Meow Mix and Milk Bone innovation but as well as from other successful strategic new products particularly in our dry pet and pet snacks area. Pricing actions helped to combat the ongoing pressures of higher input costs in Q4, primarily commodities. During fiscal 2008 the industry and Del Monte took an unprecedented two rounds of price increases in an effort to combat escalating energy, grain and gas costs. However, escalation of commodity and energy costs has surpassed levels of the industry and we originally anticipated when we took pricing in May 2009 and February of 2008 and as a result we have announced another 5.5% average price increase across our pet business effective June 2008.

Now what I’d really like to do here is address our fiscal 2009. As I said it is going to be a year of challenging input costs which will require aggressive pricing and productivity actions we are and will be taking. However, beyond these actions we are taking important additional steps to combat these exogenous cost factors and to drive future sustained and profitable growth.

These steps are targeted to further accelerate our strategic commitment to grow in higher margin, higher growth business segments and are supported by an organization that is going to be much more aggressively marketing oriented. To that end, we have recently announced an organization realignment of our business to create a more marketing-centric organizational structure located in San Francisco and as well the announcement of Bill Pierce as CMO.

Bill’s experienced leadership combined with a centralized marketing organization will build on the marketing success we have realized to date. These changes will further heighten the marketing profile in the Del Monte culture. These changes will strengthen our talent pool and these changes will directly support our strategic goals as we drive enhanced focus on marketing and innovation.

Today we also announced our plans to further our strategic commitment to aggressively sharpen our focus on branded, high margin, high growth businesses. This will include investing in growth engines, maximizing the current business and as well realigning the portfolio to deliver substantially increased long-term revenue and EPS growth.

Specifically our plan is centered around two main directives which we believe will position us to better deliver value to shareholders. First we are increasing levels of strategic consumer and processing technology investments in our packaged produce and our pet products platforms to support our strongest brands including Del Monte, Milk Bone and Meow Mix. These are higher margin, higher growth businesses where we believe we have a distinct competitive advantage and we see potential for high growth.

We expected packaged produce driven by product extensions beyond the can and pet products driven by strong brand equities to become a much larger portion of our portfolio and further expand our targeted high growth, high margin portfolio platform.

Second, we have also announced steps to more aggressively execute against our core brands through increased investment in innovation and enhance the implementation of specific targeted productivity improvements to improve our cost structure. Also, as we have discussed, we will continue to execute pricing actions to drive margin expansion.

We believe that the structural realignment which includes the appointment of Nils Lommerin as COO and the hiring of Bill Pierce combined with the centralization of our marketing functions in San Francisco will very much facilitate the execution of this strategy. We believe the intensification of what we do well, our first mover advantage particularly in packaged produced coupled with increased innovation investment and significantly higher marketing investment will enable Del Monte to increase its margin structure, drive increased revenue growth and higher EPS performance in the long-term.

Dave will now take you through the financial details of Q4 fiscal 2008 and fiscal 2009.

Dave?

Dave Meyers

Thank you. In Q4 net sales were above our expected range. In the consumer business we realized greater than anticipated strength. In our seafood business where we drove incremental, low margin sales in seafood as we gained share based on solid end-market execution.

EPS of $0.25 compared to our guidance range of $0.23 to $0.27. On a full-year basis we generated 9.4% top line growth and EPS from continuing operations of $0.66. In all we delivered solid results in the face of significant challenges including strong inflationary headwinds and another difficult year on Star-Kist. I am particularly pleased with our $207 million of cash flow which was above our guidance primarily due to stronger working capital management, particularly the favorable timing of tax payments, related incremental pension payments and NOL’s.

Looking at the fourth quarter in greater detail and the 11.1% increase in Q4 year-over-year net sales, existing product volumes contributed 6.7 points and volume growth in new products contributed 3.4 points. Pricing increased net sales by 3.4 points which was largely offset by 2.4 points of pricing related volume elasticity.

On Slide 14 you can see that the full-year fiscal 2008 net sales results were driven by similar factors. Gross margin for the quarter was 24.1%, a decrease of 110 basis points versus last year. Net pricing drove a 3.3 point increase. However, higher commodity and ingredient costs including grains, fats, oils and meats in addition to higher fish and energy costs drove a negative 4.6 points of margin contraction. Mix drove a 0.2 point improvement.

Q4 operating income increased 18.3% with operating margins increasing 60 basis points. Operating income was driven by the $15 million increase in gross profit and lower SG&A. The $1 million SG&A reduction was driven primarily by the insurance proceeds related to the pet recall and the absence of case or arbitration costs incurred in this quarter last fiscal year partially offset by higher transformation costs and customer delivery expenses. The $110 million of transformation investments are now complete and we are on track to deliver $50 million in run rate savings in fiscal 2009.

Interest expense in the quarter was $7 million lower primarily driven by lower interest rates as well as lower debt. During the fourth quarter we spent $30 million on capital projects versus $44 million a year ago due primarily to lower transformation investments. We incurred $28 million in depreciation and amortization costs which included $1 million of fee amortization included in interest expense.

F08 year-end debt levels decreased by $110 million from $2 billion to $1.89 billion. For the full year we generated cash flow of $207 million versus $196 million of adjusted cash flow a year ago. The increase in cash flow is primarily driven by higher earnings.

Now I’d like to discuss guidance for fiscal 2009.

Overall, there are three main themes to F09. First we are planning to drive and invest behind much higher levels of innovation on our key brands and expansion of packaged produce to facilitate long-term EPS growth. Rick has already covered this first theme in some detail.

Second, we expect to implement pricing actions approximately 3 times higher than the average of our last three fiscal years as we combat unprecedented cost inflation.

Third, inflation and other cost pressures are expected to be the highest in this decade and recently the pace of increases is staggering. To combat this cost pressure we are planning to implement aggressive pricing actions though they will lag covering our gross cost inflation estimates within F09 due to timing.

On the top line in F09 we expect to deliver sales growth of 5-7% with strong growth expected in pet as well as solid growth in consumer, both primarily driven by new products as we step up to higher levels of investment to grow our key brands. In consumer products new product activity will have a strong focus on fruit particularly as we expand our $150 million packaged produce business. We also plan to implement aggressive pricing actions across our portfolio. The top line benefit of pricing will be largely neutralized by elasticity and to potential customer disruption impacting our unit volume impacting our pricing actions.

We have incorporated elasticity into our forecast at levels consistent with models based on prior year’s experience. Should this elasticity be less pronounced reflecting either the intensified general environment and price increases across grocery or increased demand for our products as the consumer increases meals at home in a soft economy volume would be of course correspondingly higher.

Gross margin is anticipated to be between 23-25% versus 24.7% in fiscal 2008, down approximately 70 basis points if you assume the mid point of the range. This expected margin dilution reflects very aggressive pricing activity which lags even more aggressive cost increases which I will elaborate on later.

Operating margin is expected to be between 7.8-8.8% of net sales compared to 9.3% in fiscal 2008. Higher SG&A reflects an anticipated approximately 20% increase in marketing investment primarily to support the new product activity and key brand equities. This investment will increase our marketing as a percent of net sales by approximately 2.8% of NSV in fiscal 2008 to well over 3% of NSV in fiscal 2009.

The marketing investments are significant in light of the fact that marketing was flat on a dollar basis in fiscal 2008 versus fiscal 2007. Frankly, we may have squeezed marketing dollars too hard in the last two years. At this point the extreme cost headwinds have actually elevated the importance of increasing our marketing spending to drive greater brand differentiation for the consumer which will facilitate greater pricing power.

Importantly, management and the Board have had extensive discussions and are fully aligned on sharpening our strategic focus including fiscal 2009 investments which are EPS dilutive but are required to execute a branded marketing-led strategy. In addition, SG&A will increase due to the absence of the S&W gain and pet recall insurance proceeds realized in fiscal 2008.

These increases coupled with normal annual inflation are partially offset by the absence of transformation expenses. Interest expense is expected to be between $125-140 million about $17 million lower than 2008 at the mid-point of our estimate primarily driven by lower rates as well as lower average debt levels. We expect our tax rate to be between 36-38%. The higher tax rate primarily reflects the absence of a reduction of the foreign tax valuation allowance for NOLs.

Capital expenditures will be between $80-90 million reflecting a return to a more historical level given the completion of our transformation initiatives. Depreciation and amortization expense is expected to be between $100-110 million. This includes approximately $7 million of amortization for financing fees which is expected to be included in interest expense.

Fiscal 2009 reported EPS is expected to be in the range of $0.58 to $0.62. We reported EPS from continuing operations of $0.66 in fiscal 2008 which included $0.08 of transformation expense. However, our projected F09 EPS is disappointing compared to this team’s original expectations driven primarily by the fact that pricing actions are now expected to lag the accelerated level and suddenness of cost headwinds in F09.

Specific additional EPS drivers are expected to include: $0.08 in the absence of F08 transformation related expenses, negative $0.15 in aggressive pricing actions are being implemented though they do lag cost headwinds in F09. We set our pricing actions based on the best information at the time of our decision. That said we seek to set our pricing based on proven market conditions to enable a fact based discussion with key retailers as well as competitive dynamics particularly where we are price followers in portions of the pet business. As such when key cost inputs spike in a dramatic fashion such as the approximate 30% increase in crude oil, corn and natural gas from January through mid-May we will realize mid-term margin compression as we prepare and implement pricing actions.

While the vast majority of our business does fully offset costs within fiscal 2009 dry dog food will be particularly hurt by cost pressure without significant pricing actions. We made longer term promotional commitments to key retailers which we plan to honor, coupled with a tougher competitive pricing environment due to an absence of significant new product news for Kibbles-n-Bits. We plan to address this weaker equity over time.

Three, negative $0.04 reflects the negative impact of planned strategic marketing investment in growth engines focused on accelerating and launching products. We will also realize costs in F09 associated with the organizational move to San Francisco net of partial year anticipated savings.

Fourth, $0.08 driven by strong top line growth net of stepped up marketing expenses. Next is $0.02 driven by lower interest expense due to the lower Libor net of the higher tax rate. Also note we are planning to eliminate certain pricing and/or promotional programs which tend to make our supply chain and trade spending less than optimum. We expect these efforts will reduce year-end shipments including buy-forwards. In fiscal 2009 this trade inventory adjustment at year-end will be largely offset by the 53^rd week, the impact of which is typically 2 points of NSV growth.

Last, negative $0.05 and this reflects the absence of the S&W gain on sale in the eastern hemisphere as well as pet recall insurance proceeds both of which we benefited from in fiscal 2008. We expect to generate cash flow in fiscal 2009 of between $150-170 million which is down from fiscal 2008 as fiscal 2009 is burdened by headwinds including higher tax payments, higher inventory and lower earnings.

On taxes fiscal 2009 will not benefit from the favorable timing of cash tax payments which we benefited from in fiscal 2008 as well as reduced levels of NOL’s utilized. We anticipate higher inventory primarily due to higher inventory carrying costs related to the already discussed much higher cost inputs. We have experienced strong cash flow the past few years and would expect that the headwinds I just described in 2009 to not recur to this extent going forward.

On use of cash for 2009 we plan to focus on debt reduction and maintaining our dividend payment. Given the challenging economic conditions, planned investments in our growth engines and targeted leverage (audio break) we do not currently plan to allocate cash generated to repurchase common stock in 2009.

As usual we will continue to evaluate use of cash during the year. In looking at our cost buckets in greater detail we anticipate $345 million in gross inflationary and other cost increases relative to our $2.9 billion in total operation costs. This translates into a gross cost increase of approximately 12% and we believe reflects a very realistic projection of a challenging cost environment. The incremental headwinds are primarily driven by the pervasive impact of our country’s shift in agricultural production to ethanol and dramatic rise in diesel and other energy inputs all of which are industry wide issues.

The greatest driver of the $345 million increase is expected to be raw product in ingredient cost increases of approximately $200 million or approximately 17% increase versus last year. This bucket reflects fish at new historic highs as well as the continued acceleration of corn, soy, wheat, fats and oil costs, increases in raw vegetable, tomato and fruit costs will have an impact on the consumer. We are projecting $1,450 short ton on white meat fish for the year which requires moderation relative to current spot purchase levels.

Packaging is projected to increase $40-60 million reflecting acceleration in tin plate and resin based packaging reflecting the energy cost environment. Logistics costs are projected to increase by $40-60 million with the increase primarily driven by the cost of energy. Manufacturing, labor, benefits and other costs are expected to increase $30-50 million. The direct impact of energy cost increases which impacts all cost buckets will be approximately $60 million including the impact of diesel, freight and natural gas.

We are assuming crude oil average of $125 per barrel for 2009 which reflects the current market. We are taking appropriate actions in terms of cost savings and pricing to mitigate as much of the cost impact as possible while maintaining the long-term health of the business. We have announced pricing actions across the entire portfolio including approximately 5% across pet effective June. Keep in mind this follows a similar pet price increase we put in place in February, only four months ago.

We also announced an approximate 5% increase across our fruit business effective May. We are currently implementing pricing effective in August of approximately 14% on our vegetable business and 13% on tomatoes. We plan to take additional pricing actions in the second half of fiscal 2009 and anticipate full-year pricing actions to be about three times the average of our last three years. Yet the entire portfolio is being aggressive managed to seek to maintain long-term margins but the unprecedented cost increase and speed of the advance particularly in energy which is impacting commodities, transportation and packaging will prevent us from fully covering costs in fiscal 2009.

The timing of cost versus pricing is by far the largest headwind the company faces. We are also seeking to mitigate cost increases with our VIP productivity program which has been very successful over the past three years. In fiscal 2009 we expect to generate $50 million in cost savings driven by our lean initiatives and achieve our target $50 million run rate transformation savings for an incremental $15 million by year-end. Effective with fiscal 2009 our earnings guidance procedure will be to provide annual guidance with quarterly updates to annual guidance.

This is consistent with the long-term view the company takes in making business decisions as well as our peer group. We will continue to provide next quarter information and insight into growth, cost and pricing drivers and industry data critical to understanding the company’s business and operational environment. We anticipate solid Q1 top line growth entirely driven by our pet business as we gain traction on innovation and benefit from solid promotional execution. In consumer we expect a relatively flat top line primarily due to timing as Q4 fruit shipments benefited from increasing related trade inventory changes.

For the overall company a key factor in Q1 will be the anticipated dramatically higher cost inputs in the form of commodities, energy, fish, ingredients and packaging. EPS is expected to be acutely impacted and negative in Q1 driven by the rapidly accelerating cost inflation as the impact of our announced pricing actions in our first quarter will be muted as the benefits will be fully realized as we progress through the year.

Keep in mind our fiscal 2008 Q4 results largely reflected Q3 cost input levels which preceded the rapid acceleration in corn, energy and fish. In addition we plan to make investments in Q1 to support our new product initiatives and packaged produce opportunities both at much higher levels than last year.

In total EBIT is expected to be essentially break-even feeding to an expected negative EPS for Q1. Clearly Q1 is our greatest challenge from an earnings standpoint. As we look to Q2 through Q4 pricing actions are expected to offset costs at an increasingly effective rate yielding roughly flat year-over-year EPS comparisons for Q2 through Q4 in total excluding transformation.

With that I’ll turn it back to Rick.

Rick Wolford

Thank you Dave. To conclude with the challenging 2008 cost environment we executed pricing actions, cost reduction programs and innovation largely offsetting the impact of escalating cost inflation. In 2009 we will face cost increases whose magnitude will surpass the prior year. We must execute in 2009 as we did in fiscal 2008 and with similar success. However, looking at 2009 and beyond we are taking additional important steps to change the trajectory of our earnings and to support sustainable and profitable growth.

These steps are aimed to further sharpen our strategic commitment to grow more profitably in fast growth businesses which we began over two years ago. Clearly the challenges are much greater as at that time we expected inflationary growth of approximately 3% and we are now expecting 2009 to be double-digit. To meet these challenges we must accelerate and aggressively sharpen our strategic focus. We believe that the organizational alignment is combined with growth initiatives we have announced today further combined with the investment we are making behind these initiatives will accelerate our top line and earnings potential.

We look forward to discussing all these strategic initiatives in a lot more detail on July 8 at our Investor Day in New York.

With that Dave and I will take any questions you may have.

Question-and-Answer Session

Operator

(Operator Instructions)

Your first question comes from the line of Farha Aslam – Stephens Inc.

Farha Aslam – Stephens Inc.

Thanks for all the color regarding the cost increases you are facing. You had anticipated $200 million in raw product increases. How much of that is fish roughly? Could I say half of that is fish?

Dave Meyers

Approximately $45 million is fish.

Farha Aslam – Stephens Inc.

Given that you are looking for strategic alternatives for your fish businesses is there a reason you don’t put it in discontinued operations?

Rick Wolford

We don’t really comment on those Farha and that is all we can really say on that.

Farha Aslam – Stephens Inc.

If you do sell your fish business are you required to use the proceeds to pay down debt or can you choose to repurchase shares?

Rick Wolford

Again, we don’t comment on activity.

Dave Meyers

Thanks for your questions Farha. We want to make sure we get all the callers in so if we can move onto the next question please.

Operator

The next question comes from the line of Gretchen Montgomery - Deutsche Bank.

Gretchen Montgomery - Deutsche Bank

I just wanted to talk about the tuna business. What impact would an exit in that mean to earnings or to cash flow? What would the balance sheet look like post tuna and how much would that change your capital expenditures?

Rick Wolford

As we said Gretchen, we appreciate the question but we really can’t comment on that business and we’ve tried to give an outline of the operating impact it had and is having this year. We face higher fish costs with catch rates down and fuel costs up. We talked about the progress we are making in the marketplace which we are pleased with in terms of some initiatives we have in place. We have some very good strategies we are executing up there and those are generally a good outline of where we are with that business.

Operator

The next question comes from the line of Jonathan Feeney - Wachovia Securities.

Jonathan Feeney - Wachovia Securities

In terms of targeting this increased marketing spending I against some of the higher commercial brands could you give us a rough idea of what percent of your portfolio you are considering to be in this sort of bucket of brand and name investment?

Rick Wolford

Well, when we talk about this broadly our growth quadrant and that represents about over 40% of our net sales but the specific components of that we are particularly targeting are the packaged produce which today is about $150 million business and dramatically as I mentioned earlier in the prepared words this is a business we started essentially from a standing start several years ago, first with glass and now with plastic and now with our Fruit Naturals and we are very excited about the products we will be rolling out with this initiative in this category as we go forward.

The other component which is part of our…40% of our portfolio is pet and dry cat and dry food where we believe that we can also significantly enhance in terms of driving growth. A couple of great brands in Milk Bones and Meow Mix in our pet business which sort of the brands associated with this growth initiative against snacks and dry food and we feel very good about what we can do there.

Overall I think it is important to remember that in our portfolio 80% of our sales in the United States are with brands where we are number 1 and 2 so when we look at this aggressive commitment with these two specific sets of growth engines we have a very strong brand base from which to build.

Operator

The next question comes from the line of Ken Goldman – JP Morgan.

Ken Goldman – JP Morgan

You mentioned that marketing spending I believe should be well above 3% in 2009. I’m curious what your longer-term goal for that number is? I think if you look at what most packaged food companies are spending it is above that figure in advertising alone so I applaud you. I think it is great that you are spending more or reinvesting in more business. I’m just curious how you guys see the longer-term number, what it has to be to get the company to be where you want it to go.

Rick Wolford

I think we are pleased with the steps we are taking this year in terms of what it means of supporting our new products as well as our brand. We think that it is important given the pricing we are taking this year, given the cost challenges we have in the market and given the aggressive innovation we have in the market for this coming year.

I think if we look at this at this percent of sales going forward it will continue to reflect the quality of higher margin, higher value products we will be producing and we will be supporting and that is part of the strategic commitment we are looking at that we talked about today and so I think you would see that percentage correspond to the kind of value add, higher margin products we are targeting in our packaged product products and our pet snack area as well as some of the innovation we are developing against our base business, our core business. If you look at Fruit Chillers which today is a very successful business for us in center store. Our Harvest Selection which is a microwaveable business, microwaveable meal business where we are also quite pleased with the results so far. Those are both significant businesses. They offer higher growth, higher margin potential and as we look at supporting those we will tend to have higher marketing spend.

When you look at some of our traditional brands in Del Monte portfolio particularly I think we have been pretty effective in a lot of the programs we have fielded. We believe we need to invest more money in marketing in order to grow to another level in terms of value add, product based growth quadrant. But I also would like to make sure we don’t lose sight of the fact that in fiscal 2008 we had very, very good top line growth and that 9% plus growth reflects a mix of marketing and executional programs that delivered growth. So we believe we have executed well against what we have done but we are very excited about our ability to invest more and to grow our business with greater marketing support.

2008 was of course a record year for new products.

Operator

The next question comes from the line of Vincent Andrews - Morgan Stanley.

Vincent Andrews - Morgan Stanley

Dave I’m just wondering maybe it is in the slides but I don’t have it in front of me but in the past you have given us some insight into where and how much you are hedged on your hedgable commodities and I’m just wondering if you can put any color around that for fiscal 2009?

Dave Meyers

Yes. First of all you need to understand the commodities we hedge represent less than 10% of our total operational costs and we are approximately 45% covered for F09.

Vincent Andrews - Morgan Stanley

That 45% would be consistent across those hedgeable commodities?

Dave Meyers

Pretty much.

Operator

The next question comes from the line of Alton Stump – Longbow Research.

Alton Stump – Longbow Research

Just a quick question on the packaging cost outlook. There has since been some market rumors that tin plate steel costs might be going up either at the first of calendar year 2009 or potentially mid-year pass through next month. I just want to get an idea of what you saw there and whether or not that is included in your current guidance?

Rick Wolford

Tin plate is obviously included in our packaging which is up overall about 9% but we do have long-term contracts with two significant suppliers in pressed and seal can. We think that we buy from them tin plate as economically or as efficiently as anybody in the marketplace.

Operator

The next question comes from the line of Reza Vahabzadeh - Lehman Brothers.

Reza Vahabzadeh - Lehman Brothers

On the fourth quarter did you provide any color as to the amount of the buy-forward that benefits fourth quarter and hurt the first quarter or some kind of a net EBIT impact by any chance?

Rick Wolford

We haven’t provided any color and strictly year-over-year we see buy-forward. We get a lot of promotional events that cover or crossover from the fourth quarter to the first quarter. This year particularly we had a price increase in our fruit business that basically was at the beginning of our first quarter so that had a pretty significant impact but we have not provided any more color than that.

Reza Vahabzadeh - Lehman Brothers

The free cash flow guidance for 09 a little lighter than 08. How much of that is planning your tax payments versus some of the other?

Dave Meyers

It is a pretty significant impact is really overall capital which we will certainly focus on in F09 and on a go forward basis but the tax payment was also a significant piece of that.

Reza Vahabzadeh - Lehman Brothers

So the difference between 2009 and 2008 on free cash flow is basically working capital and planning of tax payments?

Rick Wolford

That is the majority of it.

Operator

The next question comes from the line of Eric Serotta – Merrill Lynch.

Eric Serotta – Merrill Lynch

I can certainly give you guys credit for the longer term actions you are taking with the increased investment spending and the increased marketing spending as well for the productivity gains you have realized over the past few years. But it seems that if the environment cost side is getting even tougher I would have expected to see you taking more steps on the productivity side for 2009 and I don’t really see any benefit there included in the EPS you have on Slide 19. Why isn’t there a greater urgency on controllable costs? Have you hit the limit on what you could take out already?

Dave Meyers

We have $65 million in our plan for 2009 with productivity savings. In prior years we have been able to exceed our estimate and I can certainly assure you that our operational people who have done a great job…we have taken 15 million miles out of our distribution network as an example, are going to continue to be working very hard with my help to take as much cost as possible out of this business. We are very aggressively focused on that. I would also like to make sure you understand that when we talk about our two-prong strategy, one against our growth engines and second against our core business that is that core business is going to be driven not just by innovation but also productivity gains. We have done a lot of work here in the last couple of months to identify a variety of very specific target initiatives which we are working to implement across our business which will further help drive savings beyond the number that we have in our guidance.

Further, there are a couple of areas where we believe generally look to expand our business this year and expand our productivity savings will be taking more money out of our operations with our lean activities and also to leverage a lot of our new supply chain tools which we developed with our transformation initiatives. Today our control, our visibility and our ability to alter our distribution patterns through supply chain substantially enhanced over prior years.

Finally, while this is not the purpose of our marketing realignment we will also be recognizing some good G&A in San Francisco on an ongoing basis which will also reduce our overall costs. We look aggressively at G&A every year. We are looking at it this year from a variety of points and perspective and one of those will be with the consolidation of our offices of marketing activity here in San Francisco. We would expect to have some efficiencies in that as well. Importantly, just to reassert our operations in Pittsburgh which is a critical service center for the company remain very vital to our success and is a very, very key part of our ongoing structure.

So what we are talking about in terms of the organization in San Francisco and our marketing activity is our direct marketing, pet marketing folk, our pet finance folks, our customer marketing folks as well as our MRD a lot of which was in Pittsburgh and will over time begin to migrate out here.

Eric Serotta – Merrill Lynch

Just a quick clarification. Is that $65 million a year-over-year….is that $65 million productivity in the plan is that year-over-year incremental or is that cumulative from the past few years versus a year-over-year impact?

Rick Wolford

Eric it is a year-over-year incremental savings and is incorporated into our guidance.

Operator

The next question comes from the line of Ann Gurkin - Davenport & Co.

Ann Gurkin - Davenport & Co.

I wanted a clarification. It was my understand that you all were pushing back innovation and marketing to the division level and now that you are hiring Bill Pierce does that change that sentiment? Are you changing direction and moving that back up to more of a centralized? Secondly if you focus on your core products are you going to rationalize SKU’s or sell lower returning brands or anything?

Dave Meyers

In terms of your second question, rationalizing SKU’s, we regularly look at our SKUs and would allow those that are slow moving in today’s marketing environment with our customers you have a self-limiting process that is increasingly real just given our customers efficiency. That is something we work with our customer very much. As we launch new product we often times will trade down slower moving items.

In response to the first question in terms of our innovation those initiatives will still be driven by the individuals in charge of our individual businesses, our pet foods business, our pet snacks business, our fruit and vegetable and tomato business, those are the marketing people who are most closely associated with the consumers and the trends in those categories and they are charged as a key part of their job to be very, very innovation centric. The advantage of having everyone in the same office and having EMO provide an umbrella of centralization and umbrella of focus will allow us to leverage consumer insights better across the company, allow us to raise the bar of execution and it will allow us to be pulling best practices from each one of our marketing units collectively as we work here in San Francisco.

Importantly innovation and for marketing the centralization in San Francisco will give us a much stronger talent pool. We will have the ability to have a lot more career movement across marketing and we will have access to a very good and rich marketing environment in terms of younger folks here in San Francisco. We have had great success with the group in Pittsburgh and they have delivered wonderful performance. For the longer term, however, this implementation gives us the ability to more tightening our overall functionality, to have greater decision making, to have greater efficiency and resource deployment across our portfolio and to drive deeper, better opportunities for our marketing folks and drive our common goal.

Operator

The final question comes from the line of Robert Moskow - Credit Suisse.

Robert Moskow - Credit Suisse

I would imagine that coordination between marketing and R&D is going to be very important in your pet food business going forward. Where is your R&D facilities for pet? Secondly, are you making any changes to your long-term goals of 7-9% EPS and I think it was $200 million plus for free cash flow?

Rick Wolford

In regards to your first question our pet R&D facility is here on the West Coast. It is down in Long Beach where we have our kennel and our cattery where we can do a lot of testing mills. We have a plant down there. It is very focused here on the West Coast, much more so than in the product structure. Also we have great timing with our marketing and R&D with the CMO structure and so I think that will be a benefit to us as well.

In terms of our long-term goal….

Dave Meyers

We’ll talk more about long-term goals at Investor Day which I believe is July 8^th.

Rick Wolford

July 8^th in New York.

Thank you all very much. We appreciate your involvement today and look forward to seeing each and every one of you in New York and hope to answer your questions and talk to you about where we see ourselves going. We are pretty excited about what we can do with this company despite our cost challenges.

Operator

Thank you. That does conclude today’s conference call. Thank you for your participation. You may disconnect at this time.

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