Cuisine Solutions, Inc. F4Q08 (Qtr End 06/28/08) Earnings Call Transcript

Cuisine Solutions, Inc. (FZN)

F4Q08 Earnings Call

September 18, 2008 10:00 am ET

Executives

Stanislas Vilgrain - President, Chief Executive Officer, Director

Ronald R. Zilkowski - Chief Financial Officer, Treasurer, Corporate Secretary

Analysts

Quinn Ruddick - Roth Capital Partners LLC

[Jerry Schnero] - JPMorgan

Presentation

Operator

Welcome to the Cuisine Solutions, Inc. fourth quarter 2008 conference call. (Operator Instructions) It is now my pleasure to introduce your host Stanislas Vilgrain, Chief Executive Officer and President for Cuisine Solutions, Inc.

Stanislas Vilgrain

Welcome to our conference call to discuss Cuisine Solutions fiscal year 2008 fourth quarter and year-end results. We’d like to caution you that in today’s’ call there may be forward-looking statements within the meaning of federal securities rules. In light of the risks and uncertainties involved we encourage you to read the forward-looking information section of Cuisine Solutions Form 10K for the year ended June 28, 2008 filed September 7, 2008.

With me today is Ronald Zilkowski, our Chief Financial Officer, Secretary and Treasurer.

We are pleased to report that a tough decision that we took in the third quarter of fiscal 2008 paid [inaudible] dividends in the fourth quarter with improved margins of 26% versus 19.6%, a three point improvement, and sales increase of 10.7% versus the 5.6% increase in the third quarter of this year. The change was most noticeable in Europe which is now growing profitably again. Gross margin even improved over the fiscal year 2007 fourth quarter as a percent. Those improvements should last well into the new fiscal year.

As we highlighted in our press release, growth in our fourth quarter was largely due to the on board services and military sales channels. Military sales grew by 23.7%; on board services sales grew by 23.1%, as we keep adding new products and new airlines to our portfolio of customers. Our focus on reinventing typical airlines food products that deliver exceptional quality and ultimate convenience for first and business class customers is the right strategy in this environment.

Our food service sales channel showed modest growth of 5.2%. Our patience and focus on this channel is now starting to show some results. The hotel chain, our hotel chains are facing a hard economic climate and they are finding our products and services are delivering quality, value and labor cost savings for their operations.

Our retail sales channel is down 5% as [Costco] as virtually eliminated our ability to provide promotional incentive. We are working diligently on streamlining our product line to pull in line with expected margins. We believe our new local initiative in this sales channel is local outstanding DC chefs are always local raw material suppliers will yield some brand awareness and increase sales allotment in the Washington DC metro area in the coming quarters.

National restaurant chain is the star sales channel of our fiscal year. Even though this past quarter is down 5.9%, the decline being largely due to large inventory buildup by restaurant last year during the same quarter, this year’s annual growth in national restaurant chain is about 47%. We believe that our products and services are the perfect solution for the industry’s incoming challenges of the higher food costs, labor shortage and the high cost of capital. We shall continue to aggressively innovate with our current customers and seek new ones in this industry.

Internally we are still working diligently on Sarbanes-Oxley compliance, our new ERP system, and we also recently acquired [inaudible] to help us with the growth in sales of services related to our product sales channel and to help us spread the word on sous-vide and its benefits. Finally, we shall be moving to a new corporate office in November. We have a bright and exciting and innovative future ahead of us.

Ron, can you give us a summary of the financials for this quarter.

Ronald R. Zilkowski

As mentioned our fourth quarter results show a 10.7% increase in net sales and an 8.9% increase in net sales for the year. I’d like to highlight a couple other points. We saw European sales were up 22.4% for the quarter; 23% for the full year. Our new products developed in the last 12 months contributed increases of 13.1% for the quarter and 10.5% for the year.

Cost of goods for the quarter were $16.3 million compared to $14.8 million with a gross margin of 22.6%, 3 percentage points higher than last quarter of 19.6% and slightly higher than last year’s 22.2%. For the year our costs were $69.4 million as compared to $62.1 million with a gross margin of 20.6% in fiscal 2008 as compared to 22.7% gross margin in fiscal 2007.

We are working hard to develop our new reporting system that will allow us to react faster to changes in material costs and demands. Grants is the main reason we are still down from our target gross margin of 30% but our US staff is working closely with the French team to streamline production and to better focus the team on cost improvements. Raw material costs and freight expenses also impacted the gross margin.

Selling and marketing expense was up 17% in the fourth quarter compared to a year ago. This increase was primarily related to expenses for our [inaudible] office of $180,000 and consulting costs of $48,000. For the year selling and marketing was up 6.6% related to the same office expenses of $498,000 and consulting costs of $168,000.

General and administrative expense was up 29.8% in the fourth quarter from a year ago due to public company fees and legal expenses of $212,000 and new system expenses of $116,000 as well as additional expenses for travel. We now have a lot more clarity in our general and administrative expense and we’re working hard to reduce costs in a number of areas. For the year we are up 42% over last year primarily due to personnel reductions in France of $590,000, legal and public company expenses of $397,000, increased staff salaries in the US of $350,000, new system expenses of $209,000 and travel increases of $92,000.

Our net income for this quarter is $222,000 or $0.01 per share compared to last year’s loss of $223,000 or -$0.01 per share on a fully diluted basis. For the year we earned $44,000 or $0.00 per share compared to last year’s restated earnings of $8,725,000 or $0.48 per share on a fully diluted basis. This $8,725,000 includes a tax benefit and the reversal of the valuation laws of $5,249,000.

Our balance sheet remains strong with a current ratio of 2.1 and a long-term debt to equity of only 27%. We have excellent customers and our day sales in receivables remains low at 34.4 days. We were able to reduce our overall inventory down approximately $4 million or 25% as compared to the prior year end inventory as we had reductions in raw material and finished goods inventories. We continue to work with our suppliers in making sure deliveries are well timed to production and sales. Due primarily to the inventory reduction, our cash from operations contributed $3.4 million and we used $2.4 million for infrastructure improvements and $600,000 to reduce some debt. Our overall cash balance at the end of the year was over $1 million.

We mentioned last quarter that the key to getting profitability back in line is gross margin and we feel that the increase of 3% in this quarter is very important to our turnaround.

I’ll now turn the presentation back over to Stanislas.

Stanislas Vilgrain

I will now open the call up to questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Quinn Ruddick - Roth Capital Partners LLC.

Quinn Ruddick - Roth Capital Partners LLC

Maybe you could just remind me, how big was the price increase that you guys have rolled out over the past several months and how should we think about the sales increase being driven from pricing versus volume increases?

Ronald R. Zilkowski

Quinn, as you know the price increase was more layered into the development of new products to people that we were selling. It wasn’t just an overall flat percentage increase so as we redeveloped or we added product to certain items for people, those prices were reflected in the new increases.

Quinn Ruddick - Roth Capital Partners LLC

Secondly, if you could just give a little more color as far as the status of plans, how that’s going currently? What steps you’ve taken over the past quarter and anything else you could provide?

Stanislas Vilgrain

We’re quite satisfied that in the gross margin area some of the actions we’ve taken have actually ended in very good results and we’ll hopefully continue to yield good results. Some of it is the raw material area, productivity, added push on the way to manufacturing to try to yield a better margin, and on the other side we’ve also reduced the size of the management team over there and it seems like we have more of a direct control over it and it’s one, seeing some money and two, making it a little bit more direct in terms of communication. The customers are getting a better read of how we are doing and how things have improved over there.

Ronald R. Zilkowski

I think overall also from my perspective too and I think I see the group really working together more closely. I think in the past there were too many people working alone on what they described was their responsibility but not necessarily coordinating with the other people in the field. And now we have a team over there that gets together every week, they discuss other issues, they document it and it’s really coming together really nicely.

Quinn Ruddick - Roth Capital Partners LLC

I know part of the restructuring there was eliminating some of the top management. Have they been replaced or is it more they’re reporting directly to US management?

Stanislas Vilgrain

They are reporting directly to US management.

Operator

Our next question comes from [Jerry Schnero] - JPMorgan.

[Jerry Schnero] - JPMorgan

First, can you elaborate a little bit on what happened to the restaurant channel in the fourth quarter? And I guess as part of that, if you took out the customer that built inventory last year, what would sales have looked like?

Ronald R. Zilkowski

That’s a good question. It was primarily related to a prior year ramp up of a new customer that caused this year to look a little negative. But that was very as I recall substantial increase last year; somewhere around 100% or a couple million dollars.

Stanislas Vilgrain

And the national restaurant chain with an overall increase you’re going to see those high ups and downs from quarter to quarter depending on when the new menu items are coming into the restaurant chain at the time and when it’s prompted for.

[Jerry Schnero] - JPMorgan

Can you talk about maybe products you’re testing in general, maybe without mentioning any specific names, types of products?

Stanislas Vilgrain

It’s mostly protein, salmon, lamb, chicken in four different national restaurant chains and as we add items and some of the items are going on promotion, some are not, some are leaving the promotion, some are leaving the menus so that’s why you have the [inaudible] to keep adding products. And as we keep adding those products sometimes you have huge jumps and sometimes you have increases from month to month. But overall we think we’ve hit something big there because we are seeing in the casual dining they have to kind of reinvent their business and we are [seeking] very well there. Very easy training for new product introduction, no need for new labor, the cost is fairly [inaudible], there’s no yield problems or anything like that. Big safety improvements. So all of that is moving in our direction.

[Jerry Schnero] - JPMorgan

On the cost side, when you look at your sales and marketing and G&A, obviously today they’re good size percentages of revenue. Do you look at those as costs that there are opportunities on to reduce or simply that you just need a lot more sales to leverage what you currently have?

Stanislas Vilgrain

Definitely we think your first opinion, I think there is still some -

Ronald R. Zilkowski

I don’t know about in the sales and marketing side. That is fairly contained. But in the G&A side we definitely know that there are places to cut and we’re really focused on that for 2009.

[Jerry Schnero] - JPMorgan

Do you have a target number or range of how much you think you can take out of there, because that is a pretty big number?

Ronald R. Zilkowski

I’m not really that sure how much we can take out of there but we’re definitely doing everything we can to get that number down.

Stanislas Vilgrain

In value. Not only in percentage but in value.

Operator

Gentlemen, it appears we have no further questions.

Stanislas Vilgrain

Thank you very much for being at our conference and we’ll now close it. Have a great week and a good weekend. Thank you.

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