Del Monte Foods Company F1Q09 (Qtr End 07/28/08) Earnings Call Transcript

| About: Del Monte (DLM)

Del Monte Foods Company (DLM) F1Q09 Earnings Call August 28, 2008 10:00 AM ET

Executives

Richard G. Wolford - Chairman, President, Chief Executive Officer

David L. Meyers - Chief Financial Officer, Executive Vice President - Administration

Larry Bodner - Senior Vice President - Finance, Investor Relations and Corporate Communications

Analysts

Vincent Andrews - Morgan Stanley

Aslam – Stephens, Inc.

Ann H. Gurkin – Davenport & Co. of Virginia, Inc.

Analyst for Reza Vahabzdeh – Lehman Brothers

Paul Moomaw – Hester Capital Management

Edan Ebebunia - Columbia Management

Sean [Tisoro] – BlackRock

Operator

Welcome and thank you for joining Del Monte Foods Company first quarter fiscal 2009 earnings conference call. (Operator Instructions) Now I will turn the call over to Larry Bodner, Senior Vice President - Finance, Investor Relations and Corporate Communications, Del Monte Foods.

Larry Bodner

With me today are Rick Wolford, Del Monte’s Chairman and CEO, and Dave Meyers, our CFO. The call today will last one hour. In the interest of time, we’d ask you to limit your questions to one per person.

Let me remind everyone that statements made during this conference call which are not historical facts including any statements about the company’s targets, beliefs, plans or expectations are forward-looking statements and are based on management’s current plans, estimates and projections. The company does not undertake to update any of these statements in light of new information or future events. Forward-looking statements involve inherent risks and uncertainties and investors should not place undue reliance on them. There are a number of important factors that could cause actual results to differ materially from those continued in such statements. These factors are described in more detail in the earnings release we issued today and in our filings with the SEC.

On June 29, 2008 the company announced the divestiture of its seafood business including StarKist. Unless otherwise specified all financial results today discussed on the call relate to continuing operations only and therefore exclude StarKist. The all outlets share data we will discuss today are internal estimates based on Nielson grocery share data and Nielson all outlet panel data for the 13 weeks ended July 26, 2008. Additional 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.

Richard G. Wolford

We’re pleased with our Q1 top line growth of 16% which illustrates Del Monte’s solid business performance in the market place. Our consumer and pet businesses delivered double-digit gains of 21% and 11% respectively. Importantly, the strength of the top line reflects a good balance of base new product volume growth as well as the results of aggressive pricing actions that we’ve taken. We’re pleased with the execution of these actions as we realize solid volume performance despite significant pricing particularly in vegetables. As well however, a portion of our volume gains were also driven by promotional activity primarily in tomatoes and dry dog. Additionally, consumer migration towards large-size bags and value channels contributed to a negative mix impact particularly in our dry pet business.

Turning to EPS, the rapid acceleration of costs during late spring in Q1 exceeded the levels that we expected at the time that we took our earlier pricing actions and as expected led to a loss for the quarter.

Looking at our portfolio broadly, all outlet category trends continue to be healthy. In consumer, the fruit and sub-categories, each posted volume growth. Tomatoes remained flat and while category volumes in vegetables were down the decline was at a lesser rate than previous quarters. In pets category volumes were generally flat but up materially on an $8.00 basis with the exception of wet cat which experienced a volume decline.

In terms of market share Del Monte largely maintained its all outlet share position across its consumer portfolio and posted modest gains in total pet driven by dry dog. We view this share performance as positive given the increased price gaps which reflect our pricing actions which private label has lagged in the near term. During the quarter we saw evidence of consumers migrating toward value with respect to channel and percent of purchases made on veal as well as some trade-down to private label reflecting increased promotional activity. These trends led to some private label market share gains in consumer as well as in some select areas of pet, primarily wet cat. Overall, the business top line performed well underscoring our brand strength in a market which is undergoing significant changes in pricing.

Now a brief update on the company’s progress against our accelerated growth strategy which we outlined during our July Investor Day. During Q1 we continued to execute pricing actions as well as to drive gains and productivity, both of which are critical to offset the cost increases that we face. Importantly, to create greater earnings capability we also continued our focus on two primary objectives to unleash the value of our core brands and to drive growth engines in pet products and packaged produce, both supported by increased investment and innovation. During Q1 we also continued our progress to heighten the marketing center focus of our organization which is a key building block for our future success. I’ll now touch on each of these areas briefly.

First, in Q1 we continued our pricing and productivity actions. Toward the end of Q1 we implemented average price increases of 14% in vegetables and 13% in tomatoes. These additional pricing actions were taken to offset the late spring and Q1 cost acceleration and are being reflecting on shelf. In addition, we have recently announced a 7% average price increase for fruit effective early September. This also reflects the recent cost increases and is deeper and earlier than initially expected. During Q1 we also increased pet pricing by 5.5% across the portfolio. However, reflecting continued cost increases we are actively evaluating additional pricing in pets.

On the productivity front we continue to make great progress with $13 million in Q1 productivity and transformation savings. We remain on track to deliver a total of approximately $50 million in annual savings. As we highlighted at Investor Day increased marketing investment and best in class innovation are both critical to unleashing the value of our core brands and in driving our growth engines.

Looking at marketing first, we began ramping up our spending during Q1. Specifically we have increased marketing investment and pet by over 30% year-over-year in support of events such as Milk Bone’s 100 year anniversary campaign which kicked off in New York in July. This centered on the world’s biggest dog house in Times Square resulting in significant media coverage for this a key pillar brand of ours. In addition we launched television ads in support of our new Meow Mix Wholesome Goodness natural pet food line, which are driving early success particularly for wet cat. As expected we will begin to increase spending behind our packaged produce platform in Q2. In total we continue to target fiscal 2009 marketing spending at at least 20% above the F08 levels.

Turning to innovation, we’re pleased with the early results of some of the products that we highlighted at Investor Day. In pet we’ve seen positive innovation results against our premium wet cat offering strengthening our platform here. We are enjoying continued strength from Meow Mix Market Select Cups driven by successful line extensions and are seeing positive early results in our recently launched Meow Mix Wholesome Goodness wet product line. While the Wholesome Goodness product is not yet in full distribution, early results indicate good velocity as well as being highly incremental to the segment.

On the consumer side, early reads on our packaged produce multi-serve grapefruit bowl are positive with significantly higher-than-expected distribution in grocery and mass. This success builds on our packaged produce platform which continues to grow through the increased trial and expanded distribution of our base fruit naturals line. We continue to be very encouraged by the potential of this platform which we are continuing to target as an incremental $200 million opportunity over our current $145 million packaged produce base business. Looking at Harvest Selections, consumer performance here is meeting expectations with current velocities actually ahead of those that we achieved in our test market.

Finally during this quarter to support the strategy we’ve also taken important steps to build our marketing capabilities and to heighten the marketing central focus of our organization. With the leadership of Nils Lommerin and Bill Pearce, we have met key milestones as we strengthen and centralize our marketing organization. All key marketing positions are filled and the relocation of the entire marketing function to San Francisco is expected to be complete in September.

In sum, I believe that we are making good progress against our accelerated growth strategy and are pursuing the right steps to enable Del Monte to increase its margin structure and drive increased growth revenue.

Turning back to Q1, as I mentioned earlier, Del Monte realized strong top line performance across the portfolio driven by a balanced mix of base new product volumes as well as pricing. However while our top line growth was strong, we did not deliver a corresponding increase in bottom line results. The singular and primary driver was significant cost acceleration in late spring and Q1 which exceeded the pricing actions we’d taken earlier. In addition there were other drivers offsetting the top line strength and those include some lower margin volume particularly in dry pet and tomatoes, increased marketing investment behind pet, and transition costs related to the centralization of all of our marketing function sin San Francisco.

Looking at each in a bit more detail, as mentioned the rapid recent acceleration of costs required that we take additional pricing actions in Q1. Importantly, the pricing cost dynamic is expected to improve significantly toward the back half of fiscal 2009 with accumulative impact of our pricing actions combined with productivity gains expected to fully offset costs in the second half of our fiscal 09.

Turning to additional factors starting with the lower margin volumes, as discussed on our Q4 2008 call we expected the first quarter of this year to be impacted by a promotional commitment to one of our key retailers for Kibbles and Bits. As a result we experienced a significant volume uptick in Q1 but at a reduced price point. This promotional program ceased in early August and our realized price for this brand has increased. Importantly, given the rising commodity cost environment we’ve now shortened the time horizon for our promotional commitments to customers.

During Q1 part of the increased tomato top line included additional volume due to expanded distribution in value channels for certain of our lower margin non-cut segments driven by promotional activity which actually resulted in favorable price gaps to branded competitors. Following the recent price increases across tomatoes our price gaps are now much more in line with historical norms.

With respect to marketing investment, as anticipated we increased spending in Q1 by almost 15% year-over-year and expect to continue this increase portfolio investment throughout the year in support of our accelerated growth strategy. Finally, during Q1 Del Monte incurred transition costs associated with centralization of all marketing functions in San Francisco. These costs are expected to be complete in Q2. Benefits should begin to accrue in the back half of fiscal 2009 with a net annual savings beginning in fiscal 2010.

Now I’d like to run briefly through consumer and pet business unit performance. Q1 net sales for our consumer products business was up 21% driven primarily by volume growth particularly in tomatoes and vegetables. The top line also benefited from year-over-year pricing actions as well as new product volumes. First quarter operating income was essentially flat as the positive top line impact on volume as well as the pricing that we took prior to Q1 was almost entirely offset by higher costs. Volume gains were driven by solid promotional activity in tomatoes combined with strength in vegetables which were primarily driven by stronger than expected baseline sales following our January price increase. Pricing in vegetables, fruit and tomatoes in addition to the success of new products also contributed to the top line gains. Cost pressures increased in Q1 across the consumer business primarily in raw products driven by vegetables as it competes with other grain related crops for acreage as well as higher logistics costs which were driven by fuel and higher packaging costs due to significant increases in 10 plate stemming from higher prices for iron ore and energy.

Turning to pet, in pet products our Q1 top line grew 11% reflecting the impact of two successive pricing actions so far this calendar year as well as strength in new products mentioned earlier and existing volume growth primarily in dry pet. As expected pet operating income declined significantly driven almost entirely by higher ingredient costs. We have taken significant prior year pricing actions as well as a late June price increase for this business. However, given the continued spike in costs we are now evaluating the timing and competitive dynamics of additional pricing. As expected cost increases in ingredients more than offset pricing benefits during the quarter and ingredient costs were up significantly driven primarily by increases in grains reflecting higher prices for corn and wheat as well as increases in proteins and [inaudible].

Now I’d like to turn it over to Dave.

David L. Meyers

In Q1 net sales exceeded our expectations primarily driven by strong results in vegetables, tomatoes and dry pet food. In vegetables our January pricing action has played out better than expected as baseline volume has continued to be strong. In tomatoes we realized favorable price gaps to branded competitors which drove stronger promotional volume gains. Dry pet food responded strongly to promotional offers. EPS from continuing operations of -$0.04 is favorable relative to our expectations. In Q1 net sales of 16% was strong. Looking at Q1 top line drivers in greater detail, existing product volume contributed 9.5 points and volume growth in new products contributed 2.8 points. Pricing increased sales by 5.6 points which was partially offset by 2 points of pricing related volume elasticity.

Gross margin for the quarter was 21.9% a decrease of 500 basis points versus last year. Net pricing drove a 4.5 point increase; however, higher commodity and ingredient costs including grains, fat, spoils and meats and other raw product increases drove a -8.4 points of margin contraction. As expected the relationship of pricing versus cost which was exacerbated by the timing of when pricing actions were implemented was the primary driver of our margin contraction. In addition, volume mix drove a 1.1 point reduction. Mix primarily in pet was negatively impacted by consumer migration to higher value, larger purchase size packages at non-grocery locations which tend to have a lower margin. This trend to value sizes was exacerbated by our long lead time promotional commitment to a particular channel for Kibbles and Bits. In addition we realized higher promoted volume in lower-margin channels for tomatoes as well.

The relationship of pricing versus cost was consistent with our expectations in the first quarter where our actions have lagged due to the year-over-year spike in inflationary pressure. Looking forward, we have a strong focus and commitment to get this relationship into equilibrium.

Q1 operating income decreased 63% with operating margins decreasing 400 basis points. Operating income contraction was driven by the $10 million decrease in gross profit as margin contraction exceeded the positive impact of a strong top line.

We also realized higher SG&A in part due to the higher volume-driven customer delivery expenses and higher diesel costs. In addition, higher costs were realized as a part of the transition related to the centralization of all marketing functions in San Francisco and marketing investments supporting pet new product introductions. The increases were partially offset by the absence of transformation expenses.

Interest expense in the quarter was $5 million lower primarily driven by lower interest rates. During the first quarter we spent $19 million on capital projects versus $23 million a year ago. Capital spending would be flat year-over-year excluding the transformational investments in the year ago period. We incurred $27 million in depreciation and amortization costs which includes $1 million of fee amortization included in interest expense.

On a year-to-date basis operating cash flow was a -$40 million versus a -$26 million a year ago. The decrease in operating cash flow was primarily driven by lower earnings which were impacted by continued cost pressures.

Now I’d like to discuss guidance for full year fiscal 2009. While Q1 EPS was a loss, it also reflects underlying business drivers that are tracking ahead of our original expectations. We drove better-than-expected top line growth, cost versus pricing coverage, as well as EPS. While encouraged by the early end market results, we are maintaining our guidance which we discussed at Investor Day in July reflecting the expected sale of our seafood business. We expect net sales growth of 6% to 8% and EPS from continuing operations toward the lower end of $0.58 to $0.62. Adjusted cash flow guidance is maintained at the lower end of $150 million to $170 million. The slide illustrates additional key guidance metrics including D&A and cap ex.

In looking at our cost buckets in greater detail we now anticipate approximately $300 million in gross inflationary and other cost increases relative to our $2.5 billion in total operational costs. This translates into a gross cost increase of approximately 12% and we believe reflects a 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 $300 million estimated increase is approximately $15 million higher than our previous estimate due to higher costs for non-hedgeable ingredients and metal packaging partially offset by favorable hedging in corn and other hedgeable commodities as well as the moderation in energy costs. We are now largely hedged through calendar year 2008 on key commodities which covers about 80% of our fiscal year. As a reminder, hedgeable commodities represent approximately 15% of our operational costs.

Further, we believe we have good visibility regarding our fruit, vegetable and tomato costs since the raw material prices and harvest conditions are tracking to our expectations thereby significantly reducing uncertainty in our cost structure.

Looking at our $300 million of cost increases in greater detail, raw product and ingredient costs are the primary driver of the $15 million change and are now expected to increase by approximately $175 million year-over-year. Packaging, manufacturing and logistics cost increases all remain essentially unchanged as compared to the ranges we discussed at Investor Day as you can see on the slide.

We are taking appropriate action 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 two increases in our pet business in the last seven months. During Q1 we also announced an approximate 7% increase across our fruit business effective early September. Further, we plan to take additional pricing in parts of our portfolio in the second half of fiscal 2009 and anticipate full-year pricing actions to be more than three times the average of our last three years. Importantly, our expected pricing actions have been adjusted to mitigate the incremental $15 million in cost pressure I mentioned earlier.

Across our fiscal year, 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 productivity program and transformation savings which are on track to generate $50 million of cost savings this year.

Looking to Q2, we expect solid top line growth with strong gains in pet and a solid top line growth rate in consumer. For the overall company a key factor in Q2 will be the continued higher cost inputs on a year-over-year basis in the form of ingredients, raw products, energy and packaging. EPS is expected to benefit from our aggressive pricing actions as we anticipate that the acute inflationary pressure will largely be offset by our pricing. In consumer we expect that pricing will fully offset cost increases while pet will experience a lag in cost coverage.

From a full-year perspective we are maintaining our EPS guidance provided at Investor Day with Q2 and the back half expected to largely track last year.

Relative to our planned sale of the seafood business, the divestiture is on track for a planned closing toward the end of our second quarter.

With that I’ll turn it back to Rick.

Richard G. Wolford

To conclude, I’m pleased with the top line momentum that we established during Q1 and looking forward we continue to expect to see strong top line results for the remainder of the year. However, as we are entering a key promotional period with price points that are significantly higher than prior promotional periods, we’re going to maintain our full-year guidance for net sales. While we continue to see cost pressure and volatility as negative impacts for the year, a significant portion of our hedgeable commodity costs are locked in for fiscal 09 and pricing is established for the raw product exposure of our packed business. Accordingly, we feel that we have a pretty good visibility into our cost profile for the remainder of the year. We remain focused on mitigating the cost pressures through aggressive pricing actions as well as productivity gains and believe that we will succeed in offsetting our second half 2009 cost increases.

Turing to the longer term, we remain squarely focused on our accelerated growth strategy to unleash the power of our core brands and to drive pet products and packaged produce growth engines. This strategy is critical to our future success and we’re making solid progress so far. The combination of these efforts is expected to drive long-term sustainable EPS growth for our company and for our shareholders.

With that I’d like to thank you all for joining us this morning, and we would like very much to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Vincent Andrews - Morgan Stanley.

Vincent Andrews - Morgan Stanley

Interest expense came in at about $27 million and if I just annualize that, that would get you to about $110 million which is below your $120 milling to $130 million guidance. Can you just help me understand where we are there?

David L. Meyers

I think the biggest thing is that our pack has come in a little bit later because of the weather conditions that we experienced in the spring and therefore you’re going to see our revolver increase over the next few months back to the normal levels.

Vincent Andrews - Morgan Stanley

So you’re still comfortable with the $120 million to $130 million then?

David L. Meyers

Yes.

Vincent Andrews - Morgan Stanley

The pet number came in well below what I think I and a lot of other people were expecting but you seem to indicate that it did better or you said broadly the business did better in the quarter than you expected. Would that be true for pet as well?

Richard G. Wolford

It would be true for pet in terms of top line and as we expected, the cost increases in pet accelerated at the end of last fiscal year and into this year. There was a significant acceleration in the commodity costs as everyone’s aware during Q1 and that impacted the cost of our business this year. As well some of our top line in pet reflected a softer mix than in prior year particularly in the dry dog as I mentioned with our promotional activity.

Vincent Andrews - Morgan Stanley

And if you could just remind us, it’s just the huge drop in operating income given the cost increases which everybody is well aware of at this point, why is pricing lagging so much? We’re just not seeing it lag so much in any other company.

Richard G. Wolford

Right. We took significant pricing last year. What happened beginning in the spring of calendar 08 is a dramatic increase in cost across our business and as a result of that we announced pricing in the end of last year, early part of Q1 and have implemented the pricing to address this most recent increase. The year-over-year increase was dramatic if we look at costs that we incurred last year versus this year and as soon as we had visibility to the cost we had increased our pricing. I think as you can tell we have significant pricing that we’ve implemented to address this cost, 14% in vegetables and so on as mentioned in the course of the prepared comments but the fact is that we, as well as the entire industry saw dramatic increases in of course the last four to six months and we’ve taken actions to address it.

We believe that the second half our pricing will meet those higher cost levels and so we expect that the actions we’ve taken will be successful. We have also taken significant steps in addressing that cost increase in Q2 so we should see improvement in the next quarter as well.

Operator

Our next question comes from Faraha Aslam – Stephens, Inc.

Faraha Aslam – Stephens, Inc.

Could you just share with us how the Tuna business, the cost, the overhead absorption that we’re going to have to overtake that cannot be allocated to Tuna and how that flows through your P&L.

David L. Meyers

Yes, we’re going to hopefully close the seafood business during the second quarter. Once we finish the closing and we have the actual numbers we will update everyone with those numbers.

Richard G. Wolford

So far as you know, part of our agreement in terms of the purchase agreement is a two year operating services agreement which goes a long way to mitigating that residual G&A, not really G&A but fixed cost that we have continuing after the sale of about 15% of our top line business. We expect that over the course of the next two years, as we said at investor day to address that residual fixed cost base by one, significant organic growth and two, taking clear steps over the course of the next period of time to reduce that fixed structure. So, we’re pleased with the transaction particularly given the fact that we have a two year process here with our OSA to help mitigate that cost increase. And by the way, the impact are in the guidance.

Faraha Aslam – Stephens, Inc.

Just a clarification Dave, you had said your second quarter will track to the year ago level so that will be 14 times roughly excluding extraordinary, that includes the Tuna business so I’m just trying to get clarity on that comment?

David L. Meyers

If you go to the press release we issued with the sale of the seafood business you’ll see that we estimated what are F08 numbers would be on a quarter-by-quarter business and it should go back to that.

Operator

Our next question comes from Ann H. Gurkin – Davenport & Co. of Virginia, Inc.

Ann H. Gurkin – Davenport & Co. of Virginia, Inc.

I just wanted to start with the pet segment realizing the cost pressures that are depressing the margins but can you get back to a 10%, 11% operating margin by the back half of the year? Is that doable still?

David L. Meyers

We haven’t provided what the margin is in the back half of the year but as Rick said our pricing and cost will be much more in balanced and in fact pricing will exceed costs and we fully expect our margins to come back up in the back half of the year. In fact, beginning in the second quarter our margins should come back up.

Richard G. Wolford

And to put some perspective on the kind of pricing and the cost challenges that we’ve had, and this goes back to the question asked earlier by Vince from Morgan, and that is year-over-year we’ve had $300 million cost increase which we’ve talked about and a good portion of that has taken place in the last six months. So, we have got a significant hill to climb but the pricing we’ve taken we think will achieve that and as Dave said will play out in Q2.

Ann H. Gurkin – Davenport & Co. of Virginia, Inc.

And then as you went back to the retailers to raise prices on vegetables, tomatoes, etc., are you getting any change in the level of push back from the retailers or are they absorbing these prices? Can you comment at all how discussions went?

Richard G. Wolford

Well, I think our discussions with our customers were pretty productive. One of the issues has been with the price increases, has been that we have been very thorough in our cost base, our fact base support for those price increases. Again, that goes to the point of why pricing lags cost increases. In today’s environment it’s not easy to take the kind of pricing that we’ve taken. The way you have to do that is by being able to demonstrate that you have a higher cost base, that you absolutely must offset. With that kind of a fact based selling approach which we’ve used has been effective for all of our customers in both grocery and mass. And while the industry broadly is accustomed to more pricing this year than in prior years, I can tell you it’s still not an easy process because no retailer is happy to see these kind of costs increases being based on to their customers.

However, with a fact base approach that we have used, we have been successful in implementing the programs that we’ve had, and as I mentioned earlier, when you look at our vegetable business while we’re not declaring total year victory, if you look at our vegetable business, we’re pleased with our first quarter performance as the base line volume there has actually increased with higher price points than in prior years. So, we believe our pricing actions have been effective. We still believe that we have significant challenge coming up in the second quarter during our holiday promotional period. We’re going to promoting at a higher price point than in prior years and we believe that’s going to represent a certain amount of – there are going to be issues there that we’re going to have to be very careful in managing. We absolutely know that everybody in each of our industries is facing the same cost challenges that we are. We know that they must pass them on through in costs so we expect that the price gaps that we have in our consumer business particularly will be addressed as the private label manufactures begin to move their pricing on through the system. Typically that always lags and the same will be true for all of our competitors in the pet business as well.

Operator

Our next question comes from Analyst for Reza Vahabzdeh – Lehman Brothers.

Analyst for Reza Vahabzdeh – Lehman Brothers

I was just curious how much additional pricing you need to take in the back half of 09 to offset your current projections for input cost inflation?

David L. Meyers

I think if you look at the pricing schedules we’ve got in the slides you can see significant pricing in Q1 and Q1 and as we’ve said we’ll continue to evaluate what incremental pricing we need to take in the back half.

Analyst for Reza Vahabzdeh – Lehman Brothers

So should I assume modest pricing?

Richard G. Wolford

As we said previously we’re looking essentially three times the average of our prior year average and that kind of gives you a direction as to what we would expect for the full year. We also mentioned that the cost increases in our consumer business to a large decree have been met, although we have some issues that we need to deal with there. Significantly, the pet business reflects an additional set of challenges as the grain complex and other commodity costs in that complex required for those products has truly spiked and accordingly we will be, as I said in my prepared words looking for increase pricing in the pet business as we go through the year.

Operator

Our next question comes from Paul Moomaw – Hester Capital Management.

Paul Moomaw – Hester Capital Management

I want to step back from the quarter for a second and ask sort of a big picture question. It sounds like you’re already working hard on the results for the fiscal year but it seems like Del Monte is in an interesting position because you manage such a valuable franchise of brands and yet you haven’t been able to deliver profit improvement and perhaps that’s because of the cost environment. For the shareholders say, because there’s something that maybe – I know you have a board meeting coming up, that the board could do symbolically and perhaps unilaterally to give the shareholders some hope for better days to come in terms of achieving more shareholder value like unstaggering the board or separating the Chairman and CEO roles or something that would be a symbol to us.

Richard G. Wolford

I think that the Board’s involvement with the strategy of the company is a very, very engaged one. The accelerated growth strategy that we talked about in our Investor Day in New York was a strategy that we developed in a great deal of detail working with the Board. As you may recall we made a substantial investment this year in our business to support that strategy and as a result it is evident in our projected EPS for the year. So the Board is very engaged in our strategies and are very engaged in the strategy that is going to drive long-term value for the shareholder as is management. That kind of involvement I think is probably the most critical involvement that we can have and that shareholders can have to ensure that there is a complete focus on what will drive long-term value. And I think that when you look at those types of examples, they are pretty substantive in terms of what involvement and interaction our Board has with our business.

Operator

Our next question comes from [Edan Ebebunia - Columbia Management].

[Edan Ebebunia - Columbia Management]

I just have a couple of housekeeping items. Just to compare year-over-year your EBITDA, what was your EBITDA in 08 if you exclude the StarKist and seafood for comparisons versus 09?

David L. Meyers

EBITDA is not a metric that we focus on. It’s not a GAAP metric. So we haven’t provided that information in the past.

And if you want to go into the guidance and the metrics that we do use, you can go into the slides which are available on our website as well as available today and see the kinds of metrics we measure ourself against.

Operator

Our next question comes from Sean [Tisoro] – BlackRock.

Sean [Tisoro] – BlackRock

I wondered if you guys could quantify or break down within the pet segment the higher G&A and the higher marketing cost just given your comment that you said in half two the pricing should be offset the cost. I’m just wondering if you could quantify each of those two variables.

David L. Meyers

We don’t get in to that level of detail. What we have said and what Rick said in his remarks is that our marketing spending in pet is up approximately 30% in the first quarter. Our overall marketing for the year is up in advance of approximately 20% for the year so marketing is a substantial input in to our operating income certainly this year as we increase our investments behind our pet business as well as our packaged produce.

Sean [Tisoro] – BlackRock

In the 30% and 20% in the fiscal Q1 and fiscal 09 respectively, are those specific to pet or are you talking more towards the whole company?

David L. Meyers

The 30% was specific to pet year-over-year, quarter-to-quarter, the 20% is for the whole company.

Operator

Our last question comes from Analyst for Reza Vahabzdeh – Lehman Brothers.

Analyst for Reza Vahabzdeh – Lehman Brothers

I just wanted to make sure I had this correctly, 80% of your cost for the year are locked in and contracted? Is that correct.

Richard G. Wolford

No, 80% of our hedgeable. Our hedgeable cost represents about 15% of our overall costs however, what we’ve also said is that another big bucket of cost is our vegetable, our tomato and our fruit raw product costs and we feel very good about having a good appraisal of what those costs are as well as our harvest costs for the year so we’re optimistic we’ve got a really good handle on our cost profile for the year.

Analyst for Reza Vahabzdeh – Lehman Brothers

And do your estimates assume that commodity costs stay at current levels.

Richard G. Wolford

Obviously our commodity costs are going to fluctuate but we feel good about where we are today.

Larry Bodner

Thank you. I believe that’s our last caller. We appreciate you calling in and look forward to talking to you again soon.

Richard G. Wolford

Thank you all very much. We appreciate your questions.

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