Del Monte Reports Exceptionally Strong Quarter

Del Monte Fruit NaturalsDespite experiencing volume declines, Del Monte Foods Company reported exceptionally strong results for its fiscal '09 third quarter.

During the results conference call, one analyst termed the quarter the company's best since the start of the decade.

Net sales rose 8.4% to $942.3 million for the quarter, and earnings per share rose to 30 cents, versus 24 cents in Q3 fiscal '08.

Year-to-date net sales rose 11.5% to $2.57 million, and EPS was 40 cents, versus 38 cents for the first nine months of fiscal '08.

Del Monte increased its full-year net sales growth guidance to 9% to 11% (versus previous guidance of 8% to 10%) and its guidance on diluted EPS from continuing operations to 64 to 68 cents (versus a previous target of 58 to 62 cents).

Aggressive pricing increases contributed 14.4% to net sales in Q3 and 9.6% to net gross margin, which increased 2.8%. The price increases, combined with promotional pricing by competitive brands in the fruits and vegetables sectors, in particular, resulted in a volume decline of 6.7% on existing consumer foods and pet products (which Del Monte characterized as "consistent with expectations"). However, new-product volume rose 2.4%, and overall costs were cut by 6.6%.



Within consumer products, the price hikes and volume growth in new products such as grapefruit bowls and SuperFruit produced a net sales gain of 3.4% to $509.3 million. Del Monte lost share, with fruit declining about 5 percentage points to a 27.8% share, vegetables down 5.5 points to 25.8% share, and tomatoes down 0.6 points to 16.8% share. However, chairman/CEO Rick Wolford said that volume appears to be picking up in Q4, adding that Del Monte believes that competitive brands and private labels will have to raise prices to reflect cost increases.

In pet products, price increases on both food and snacks depressed overall volume slightly (losses were offset by volume gains in Kibbles 'n Bits and new Meow Mix products), but net sales jumped 15.1%, to $433 million.

"The trends in the pet food industry show very little impact from the recession," notes Christopher Shanahan, a research analyst covering food and other segments for marketing research firm Frost & Sullivan. "By and large, people are not trading down on pet food -- they'd trade down on their own diets first."

In addition to the price increases to recoup margin erosion from input costs in recent years and its focus on operational cost reductions, Del Monte confirmed continuation of aggressive marketing investment as part of its overall accelerated growth plan.

The company reported that full-year FY '09 marketing spending will be up about 30%, including a significant increase in Q3 and an even larger one in Q4 -- and that investment levels will continue to be stepped up next year. The major thrust is on core brands. Packaged produce saw increased investment in Q3, and Pup-Peroni had its first-ever national television campaign. Q4 plans call for more efforts for both of those lines, along with Fruit Naturals, Meow Mix, Milk-Bone and SuperFruit, according to a company source.

Wolford said that Del Monte is realizing significantly improved marketing efficiencies as a result of its recently completed centralization of all marketing functions in San Francisco under William Pearce, who was hired in the newly created position of CMO last May.

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