The fourth quarter operating results were significantly impacted by several key developments, principally including the following:
- Continued and accelerated consumption declines in the pasta industry, resulting in lower sales demand and reduced operating margins, primarily due to price competitiveness and rising costs.
- Industry-wide retail consumption of dry pasta (as measured by ACNielsen) declined in volume by 4-5% and 6-7% for the 13-week and four-week periods ended October 4, 2004, respectively. During the fourth quarter, the Company's retail revenues decreased by approximately 20% (on a 9% reduction in volume) and institutional revenues increased approximately 4% (on a volume increase of 1%).
- Production and manufacturing cost inefficiencies in the initial eight weeks following the implementation of the Company's restructuring and rightsizing program, including the impact of transferring industrial products to other plant facilities, which resulted in higher than expected per unit manufacturing and distribution costs.
- Customer shipment delays resulting from reduced inventory levels and product availability issues, negatively impacted revenues.
- Higher than expected costs relating to the Company's inventory reduction strategy, implemented as part of the restructuring program, totaled $8.6 million.
- Reduced carb product sales were nearly 50% less than earlier expectations in spite of heavy introductory marketing spending of $3.9 million during the quarter. There were no sales to Atkins Nutritionals of their proprietary low carb products during the quarter. As the sales outlook for this line is substantially diminished, recoverability of certain assets related to the agreement of $0.8 million became uncertain and were expensed in the fourth quarter.
These developments resulted in materially different financial results than had been anticipated. This information is preliminary and subject to the Company's year-end closing process which is still underway, and includes further review by the Company's management of the preliminary results, completion of required impairment testing of acquired brands under SFAS 142 and completion of the audit by the Company's external auditors. We expect to report results generally in line with the following:
- Revenues: Fourth quarter -- $99 million; full year -- $417 million (down 15.1% for the quarter and 4.9% for the year).
- Restructuring and rightsizing program costs: Fourth quarter -- $1.9 million; full year -- $2.9 million.
- Cost of goods sold: Will include costs related to the inventory reduction component of the rightsizing plan of $8.6 million in the fourth quarter and $14.1 million for the full year. The fourth quarter amount includes costs relating to the Kenosha plant's suspended operations, costs incurred at two plants while temporarily shutdown during July, liquidation of certain higher cost inventory and provision of reserves for certain slower moving inventories. In addition, the Company has continued to experience higher raw materials, utility and freight costs.
- General and administrative expenses: Will include additional reserves for doubtful accounts totaling $1.4 million to replenish reserves after the write off in fiscal 2004 of approximately $1.0 million relating to a customer bankruptcy filing and provide for anticipated uncollectible accounts that have been identified.
- Operating income: Fourth quarter - ($14.1) million loss; full year -- $17.7 million income. The operating profitability was impacted by the following factors:
Fourth Quarter Full Year Reduced carb product development costs --- $3.9 million Reduced carb marketing and introductory costs $3.9 million 6.0 million Restructuring expenses 1.9 million 2.9 million Inventory reduction costs 8.6 million 14.1 million $14.4 million $26.9 million Operating profit, excluding these costs, would have been $0.3 million and $44.6 million for the fourth quarter and full year, respectively. -- Net income (loss): Fourth quarter -- ($11.9) million; full year -- $3.3 million -- Fully diluted earnings (loss) per share: Fourth quarter -- ($.66) per share; full year -- $.18 per share. Excluding certain costs identified in the operating profit discussion above, fully diluted EPS would have been ($0.13) for the quarter and $1.14 for the year, respectively. In related matters, the Company noted:
Inventories: As a key part of the rightsizing plan, inventories were reduced during the fourth quarter by approximately $24.0 million, significantly ahead of the target of $15 to $20 million.
Cash flow: Operating cash flow for the fourth quarter was approximately $23 million and free cash flow (operating cash flow less capital expenditures) was approximately $18.5 million.
Debt reduction: Long-term debt was $289 million at the end of the fiscal year 2004, a reduction of approximately $20 million during the fourth quarter.
Bank credit agreement: The Company is currently in discussions with its bank group to revise certain financial covenants for 2004 and 2005. The Company expects to receive approval of the amendment by November 10, 2004.
Dividend: Subject to the completion of the amendment with the bank group, the Board of Directors also approved the Company's quarterly dividend of $.1875 per share.
Fiscal 2005 Business Outlook:
After the most challenging year in the Company's history, the Company's strategic plan is focused on returning to several of its historical operating approaches and performance characteristics, including greater profitability, higher margins and lower production cost. To achieve these objectives, the plan targets a smaller base of more profitable volume and includes profit improvement through price increases and/or cost reductions for all Strategic Business Units. The new pricing strategy is already being implemented with particular emphasis on the lowest margin volumes. The plan anticipates total revenues will be lower than last year, due to the impact of continued consumption declines in the broad pasta market and the effect of optimizing our volume portfolio.
Our anticipated smaller, more profitable volume portfolio will be well matched with our recently adjusted production capacity. The Kenosha plant will remain in a stand-by mode, and in fact, has recently been partially re-activated for a few weeks to balance short-term demand with production availability. We are targeting an operating model that will return us to the high asset utilization and low cost producer status that drove our excellent operating profitability in previous years (e.g. 1999 - 2002). Management has incorporated into the 2005 business plan over $12 million in annual cost savings resulting from the 2004 restructuring and rightsizing program.
In the near term, we continue to complete our restructuring and rightsizing program. Immediate priorities include rebalancing and building our inventory position to eliminate our current order backlog, re-establish our excellent historical customer service levels and, ultimately, to achieve our targeted operating cost profile. There is also near-term variability in the timing of price increases and the potential impact on our volume base. Accordingly, we expect to show steadily improving, sequential progress each quarter.
In addition, our 2005 business plan is strongly focused on balance sheet management. We expect capital expenditures to be under $20 million in 2005 and have implemented working capital reduction efforts. We also have a focused program to reduce debt levels and interest cost during the year.
Key Financial Objectives
Based on our objectives, strategies and action plans, as well as current assumptions regarding pasta market conditions, commodities and other key cost components, we have established the following targets for fiscal 2005:
-- Net revenues $370 - 400 million -- Operating profit $38 - 45 million -- Interest expense $15 - 17 million -- Net income $15 - 18 million -- Earnings per share $.80 - $1.00 per share -- Free cash flow - available for $40 - 45 million debt repayment & dividends (operating cash flow less capital expenditures)
The 2005 business plan calls for steady profit improvements each quarter and if the fourth quarter of 2005 results are sustained in 2006, the Company would be approaching its historical operating income margin of mid-teens as a percent of revenue.
Tim Webster commented on the 2005 business plan: "After the painful experience in 2004 of consumption declines, over-capacities and related price and margin pressures, the limited consumer acceptance of high quality new reduced carb products, and our own restructuring and rightsizing program, we believe that our 2005 business plan will return us to our profitable leadership position in the industry. With clear focus we will use our state-of-the-art manufacturing facilities as our key competitive advantage for high quality products, low cost production and excellent customer service."
Founded in 1988 and based in Kansas City, Missouri, American Italian Pasta Company is the largest producer and marketer of dry pasta in North America. The Company has five plants that are located in Excelsior Springs, Missouri; Columbia, South Carolina; Tolleson, Arizona; Kenosha, Wisconsin and Verolanuova, Italy. The Company has approximately 650 employees located in the United States and Italy.
SOURCE American Italian Pasta Company
10/28/2004
CONTACT: George Shadid - EVP & Chief Financial Officer of American Italian Pasta Company, +1-816-584-5621, [email protected]
Web site: http://www.aipc.com
