More zoom than gloom at CAGNY meeting

March 14, 2008
Many food companies plan to beat their 2008 earnings estimates, despite cost increases.

Following – maybe because of – a tough 2007 and despite soaring ingredient costs, more top-10 food companies promised improved 2008 financial performances rather than disappointments at the Consumer Analyst Group of New York (CAGNY) annual meeting.

Unilever reorganizing foods
A few days after the CAGNY conference, Unilever announced an organizational realignment, combining Home & Personal Care and Foods into a single category structure. The presidencies of Home & Personal Care and Foods will be merged under the leadership of Vindi Banga, currently president of Foods.
“To reflect the company’s strategic focus on growth in developing markets, Central & Eastern Europe will in future be managed within an enlarged region comprising Asia, Africa and Central & Eastern Europe,” a company announcement said. “Western Europe will become a standalone region.”
Anheuser-Busch, General Mills and ConAgra raised earnings projections, while Kraft and PepsiCo stood  by earlier, aggressive predictions.

“Fortunately for us, consumers still want to eat and wash, even when discretionary expenditure is tight,” Jim Lawrence, chief financial officer at Unilever Plc, told the analysts at the February meeting, held in Boca Raton, Fla.

To no one’s surprise, “unprecedented” ingredient and other cost increases were cited by nearly every speaker at the annual conference. Likewise, nearly every food executive promised price increases.

“Unprecedented input costs are impacting Kraft and the entire food industry. Therefore, we have redoubled our efforts to reduce overhead and other costs, while continuing to make the necessary investments in our brands,” said Chairman/CEO Irene Rosenfeld.

Otherwise, the largest company on the Food Processing Top 100© list, is chugging along quite nicely. Rosenfeld promised to grow both the top and bottom lines and reaffirmed the company’s 2008 guidance: organic net revenue growth of at least 4 percent and earnings per share of at least $1.90. Advertising and consumer spending will be in the mid-7 percent of revenue range, and operating income will grow faster than organic revenue.

“In 2007 … we delivered the best top-line performance since going public in 2001,” she said. “Put simply, we’ve done what we said we would; it’s working; and we’re going to keep doing it.”

Less upbeat was Richard Bond, pres./CEO of Tyson Foods Inc. The No. 2 company on the Food Processing Top 100© list expects “almost $800 million in increased grain and related input costs in fiscal 2008,” said Bond. Corn-based ethanol is putting pressure on grain costs. Tyson says nearly a quarter of the U.S. corn crop in 2008 is expected to be used to produce ethanol, compared to only 8 percent in 2002.

Bond said his company is working to offset the higher costs through risk management and by increasing finished product prices. Tyson also is pushing for changes in the government mandate on corn-based ethanol and the removal of tariffs on sugar-based ethanol imports.

At the same time, Tyson is making fuel of its own. In December 2007, Tyson and ConocoPhillips started turning beef tallow into renewable diesel fuel. Production started at 100 barrels a day and is now operating at 300-500 barrels a day. And a joint venture company, Dynamic Fuels, will convert fat, grease and other feedstock into renewable synthetic jet fuel. A production facility is being constructed in Louisiana and is expected to begin production in 2010.

Tyson’s recent mantra has been to maximize margins in its commodity businesses by reducing non-value added costs, improving yields and pricing and optimizing product mix and services. This has included such measures as consolidating some of the company’s beef operations, changes in bird weight and optimizing the number of value-added breast portions from each chicken.

Top 100© No. 3 PepsiCo also confirmed its 2008 guidance, expecting earnings per share of at least $3.72. The company expects full-year 2008 cash from operating activities to be approximately $7.6 billion and plans to repurchase approximately $4.3 billion in stock.

Chairman/CEO Indra  Nooyi said she is “very comfortable with our near-term view,” and believes the company is “ahead of the curve in changing its portfolio” to meet consumer demands for healthier food products.

Beer is back, according to August Busch IV, president/CEO of Anheuser-Busch Cos. (No. 5). “There has been an acceleration in consumer demand for beer over the past two years, and the company aims to capitalize on the improved growth of the U.S. beer industry.” Nevertheless, “Over the past year we have broadened our portfolio to enhance our participation in faster-growing, high-end categories.” He cited as innovative new products Bud and Bud Light Chelada, Landshark Lager and Bud Light Lime, the last of which will be launched in May.

No. 6 General Mills upped its projected earnings per share for fiscal 2008 (ending in May) to $3.45-3.47 – ahead of the previous target of $3.39-3.43 and significantly ahead of fiscal 2007’s $3.18 per share.

Stephen Sanger, who already has stepped down as CEO and will exit the chairman’s office in May, said he’s comfortable in “passing the baton,” because the company is entering another phase of long-term growth. He said General Mills has “an advantaged portfolio,” with 40 percent of sales from “inherently nutritious foods,” 13 percent from “better-for-you choices” and 47 percent from “quick and convenient options.”

Despite two high-profile recalls in 2007, No. 9 ConAgra Foods Inc. sees sales growth exceeding 4 percent in the near- and short-term and future annual EPS growth of 8-10 percent. CEO Gary Rodkin said the company would beat third-quarter and second-half estimates of diluted EPS from continuing operations (estimates were 70 cents for the second half ending May 31).

Although the main contributors are trading & merchandising and food ingredients businesses, consumer foods is delivering solidly, he said, despite increasing input costs. After some divestitures – meat, cheese and seafood – ConAgra is “becoming a true operating company that delivers sustainable, profitable growth.” Rodkin said. “There aren’t many companies that have gone through the gauntlet like we have in the past year,” he said, “but we’re still standing.”

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