December 7/Entertainment Close-Up -- Del Monte Foods reported net sales for the second quarter fiscal 2011 of $940.9 million, compared to $958.9 million last year, a decrease of 1.9%. Operating income was $148.0 million, compared to $140.6 million last year, an increase of 5.3%. Income from continuing operations was $81.1 million, compared to $62.6 million last year, an increase of 29.6%. Earnings per share from continuing operations (EPS) was $0.41 compared to $0.31 EPS last year. Results for the second quarter fiscal 2010 included pretax costs of ~$17 million ($0.05 EPS) related to the Company's 7.5% notes offering and 8.625% notes tender offer.

Net sales for the second quarter fiscal 2011 declined 1.9%, as Consumer Products decreased 5.4% and Pet Products increased 2.6% Overall unit volume declines negatively impacted the topline by 1.1% (driven by Consumer Products, primarily in tomato and vegetable). Net sales was also negatively impacted by the South American sales primarily due to the devaluation of the Venezuelan currency in January 2010. Positively contributing to net sales was the impact of new products across the portfolio which contributed 1.3%.

Operating income for the second quarter increased 5.3%. The $7.4 million increase in operating income reflects lower costs (primarily due to productivity savings and a benefit from a settlement of a claim with a vendor), a benefit related to the company's annual trade spend estimate evaluation related to prior year activity (reflected in Q2 F11 versus Q3 F10), lower marketing investment (driven by Consumer Products), and lower G&A expense, which more than offset the negative impact of the topline.

Operating margin was 15.7% for the second quarter compared to 14.7% last year, an increase of 100 basis points. Higher gross margin (due to lower costs mentioned above) and lower SG&A as a percentage of sales (due to lower marketing investment driven by Consumer Products) positively impacted operating margins.

Income from continuing operations for the second quarter increased $18.5 million to $81.1 million from $62.6 million last year, which was primarily driven by lower interest expense (due to the absence of the prior year refinancing costs) and higher operating income. Second quarter EPS of $0.41 was up $0.10 from second quarter fiscal 2010 EPS of $0.31 (which included $0.05 of debt refinancing costs) primarily due to higher income from continuing operations.

For the second quarter, Pet Products net sales were $433.2 million, an increase of 2.6% over net sales of $422.1 million in the prior year period. The increase in Pet Products net sales was primarily driven by strong unit volume growth (particularly in dry pet food and pet snacks) and new product volume growth (particularly in 9Lives). Higher trade spend (which supported dry pet food and new products) negatively impacted net sales.

Pet Products operating income increased from $84.8 million in second quarter fiscal 2010 to $92.7 million in second quarter fiscal 2011, or 9.3%. The positive impact of the topline and lower G&A expense more than offset higher marketing investment.

At 21.4% for the second quarter 2011, operating margin for Pet Products was strong, the company reported, increasing 130 basis points versus the prior-year period. Higher gross margin (due to favorable mix and productivity savings) and lower SG&A as a percentage of sales positively impacted operating margins.

For the second quarter, Consumer Products net sales were $507.7 million, a decrease of 5.4% from net sales of $536.8 million in the prior-year period. The decrease in Consumer Products net sales was driven mainly by lower unit volume (driven by tomato and vegetable). South American sales also negatively impacted net sales primarily due to the devaluation of the Venezuelan currency in January 2010. Net sales was also impacted by decreased pricing in government bids for fruit. Positively contributing to net sales was new product volume (particularly from No Sugar Added Diced Pears in plastic cups and Fruit Naturals Berries) and a benefit related to the company's annual trade spend estimate evaluation related to prior year activity (reflected in Q2 F11 versus Q3 F10).

Consumer Products operating income increased from $72.5 million in the second quarter fiscal 2010 to $74.4 million in second quarter fiscal 2011, or 2.6%. The positive impact of lower costs (driven by productivity savings and a benefit from a settlement of a claim with a vendor), the trade spend benefit mentioned above, lower marketing investment, and lower G&A expense more than offset the negative impact of the topline.

Operating margin for Consumer Products was 14.7% for the second quarter fiscal 2011, compared to 13.5% last year, an increase of 120 basis points, driven by the factors mentioned above.

First-half Results
The company reported net sales for the first half fiscal 2011 of $1,745.5 million compared to $1,772.6 million last year, a decrease of 1.5%. Income from continuing operations was $141.0 million, or $0.70 EPS, compared to $121.5 million, or $0.61 EPS in the previous year. Results for the six months ended November 1, 2009 included pre-tax costs of ~$17 million ($0.05 EPS) relating to the company's 7.5% notes offering and 8.625% notes tender offer.

Net sales for the first half fiscal 2011 declined 1.5%, as Consumer Products decreased 5.7% and Pet Products increased 3.1%. Overall unit volume declines negatively impacted the topline by 1.3% driven by retail volume declines in Consumer Products. Net sales was also negatively impacted by the South American sales primarily due to the devaluation of the Venezuelan currency in January 2010. Higher trade spend (primarily in dry pet food) reduced net sales by 0.7%. Positively contributing to net sales was the impact of new products across the portfolio which contributed 1.3%.

Operating income for the first half fiscal 2011 increased 2.3%. The $5.9 million increase in operating income reflects lower costs (primarily due to productivity savings) which more than offset the negative impact of the topline.

Operating margin was 15.3% for the first half fiscal 2011, compared to 14.8% last year, an increase of 50 basis points. Higher gross margin was primarily driven by productivity savings.

Income from continuing operations for the first half fiscal 2011 increased $19.5 million to $141.0 million from $121.5 million last year, primarily driven by lower interest expense (primarily due to the absence of prior year refinancing costs) and higher operating income. First half EPS of $0.70 was up $0.09 from first half fiscal 2010 EPS of $0.61 (which included $0.05 of debt refinancing costs) primarily due to higher income from continuing operations.

Cash provided by operating activities, less cash used in investing activities was ($122.1) million in the first half fiscal 2011 compared to ($133.1) million in the prior year period primarily due to lower capital expenditures.

Excluding the impact of the potential transaction announced on November 25, with a consortium of private equity funds affiliated with Kohlberg Kravis Roberts & Co. L.P., Vestar Capital Partners, and Centerview Partners, the company now expects for fiscal 2011, net sales growth of -1% to 1%t over fiscal 2010 net sales of $3,739.8 million, compared to previous expectations of 1-3%.

The company continues to expect fiscal 2011 diluted EPS from continuing operations of $1.38 to $1.42, excluding the impact of the potential transaction. EPS guidance was maintained despite lower expected volume (primarily in lower margin products) due to reduced levels of planned promotional activity. In fiscal 2010, the company generated $1.19 GAAP EPS from continuing operations (which included ~$0.11 EPS relating to the closed notes and tender offer as well as the refinancing of the Senior Credit Facility).

From the December 8, 2010, Prepared Foods' Daily News
For more of the latest news from the food and beverage industry, visit Prepared Foods' Daily News