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Article Excerpt
OPERATOR: Good afternoon. I will be your conference operator today. At this time, I would like to welcome everyone to the Diamond Foods fiscal 2009 second quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions). Now at this time, I would like to turn the conference over to Mr. Bob Philips. Please go ahead, sir.
BOB PHILLIPS, TREASURER, VP OF IR, DIAMOND FOODS, INC.: Thank you, Dustin, and good afternoon, everyone. Welcome to the Diamond Foods investor conference call and webcast to review the financial results of our fiscal 2009 second quarter which ended January 31. Before we get started, let's cover a few housekeeping items.
First, a printed copy of our prepared remarks will be available on our website, diamondfoods.com under the section titled Investor Relations followed by earnings releases within one hour after the call's conclusion. Second, we have arranged for a taped replay of this call to be available via telephone beginning about three hours after the call's conclusion through midnight eastern time on March 16. The toll free dial in number to access the replay is 1-888-203-1112. Otherwise, use 719-457-0820. The conference ID is 9395904.
In addition, this call is being webcast live and a replay will be available on the website. Third, we want to remind that you during the course of today's call, we will make forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995, including projections of our results. Since actual results may differ materially from those projections, we encourage to you learn more about the risks and uncertainties that affect our business by reviewing our SEC filings under the heading risk factors. Note that our forward-looking statements are based on factors that are subject to change and therefore, these statements speak only as of the date they are given. We do not undertake to update forward-looking statements.
Now I would like to turn the call over to Michael Mendes, our President and Chief Executive Officer.
MICHAEL MENDES, CEO, DIAMOND FOODS, INC.: Thanks, Bob. Good afternoon, everyone, and thank you for joining us. On our call today will be Steve Neil, our Chief Financial and Administrative Officer and Andrew Burk, our Senior Vice President of Marketing. Gary Ford, our Chief Operating Officer, will join us for the Q&A session.
During the last few quarters, the deteriorating global economy has resulted in many companies reporting constricting margins and a pessimistic view as to when conditions may improve. Diamond Foods has not only weathered these conditions, but has prospered. Our focused business model and ability to rapidly adapt to change have enabled to us post year-over-year EPS growth for six quarters in a row. This quarter was another example of our ability to deliver strong results. North American retail sales grew 27% led by performance of Emerald and Pop Secret. These trends are continuing as we begin the third quarter as Emerald set a new market share record of 8% for the month of February. For the fifth quarter in a row, gross margins grew the prior year as our mix of retail sales improved to nearly 90%. In fact, our gross margins increased even though we spent significantly more promotions in order to deliver greater value to consumers. In the second quarter, we earned $0.37 per share, 118% above EPS of $0.17 for the same period last year. Earnings were $0.03 above the top end of our guidance range which we just raised by $0.05 at our analyst meeting in late January. During the current economic environment, we are increasing our investment in our brands as we look to sustain and expand market share.
And we'll now provide some more detail on our efforts to enhance brand value in order to stimulate sale and distribution growth.
ANDREW BURKE, SVP OF MARKETING, DIAMOND FOODS, INC.: Thanks, Michael. Our retail brands are well positioned to grow. Diamond culinary nuts are benefiting from consumer trends to prepare more meals at home, and the brand resonates strongly with retailers and consumers, especially in today's economy. Emerald offers consumers nutritious, innovative snacks that are a convenient source of dietary protein. Pop Secret has also benefited from recent consumer trends favoring in-home entertainment, and the category has begun to grow as the two national brands have stepped up investment. We have worked hard improving the distribution of our core Emerald items in grocery over the last year.
While Emerald's brand level distribution has remained steady at just under 90%, its higher velocity items have gained shelf space and are driving sales growth. For example, Emerald's almond sales have increased 32% over the last twelve weeks in US grocery while our whole cashew business is up 49%. This resulted in Emerald driving double-digit growth while the category declined. In the mass merchandiser channel, Emerald's 100 Calorie Pack items began shipping nationally in the second quarter and continue to perform well. We anticipate an expansion of additional items by the end of the summer. In Club, Cocoa Roast almonds started selling in 150 stores last quarter and will be expanding 550 nationwide this spring. In December, we began shipping two new Emerald dry roasted peanut items to select retailers in the Northeast. Initial sales are encouraging, and we will continue to expand the rollout to new markets in a disciplined manner so we can properly support this program. This is an important initiative for us since these items target a segment of the market, peanuts, which represent about 30% of the dollars and 50% of the volume in this snack nut category. We believe our product quality and 16-ounce clear PET package offer an attractive value for both the retailer and consumer. We remain committed to investing in our brands. It is especially important in today's environment to demonstrate the unique value and role our brands can play in consumers' every day lives.
This spring, Diamond culinary nuts will run a recipe contest asking consumers to submit their favorite recipes. The grand prize is a trip to Napa's Culinary Institute of America, and the winner gets his or her recipe printed on million of bags of culinary walnuts. This is our first spring promotion in years and comes on top of new distribution resulting from being named the category manager at one of the top three grocery chains in the US. This month, we launched print and at home creative in support of our Emerald Cocoa Roast almonds. Our proprietary dry roast process delivers a rich, satisfying flavor without adding any calories. Consumer response to this item has been strong, and we look forward to the results of our added...
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