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Article Excerpt
OPERATOR: Good afternoon. At this time, I'd like to welcome everyone to the Diamond Foods fiscal 2009 first quarter earnings conference call. (Operator Instructions) And now at this time, I'd like to turn the call over to Mr. Bob Philips. Please go ahead, sir.
BOB PHILIPS, DIAMOND FOODS, INC.: Thank you, Dustin, and good afternoon everyone. First of all, we apologize for the delay in the start of the call today. Our phone carrier had some technical problems. Hopefully those are now behind us.
Welcome to the Diamond Foods investor conference call and webcast to review the financial results of our fiscal 2009 first quarter, which ended October 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 web site, diamondfoods.com under the section titled, Investor Relations followed by Earnings Releases, within one hour after the call's conclusion. Second, we've 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 December 8. The dial-in number to access the replay is 1-888-203-1112 from the US or Canada or 719-457-0820 elsewhere. And the conference ID is 5429012. In addition, this call is being webcast live and a replay will be available on the web site.
Third, we want to remind you that 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 these projections, we encourage you to 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'd like to turn the call over to Michael Mendes, President and Chief Executive Officer of Diamond Foods.
MICHAEL MENDES, PRESIDENT, CEO & DIRECTOR, DIAMOND FOODS, INC.: Thanks, Bob. Good afternoon, everyone, and thank you for joining us.
On our call today will be Gary Ford, our Chief Operating Officer, and Steve Neil, our Chief Financial and Administrative Officer.
Diamond was founded in 1912 and has endured a number of difficult economic cycles over this period. During the last decade, we have more than tripled the size of our company and have prospered by staying focused on two underlying principles. Delivering compelling quality, service and value to consumers and our trade partners and maintaining a disciplined focus on executing against our strategy while demonstrating an exceptional ability to adapt to a rapidly changing environment.
By investing in our brands and continuing to increase our value proposition to our customers, we will strengthen the foundation of our business in order to deliver sustainable earnings growth. Based on our strong start to fiscal 2009, we are confident we can achieve this goal despite facing a difficult economic environment.
Let me take a few moments to address some of the highlights of the quarter. North American retail sales, the focus of our growth efforts, increased 23% for the quarter over the last year and represented 77% of our sales mix. As the walnut harvest was delayed by a week, in-shell and ingredient sales were lower than projected further increasing the shift toward higher margin retail sales.
In addition, our cost efficiency initiatives and continued leveraging of our infrastructure resulted in a significant increase in margins. Our gross margin was 21% for the quarter and our operating margin was 11%. Non-GAAP EPS grew 29%, to $0.67 per share.
But the numbers only tell part of the story. Our strategy to broaden the distribution of core Emerald items in grocery is progressing and translating into meaningful [gloss E gains]. This bodes well for the brand's ability to grow profitably in the future and drive category expansion.
We acquired Pop Secret from General Mills on September 15th. Consistent with our intent to re-energize the microwave popcorn category we launched a series of Pop Secret television commercials only 40 days following the acquisition. We have already aired over 400 television ads nationally during October and November alone.
We continue to be committed to supporting our brands with marketing, product and packaging innovation. Coupled with our unparalleled quality, service, and supply chain management, we're making significant strides in bolstering our position as a trusted supplier of our trade partners. This can be illustrated in part by the performance of the Diamond brand, which grew sales three times faster than the category securing 100 basis point share gain over the last 12-week period.
Finally it is important to note that much of the capital raised during our 2005 IPO was initially allocated to projects that added capacity to support the growth of our retail business. Beginning last year, we started to shift a larger portion of our capital investment towards efficiency projects designed to lower our unit costs in the future.
At this time, I'd like to turn the call over to Gary, who will provide some additional insight on operating highlights for the quarter.
GARY FORD, COO, EXECUTIVE VICE PRESIDENT, DIAMOND FOODS, INC.: Thanks, Michael. Our path to sustainable earnings growth has three key elements, growing our value-added branded segment to improve the product mix and continue to rationalize low margin business, maintaining a disciplined focus on the channels in which we compete in order to leverage our existing infrastructure and investing in capital projects that improve the cost efficiency of our business.
Let me start with a review our snack business. Our snack portfolio grew 96% during the quarter which reflected the mid-quarter acquisition of Pop Secret and over 20% growth from Emerald. In grocery, Emerald's ACV distribution improved 200 basis points to 88% and we continue to gain market share as additional shelf space is allocated to core items.
In the mass merchandise channel Breakfast On The Go has been expanded from two SKUs to three and all three will be in nearly 3,000 stores early in the calendar year. In the club channel, Cocoa Roast Almonds is a now a regular item in about 150 stores and will be in an additional 350 stores starting in February. Two of our newest items, Gourmet Snack Mix and 100 Calorie Pack Cocoa Roast Almonds, have begun shipping this month to a regional club store customer.
This is the first time Emerald has made inroads with this customer and our 100 Calorie Pack snack nuts in particular target a segment of the category that is currently underserved. Finally, Sea Salt and Pepper Cashews and the Gourmet Snack Mix are being tested in a number of club stores around the country.
Pop Secret is off to a good start for the 45 days we owned the brand this quarter. Grocery sales for October grew 7% and market share held steady at 24%. Note that we are in the very early stages of Pop Secret's integration into our snack business.
There is a lot of work to be done. A key part of our integration plan was to take over sales and marketing responsibility day one while relying on General Mills for transitional services and other areas including order to cash and supply chain services. While working closely with customers to better understand our Pop Secret business and replenishment needs, we believe this will facilitate a smoother transition of supply chain responsibilities when we complete the cutover in our third fiscal quarter.
Now let us move to culinary nuts. Our reputation for delivering service and quality is a key selling point for retailers looking to manage risk and assure reliability. As a result culinary sales grew 23% and outpaced the category, with walnut sales growing by more than 14% versus last year in grocery.
Now let me switch gears and talk about what we're doing...
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