Del Monte Foods (DLM)

Headquartered in San Francisco, California, Del Monte Foods Company (DLM) produces, distributes, and markets branded and private label food and pet products for the U.S. retail market. The company operates 17 production facilities and 9 distribution centers in North America, and also has operating units in Mexico, American Samoa, and Venezuela. From canned fruits and vegetables, management has diversified into other product categories, like pet food, seafood, private label soup, retail private label gravy, "College Inn" broth, and infant feeding. The company distributes products through grocery stores, club stores, super centers, and mass merchandisers. Del Monte markets its products under various brands, such as Del Monte, StarKist, Contadina, 9Lives, Snausages, Kibbles 'n Bits, Pup-Peroni, Meaty Bone, Pounce, Nature's Goodness, and College Inn. Del Monte Foods Company was formed in December 2002, as the result of a reverse merger of Del Monte's existing operations with SKF Foods, a subsidiary of H. J. Heinz Company.

The company operates under two reportable segments: Consumer Products and Pet Products. Consumer Products comprises branded shelf-stable seafood, baby food, fruit, vegetable, and tomato products, as well as private label soups and broth. The Pet Products segment comprises dry and wet pet food and snacks. Consumer Products generated 62% of Del Monte's total revenue in fiscal 2008, while the Pet Products segment contributed the remaining 38%. Wal-Mart is the company's major customer, accounting for 32% of fiscal year 2008 sales.

Management adopted a brand-driven strategic plan to position the company for sustained long-term growth. Management intends to achieve the long-term growth plan by encompassing five elements: 1) increase the branded focus of the product portfolio, 2) streamline the asset and cost base, 3) accelerate innovation-driven organic growth in higher margin categories, 4) align the company's M&A efforts with its strategic focus, and 5) execute a financial strategy that optimizes debt management and shareholder value. Management's long-term objectives are to achieve EPS growth in the range of 7% to 9% and top-line growth in the range of 3% to 5%, excluding the impact of transformation and integration expenses.

Acquisitions are providing strategic benefits and cost savings through a combination of stronger product portfolios and integration synergies. In December 2002, Del Monte expanded its range of new products by acquiring the U.S. StarKist seafood, North American pet food and pet snacks, U.S. infant feeding, College Inn broth, and U.S. private label soup businesses from H. J. Heinz Company. The company effectively integrated the Heinz pet, tuna, and soup businesses during fiscal year 2004. In a move to integrate backward, Del Monte acquired Mexico-based Industrias Citricolas de Montemorelos (ICMOSA) and some other assets from the UniMark Group in 2006. Industrias Citricolas de Montemorelos is a producer and distributor of processed tropical and citrus fruits with Del Monte as the primary customer. The acquisition strengthened Del Monte's position in the packaged fruit produce business. The company remains committed to building the product portfolio through acquisitions.

In 2006, Del Monte acquired Meow Mix Holdings for $705 million and Milk-Bone dog treats and other brands from Kraft for $580 million. The acquisitions are expected to contribute meaningfully to the top-line. The Milk-Bone brand, widely known in the dog snacks category, has grown at an annual average rate of 10% since 2001. Excluding integration costs, the acquisitions were slightly accretive to earnings in fiscal 2007.

With Del Monte's seafood business suffering in an environment of higher fish costs, management decided to divest StarKist and realign the company's portfolio towards higher margin, higher growth businesses. In June 2008, Del Monte Corporation signed an agreement to sell its seafood business including StarKist, to Dongwon Enterprise Company, Ltd. for $363 million. The divestiture should immediately improve the company's margin and eliminate a source of earnings volatility.

Management is implementing a Transformation Plan to better execute strategic project brand objectives, optimize the value of recent acquisitions, and enhance overall competitiveness. The Transformation Plan is designed to focus on certain key initiatives including: 1) strengthening systems and processes 2) streamlining the organization 3) leveraging the scale efficiencies that resulted from better acquisitions 4) implementing enhanced trade fund management capabilities and 5) upgrading systems and processes of marketing, planning, and budgeting. As the processes and systems are strengthened, management expects to implement improved demand planning, drive supply chain efficiencies, and reduce working capital levels. Additionally, the program is expected to significantly improve the efficiency of dry pet manufacturing and distribution. The Transformation Plan will require cumulative pre-tax charges of $110 million, of which nearly $62.8 million were incurred in fiscal 2007. In fiscal 2008, the company incurred pre-tax charge of $110 million. The company achieved pre-tax savings of $35 million in fiscal 2008 and is on target to achieve $50 million in fiscal 2009.

Management plans to accelerate growth through a U.S. focused, brand-driven strategic growth plan centered on continuous product and packaging innovation along with a cost reduction program. Del Monte has a large stable of brand names, with 66% of the total sales being generated by brands that hold the number one market position. New products and innovative packaging have been an integral part of Del Monte's sales growth strategy. For example, new packaging and increased marketing efforts have boosted sales growth of tuna-in-a-pouch so that it now accounts for 25% of the company's tuna sales. Realizing operational efficiencies is another part of the long-term growth strategy. Management achieved $50 million in savings in fiscal 2006, $110 million in savings in fiscal 2007, and $70 million in fiscal 2008. The savings should help counteract inflationary cost pressures, along with prices increases. During the third quarter of fiscal 2008, the company implemented a series of price increases across 70% of the portfolio to compensate for higher input costs.

Del Monte generates positive cash flow to enhance shareholder value through debt reduction, share repurchases and dividends. In fiscal 2008, cash flow from operations increased 24.7% to $287 million. On June 30, 2005, the company purchased 12 million shares of Del Monte common stock for $125 million (an average cost of $10.42 per share) from Goldman Sachs in a private transaction in connection with an accelerated stock buyback arrangement. In December 2005, the Board declared the company's first quarterly cash dividend since the company's initial public offering in 1999. Most recently, in September 2007, the Board of Directors authorized the repurchase of up to $200 million of the company's common stock over the next 36 months.

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