Del Monte Foods reports fiscal Q3 earnings of US$28.6M, down 67% from year-ago period as higher input costs pressured margins, company faced higher debt costs amid its takeover last year; sales unchanged at US$971.1M

Nevin Barich

SAN FRANCISCO , March 12, 2012 (press release) – Del Monte Corporation:

“Consumer sentiment and macroeconomic factors continue to challenge the operating environment for both Del Monte Foods and the industry”

Announcement Highlights

For the third quarter fiscal 2012:

* Net sales were flat year-over-year:
o Pet Products sales increased 4.4% due to new product volume growth and net pricing
o Consumer Products sales declined 3.6% due to unit volume declines
* Operating income declined 14.4% primarily due to higher operating costs
* Adjusted EBITDA1 declined 13.7%
* Total net debt was $3,753.0 million as of January 29, 2012

Del Monte Foods Three Months Ended January 29, 2012

Del Monte Foods today reported net sales for the third quarter fiscal 2012 of $971.1 million compared to $969.4 million in the third quarter fiscal 2011, an increase of 0.2%. Pet new product volume growth and list pricing actions net of trade spend, primarily in Pet, were offset by existing product unit volume declines in both Pet and Consumer.

Operating income declined from $145.4 million in the prior year period to $124.5 million. The decrease in operating income reflects the impact of higher operating costs, primarily due to higher input costs. List pricing actions net of trade spend contributed positively to operating income.

Adjusted EBITDA declined 13.7% to $164.6 million compared to $190.7 million in the prior year. The drivers of the decline in Adjusted EBITDA are similar to those for operating income, except for SG&A. In calculating Adjusted EBITDA, SG&A is more favorable year-over-year because it does not include amortization of intangibles, severance-related expenses, and other expenses related to the Merger.

“Consumer sentiment and macroeconomic factors continue to challenge the operating environment for both Del Monte Foods and the industry,” said Dave West, CEO of Del Monte Foods. “Amidst this difficult environment, new Pet Product items such as Kibbles ‘n Bits Bistro Meals and Milo’s Kitchen dog snacks performed strongly, and we continued to invest in building new go-to-market capabilities, enabling the Company’s future growth. We are launching seven additional new Pet Products through the balance of the fiscal year, including Meow Mix Tender Centers and Meow Mix Paté Toppers. We also had solid in-market execution leading to share gains in Vegetable during the critical holiday season.”

Reportable Segments – Results for Three Months Ended January 29, 2012

Pet Products

Pet Products net sales were $478.8 million, an increase of 4.4% from net sales of $458.5 million in the prior year period. The increase in Pet Products net sales was primarily driven by new product volume growth and list pricing actions net of trade spend. The increase was partially offset by unit volume declines in existing products.

Pet Products operating income decreased from $112.1 million in the third quarter fiscal 2011 to $95.3 million in the third quarter fiscal 2012, or 15.0%. The decrease was primarily driven by higher ingredient costs and SG&A, primarily due to amortization of intangibles. The decline was partially offset by list pricing actions net of trade spend.

Pet Products Adjusted EBITDA decreased from $122.7 million in the third quarter fiscal 2011 to $117.2 million in the third quarter fiscal 2012, or 4.5%. The drivers of the decline in Adjusted EBITDA are similar to those for Pet Products operating income. In calculating Adjusted EBITDA, SG&A is lower year-over-year because it does not include the amortization of intangibles, severance-related expenses, and other expenses related to the Merger.

Consumer Products

Consumer Products net sales were $492.3 million, a decrease of 3.6% from net sales of $510.9 million in the third quarter fiscal 2011. The decline in Consumer Products net sales was primarily due to unit volume declines in existing products.

Consumer Products operating income declined from $56.6 million in third quarter fiscal 2011 to $40.8 million in the third quarter fiscal 2012, or 27.9%. The decline was primarily driven by higher manufacturing and raw product costs as well as the negative impact of the topline.

Consumer Products Adjusted EBITDA declined from $74.8 million in the third quarter fiscal 2011 to $57.1 million in the third quarter fiscal 2012, or 23.6%. The drivers of the decline in Adjusted EBITDA are similar to those for Consumer Products operating income.

Del Monte Foods Nine Months Ended January 29, 2012

Net sales for the nine months ended January 29, 2012 were $2,741.6 million compared to $2,714.9 million for the prior year period, an increase of 1.0%. The increase was driven by Pet new product volume growth and list pricing actions net of trade spend. The increase was partially offset by unit volume declines in existing products.

Operating income declined from $412.8 million in the prior year period to $280.9 million, or 32.0%. The decrease in operating income reflects the impact of higher operating costs and SG&A (primarily due to amortization of intangibles, severance-related expenses, and other expenses related to the Merger). List pricing actions net of trade spend contributed positively to operating income.

Adjusted EBITDA declined 16.8% to $424.7 million compared to $510.6 million in the prior year period. The drivers of the decline in Adjusted EBITDA are similar to those for operating income, except for SG&A. In calculating Adjusted EBITDA, SG&A is lower year-over-year because it does not include the amortization of intangibles, severance-related expenses, and other expenses related to the Merger.

Select Liquidity Data

At January 29, 2012, total debt was $3,991.3 million and cash and cash equivalents were $238.3 million. As of January 29, 2012, there were no outstanding borrowings under the Company’s $750.0 million ABL Facility. For the nine months ended January 29, 2012, capital expenditures totaled $49.1 million.

Free Cash Flow2 for the nine months ended January 29, 2012 was $126.5 million, compared to $114.9 million for the nine months ended January 30, 2011. The increase was primarily due to favorable working capital, lower cash taxes and lower capital expenditures. Higher cash interest payments and lower Adjusted EBITDA partially offset the year-over-year improvement in Free Cash Flow.

Conference Call/Webcast Information

Del Monte Foods will host a live audio webcast, accompanied by a slide presentation, to discuss the third quarter fiscal 2012 results at 8:00 a.m. PT (11:00 a.m. ET) today. To access the live webcast and slides, go to http://investors.delmonte.com. Under Events, click Q3 F12 Del Monte Foods Earnings Conference Call. Printable slides are expected to be available in advance of the call. Historical quarterly results can be accessed at http://investors.delmonte.com. The audio portion of the webcast may also be accessed during the call (listen-only mode) as follows: 1-888-788-9432 (1-210-795-9068 outside the U.S. and Canada), verbal code: Del Monte Foods. The webcast and slide presentation will be available online following the presentation.

Merger

On March 8, 2011, Del Monte Foods Company was acquired by an investor group led by funds affiliated with Kohlberg Kravis Roberts & Co. L.P., Vestar Capital Partners and Centerview Capital, L.P. (collectively, the “Sponsors”). The acquisition is referred to as the “Merger.” As a result of the Merger, the Company applied the acquisition method of accounting and established a new basis of accounting on March 8, 2011. Periods presented prior to March 8, 2011 represent the operations of the predecessor company (“Predecessor”) and periods presented after March 8, 2011 represent the operations of the successor company (“Successor”). The comparability of the financial statements of the Predecessor and Successor periods has been impacted by the application of acquisition accounting and changes in the Company’s capital structure resulting from the Merger.

About Del Monte Foods

Del Monte Foods is one of the country’s largest producers, distributors and marketers of premium quality, branded pet products and food products for the U.S. retail market, generating approximately $3.7 billion in net sales in fiscal 2011. With a powerful portfolio of brands, Del Monte products are found in eight out of ten U.S. households. Pet food and pet snacks brands include Meow Mix®, Kibbles 'n Bits®, Milk-Bone®, 9Lives®, Pup-Peroni®, Gravy Train®, Nature’s Recipe®, Canine Carry Outs®, Milo’s Kitchen® and other brand names. Food product brands include Del Monte®, Contadina®, S&W®, College Inn® and other brand names. The Company also produces and distributes private label pet products and food products.

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