High Quality
Open the downloaded document, and select print from the file menu (PDF reader required).
The Inoculated Investor
The opinions included in the following posting belong to me and do not necessarily reflect those of Cove Street Capital “CSC”
or any of itsemployees. The information in this posting should not be considered as a recommendation to buy or sell any particular security or toencourage anyone to invest with CSC. Past performance of CSC is not a guarantee or indicator of future results.
BB&T Conference Notes- 8/10/11
San Francisco 1-on-1 ConferenceThe Ritz-Carlton, San Francisco
Schedule for Benjamin Claremon - Cove Street Capital
Wednesday, August 10, 2011
07:45-08:25 am
Diamond Foods, Inc.
Steve Neil, Linda Segre09:30-10:10 am
CIBER, Inc.
Gary Kohn, Claude Pumilia10:15-10:55 am
Perficient, Inc.
Jeff Davis11:00-11:40 am
Kansas City Southern
Bill Galligan, Mike Upchurch12:45-01:25 pm
Tyson Foods, Inc.
Julie Kegley, Dennis Leatherby, Jim Lochner01:30-02:10 pm
The Gorman-Rupp Company
Jeff Gorman, Wayne Knabel03:45-04:25 pm
Kirby Corporation
Steve Holcomb, Joe Pyne
Diamond Foods: CFO Steven NeilDescription
Diamond Foods, Inc., a packaged food company, engages in processing, marketing, and distributing snack products,as well as culinary, in-shell, and ingredient nuts. Its snack products include glazed nuts, roasted and mixed nuts,breakfast trail mix products, microwave popcorn pr
oducts, and potato and tortilla chips. The company’s culinary
nuts comprise shelled nuts, pegboard nuts, and harvest reserve premium nuts. Its in-shell nuts consist of uncrackednuts and mixed nuts; and ingredient/food service products include shelled and processed nuts, and custom-processednuts. The company offers its products under the Emerald, Pop Secret, Kettle, and Diamond of California brandnames. Diamond Foods, Inc. sells its products directly to retailers and indirectly through wholesale distributors, whoserve independent and small regional retail grocery store chains and convenience stores. The company offers itsproducts in the United States, the United Kingdom, Germany, the Netherlands, Spain, Italy, Canada, South Korea,Turkey, and Japan. Diamond Foods, Inc. was founded in 1912 and is based in San Francisco, California.
Ticker DMND TTM EBITDA ($mm) $135Current Price $71.85 TTM EPS $2.15Market Cap ($mm) $1,579 5 Yr. Avg. Op. Margin 5.40%Enterprise Value ($mm) $2,150 5 Yr. Avg. EBITDA Margin 7.06%Dividend Yield 0.30% Trailing EV/EBITDA 15.9xAverage Volume (mm) 0.24 Trailing P/E Ratio 33.3x
*Data from Capital IQ
The Inoculated Investor
The opinions included in the following posting belong to me and do not necessarily reflect those of Cove Street Capital “CSC”
or any of itsemployees. The information in this posting should not be considered as a recommendation to buy or sell any particular security or toencourage anyone to invest with CSC. Past performance of CSC is not a guarantee or indicator of future results.
Market and Company Background
Nuts
o
Planters is their largest nut competitor and is peanut focused
Emerald is focused on younger consumers
Share is about 10% of the market
o
Diamond is the culinary nut brand with market share 10x the next largest brand
Popcorn
o
28% market share for Pop Secret
o
Pop Secret is now in Sam
’
s Club and Wal-Mart after not being available for a while
o
Much higher margins than nuts
Cost of corn is much lower than the cost of commodity nuts
Bought Kettle Brand in 2010
o
Is an all-natural product
o
6 month shelf life instead of 3 months with other chips
o
This acquisition got them outside of the US
Profitable business in the UK
55% revenue comes from the UK
The Pringles deal will close by the end of year
o
Great brand, especially outside the US
Is the number 4 chip brand in the world in terms of sales
o
It was an orphan brand
It was the last food asset at P&G
o
Is a manufactured crisp
15-18 month shelf life
Means that it can go around the world
o
Nice infrastructure for them to pick up
o
Want to use Pringles to lever Kettle and other brands
o
The acquisition will cause non-North America revenue to increase from 21% to 46% and movesnack from 58% of revenue to 83% of revenue
o
Pringles is under-represented in grocery
Brand is in convenience stores to some extent but more so in mass stores like Target andWal-Mart
Want to focus more on grocery going forward
o
All of their buyers are the same for the chips, nuts and Pringles
Which is why it is easy for them to integrate the additional brands
Biggest cost are commodities
o
30%-40% of total COGS
o
The second biggest cost is trade funds
These are netted against sales so you never see it on the P&L
Represent how much you have to pay to market the brand to retailers
Have developed a lot of leverage with the buyers
Allows you to get more SKUs in their stores
Having all three brands in convenience stores is important
The Inoculated Investor
The opinions included in the following posting belong to me and do not necessarily reflect those of Cove Street Capital “CSC”
or any of itsemployees. The information in this posting should not be considered as a recommendation to buy or sell any particular security or toencourage anyone to invest with CSC. Past performance of CSC is not a guarantee or indicator of future results.
If you are negotiating with the same buyer, you have more leverage
Not being the biggest (Frito Lay is) is actually an advantage sometimes
o
The stores want multiple brands on the shelves and they like brands to compete
2 nationally branded and one store brand
o
They like to be one of the alternatives to the other major brands
o
They can do wholesale delivery (which is much cheaper) or manage the shelf for the stores
Growth Drivers
What are three things that need to happen for revenue and earnings to go up and the stock price to rise? Inother words, what are the main drivers of Diamond
’s performance?
o
They are focused on profitable revenue growth
Normal growth is 2-3% in this business but they have grown 20%
o
Increased scale in COGS or in OPEX
Revenue synergies
Brands make other brands stronger
o
Execution
Have earned trust from Wall Street
Believe they are great students of the game
Try to get the analysts to their plants to educate them
o
Want analysts to understand their business
Give full year guidance and the next quarter guidance
o
Also give 5 year guidance
o
Seasonality makes quarters lumpy depending on the timing of harvests
o
Try to be transparent as can be
The non-retail business is a great cash generator and gives them scale
o
But after they acquire Pringles, non-retail sales will not be thatimpactful anymore
o
Retail is going to 87% of the total
Pretty aggressive acquisition activity with Kettle Foods and Pringles recently
o
What made the company believe that this was the right time to make acquisitions?
Started off with a list of what companies they would like to buy and what was for sale
Pop Secret was on there as well as Pringles and Kettle
o
Started going through this exercise 3.5 years ago
Had been speaking with the brands and investment banks atthat time
Were targeting companies that could come on the market that fit their strategicgoals
o
Needed to be in the position to act when something came on the market
o
Won’t go into
frozen food because it is a different buyer
Will stay in their niche
o
If a buy was a good idea, they were willing to pursue it, even if theywere in the midst of an integration
Have been able to start integration of Pringles now before theclose because of the Reverse Morris Trust
Add a Comment