Inside a Real Meeting
Conference Call Summary
Friday September 5, 2003


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SPEAKER: JOHN HUGHES
Technical Market Comment:
There will be a lot of focus on the Employment number today and possibly some concern regarding the September 11th anniversary next week. Short-term the major indexes and most stocks have had a good rally over the past three weeks and are due for some pullback. The two factors we cited, the employment report and Sept 11, could provide an excuse for that profit taking.

From a longer-term perspective the market remains in good technical health. This week, not only did the averages make new highs but the advance decline lines for both the NASDAQ and NYSE did as well. The number of new highs also expanded making a new high along with the major indexes. We wouldn’t be surprised if there is a pullback here but it is hard to see the market getting into to much trouble in the absence of any divergences from these key indicators.

Recommendations:
There has been a big run-up in Technology stocks and some are extended and due for pullback. However there are lots of constructive patterns.

Please call John Hughes in our New York office for specific recommendations.

SPEAKER: ALAN SILVERMAN, CFA
Retailing:
Consumer spending is expected to rise at an annual rate of approximately 8% in coming months. This projection includes a significant increase in the savings rate which will be more than offset by strong growth in after-tax income. A major component stimulating increases in income is the accelerated growth in money supply during the past six months.

Despite widely held misconceptions, mortgage financing boosted consumer spending by less than 1% during the past several years. Therefore, the negative effect of a sharply reduced amount of refinancing in future quarters is likely to be overshadowed by growing personal income and reduced tax rates. On balance, had refinancing remained high, the 8% gain in consumer spending we project for the next 12 months might have reached a modestly higher 8½% level.

Reflecting the positive outlook, stock prices for most retailers have been stronger than the market for the past several months. Consequently, even minor or short-term setbacks seem likely to have a more-than-proportionate adverse impact on the stocks, while sales are expected to vary widely month to month.

August sales were strong for most chains. Costco (COST - $32.82) and Wal-Mart (WMT - $60.08) achieved sales increases which were greater than earlier estimates. Similarly, J.C. Penney (JCP - $22.00) reported comparable-store gains for the department store division which were above both company and street expectations. On the negative side, a group of about ten apparel-oriented firms had weak results for the month, with several citing the mid-month blackout as a contributing factor.

SPEAKER: ROBERT CUMMINS, CFA
Food:
Heinz (HNZ - $34) is off to a good start in its April 2004 fiscal year, with earnings from continuing operations up 9% in F1Q (July), to $0.51 versus $0.47. This reflected particularly strong results in global ketchup, condiments and sauces, in U.S. foodservice products, which had been depressed for some time due to industry conditions, and in its businesses in the Asia/Pacific region. A lower tax rate also contributed. In addition to solid earnings progress, HNZ is achieving significant increases in free cash flow by accelerating working capital turnover. The company has set a policy of not providing quarterly earnings guidance, but we would be surprised if the October quarter did not show another healthy gain. On the conference call, management reiterated its earnings projection of $2.15 - $2.25 (up 6%-11%) for F2004 as a whole. We continue to regard Heinz as a strong and steadily improving company that is getting inadequate recognition from the investment community. We rate the stock as a Strong Buy ("1"), with a 12-month target price of $40-$41.

Following the sale of one-third of its U.S. operations to Del Monte last December, HNZ is now reporting its domestic results based on two segments, Consumer Products (24% of worldwide sales, 41% of profits in F1Q) and Foodservice (17% and 15%). For the quarter, Consumer Products reported a 1% decline in sales and a 1% gain in operating income, which masks divergent trends between Ketchup, Condiments and Sauces, which achieved strong growth in sales and earnings, based on the performance of Heinz ketchup and Classico pasta sauces, and Frozen Foods, notably Ore-Ida and Smart Ones, which were weak for the third consecutive quarter. The company does not publish breakdowns for the two businesses, but a separate tabulation of sales by broad global categories provides a clue to the dichotomy: Ketchup, etc., on a worldwide basis reported 16% sales growth in F1Q, while Frozen Foods (which are primarily domestic) were down 10%. Management will discuss its strategies for turning its frozen foods businesses around at its first-ever all day analyst meeting in Pittsburgh on October 3rd. We are optimistic about HNZ's ability to get that product area back on track, based on the strong consumer recognition of the brands (which include Boston Market, T.G.I Friday's, Bagel Bites and others) and the company's long-term record of success in this field. Management states that the Ore-Ida products are already showing signs of improvement in F2Q.

Foodservice operations, which represent 42% of U.S. sales, have shown strong growth over the long term, and HNZ is clearly one of the major suppliers to this market, including not only ketchup and other condiments but also frozen soups, frozen desserts, and portion-control items. In view of the weak economy and the aftermath of 9/11/01, demand from the foodservice industry had been weak, but it has turned up over recent months, and HNZ's F1Q figures clearly reflect that, with sales up 8% and earnings 20%. We expect these favorable trends to continue, particularly as the economy recovers further.

Heinz's three international business segments are Europe (39% of sales, 42% of segment profits in F1Q), Asia/Pacific (15% and 10%), and Other (principally Latin America, the Middle East and India, 5% and 3%). Europe reported F1Q growth of 9% in sales and 5% in earnings, modest progress considering the favorable exchange rates. Results across the segment were mixed, with ketchup, salad dressings and tunafish delivering strong growth, canned soups and baked beans suffering from the unprecedented European heat wave and the timing of promotions, and operations in Italy and northern Europe disappointing due to competition and cost issues. However, HNZ's long-established track record in Europe, and its particularly strong position in its product categories in the U.K. and Italy, as well as the temporary nature of several of the F1Q issues, lead us to believe that progress will soon accelerate.

Asia/Pacific, which suffered earnings setbacks in F2001 and F2002, is now in a strong recovery mode, and reported its third straight quarter of year-to-year improvement. Sales in F1Q rose 22%, and operating income increased 81%, versus weak results a year ago. The gains reflected price increases and cost reductions in Australia and New Zealand, strong volume growth in Indonesia and China, and favorable exchange rates. Heinz management views Asia/Pacific as its most promising growth opportunity for the long term.

In F1Q, Heinz generated operating free cash flow (internally generated funds less capital expenditures) of $236 million, or $0.67 per share. The target range for the year is $700 million to $1 billion, or $2.00-$2.80. At the end of the quarter, the company had net debt of $3.7 billion (after adjusting for $805 million in cash), down from $5.1 billion a year ago, mainly reflecting the Del Monte spinoff. Management stated on the conference call that it had no immediate plans for acquisitions, and that it would review alternative uses for its excess cash later in F2004. One option it will consider is increasing the annual dividend, which was reduced from $1.62 to $1.08 per share in conjunction with the Del Monte transaction.

Del Monte Foods (DLM - $9), as expected, reported lower sales and earnings for F1Q (July), due to limited supplies of some vegetable and tomato products prior to the 2003 harvest, a reduced emphasis on noncore pet food lines, trade inventory adjustments, and increased advertising and marketing expenditures for DLM's key growth products. The volume issues are now largely past, and earnings in F2Q will be close to prior-year levels, although likely still down a little as marketing outlays continue high. Management reiterates the F2004 EPS forecast of $0.88-$0.92 that it established in May, which implies earnings growth of well over 30% in the seasonally more important second half. We believe that will alert investors to the attractive features of this company, including the successful integration of the product lines acquired from Heinz last December. At 8.5 times our calendar 2004 estimate of $1.06, DLM remains our most attractive idea for aggressive investors. Rated "1" (Strong Buy), 12-month target price $13-$14.

Earnings for F1Q before nonrecurring items were $0.09, down 50% from $0.18 pro forma a year ago, but toward the high end of management's forecast range of $0.07-$0.10. Consumer Products reported declines of 6% in sales and 38% in operating income, while Pet Products were down 2.5% and 13%, respectively, for the reasons discussed above. Overall operating income after corporate expenses declined 31%. On a positive note, interest and other expense was 9% below a year ago, on a pro forma basis. Net borrowings were slightly higher in July than in April due to a normal seasonal inventory buildup, but were still $130 million (7%) lower than on December 20th when the deal closed.

In F2Q, the Del Monte brands are expected to show more normal sales trends, since the depleted inventories have been replenished. Trade inventory reductions for pet foods appear to be largely past, and DLM's core brands in that area are performing well, with sales of pet snacks running 12% ahead of a year ago. Profit margins in the StarKist tuna business are strong, and the rapidly growing and highly profitable pouch line is being expanded with the addition of Tuna Creations. On balance, the trends in DLM's key businesses are healthier than in F1Q, and its aggressive marketing program is the principal factor holding back earnings progress. The "new" Del Monte's business mix is highly seasonal, with the second half (November-April) likely to account for close to 70% of earnings in the future. For this reason, the increased marketing budget is having a disproportionate effect on current results.

The company expects to generate free cash flow from operations of more than $200 million ($0.95 per share) in F2004, after capital expenditures but before $17 million of one-time integration and restructuring expenses. The funds will be used primarily to pay down about $175 million of debt, or 11% of the total outstanding at the end of F2003. We expect both cash generation and debt reduction to increase meaningfully in the April 2005 fiscal year. Management has also stated that it will give serious consideration to establishing its first cash dividend, in view of DLM's strong free cash flow and the increased emphasis on dividends since the recent tax reduction. The timing is not clear, but it seems possible that an announcement could be made at the annual shareholders' meeting on September 12th. We expect that the initial payout will be relatively modest.

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DISCLOSURE:
The analysts who have contributed to this report each certify that the views expressed in this research accurately reflect their personal views about the subject companies and their securities. They each also certify that they have not been and will not be receiving direct or indirect compensation in exchange for expressing the specific recommendations in this report. AS OF SEPTEMBER 5 , 2003 alan silverman has a long position in JC PENNEY and robert cummins has  long positionS in HEINZ AND del monte.

Any opinions made in this report are those of the individual making them and may or may not be those of Shields & Company. Shields & Company, its affiliates and subsidiaries and/or their employees may from time to time acquire, hold or sell a position in the securities mentioned herein. While this report has been prepared from original sources and data we believe reliable, we make no representations as to its accuracy or completeness, and our opinion is subject to change without notice. Additional information is available upon request.