康尼格拉食品 (CAG) 2005 Q4 法說會逐字稿

Good morning, ladies and gentlemen.

My name is Paul and I will be your conference facilitator today.

I would like to welcome everyone to ConAgra Foods' fourth-quarter earnings conference call.

At this time, all participants are in a listen-only mode.

Later, we will conduct a question-and-answer session with instructions to be given at that time.

I would now like to turn the conference over to Mr. Chris Klinefelter, Vice President of Investor Relations.

Please go ahead, Mr. Klinefelter.

You may begin your conference.

Hello and welcome to ConAgra Foods' conference call of fourth-quarter fiscal 2005 results.

I'm Chris Klinefelter, Investor Relations contact for the Company.

With me are Bruce Rohde, our Chairman and CEO, Frank Sklarsky, our Chief Financial Officer, Dennis O'Brien, Chief Operating Officer of our Retail Products segment, Allan Lutz, Chief Operating Officer of our Foodservice Products segment, and Greg Heckman, Chief Operating Officer of our Food Ingredients segment.

Today, we released fourth-quarter earnings of $0.20 per share.

That includes expense from items impacting comparability that we detail in the release.

Over the next few minutes, you'll hear from Bruce about our strategic focus as we enter fiscal 2006.

You'll also hear from Dennis, Allan and Greg about what's taking place in their segments.

You'll also hear from Frank about financial matters.

We have detailed the impact of this quarter's performance in both the news release and in the Q&A document, so I will refer you to those because they will contain a variety of items.

Today's comments also include some non-GAAP financial measures, so I refer you to the Company's reconciliation in today's news release, which is posted on the Company's Web site.

As usual, we will be making some forward-looking statements.

Although we're making those statements in good faith and while we are confident about our direction, as you know, we don't have any guarantee about the results that we will achieve in the future.

So I will refer you to our note on forward-looking statements in our earnings release.

If you'd like to read more about the factors and risks which can influence and affect our business, I will refer you to the documents that we file with the SEC.

With that out of the way, we will get started, and I will turn it over to Bruce.

Thanks, Chris.

I'd like to say a few words about our overall strategy and let you know where our focus will be in fiscal 2006.

Before I do that, I'd like to put fiscal 2005 in perspective.

As you know, the second half was far different than the first half; it was much weaker than we expected, and that's primarily tied to processed meats.

Now, I don't want to ignore the bright spots, because there were several, specifically in Food Ingredients, especially potatoes, and of course several of the brands mentioned in our press release today.

Plus, we've also passed several milestones with many of our initiatives as well as with capital allocation that Frank will get into a little bit later.

As we've told everyone before, all that's been overshadowed by a very weak performance from our packaged meets business.

The reason is clear; our execution was not what it needed to be and we made several changes to improve that and the key here is better execution going forward.

For those of you who have been following us for awhile, you know that as we repositioned our portfolio away from its historical makeup of commodities, we've undertaken a series of multiyear initiatives we see as necessary to improve our profit margins' return on capital.

Those initiatives are ground in three specifics, and those are marketing, operations, and business processes.

The business process initiatives are directly related to the SAP work that we have going on.

I will briefly touch on both marketing and business processes, but the thrust of my comments today are about operations.

So first of all, let me address marketing.

All three segments are using disciplined, fact-based processes to build brand equity and customer franchises.

This is much more than advertising, so I wouldn't want anyone to confuse the scope.

In some cases, we're changing product fundamentals like packaging, taste and quality; in other cases, we are selectively targeting our consumer advertising dollars; in other situations, we're targeting customer trade opportunities.

This leads to many bundle promotional opportunities; it also leads to new customer development opportunities in underutilized channels where we can apply our brands and our products and logistical capabilities.

Several of our brands have been strengthened through this process, but there's still plenty more to do by emphasizing specific products and markets and better tracking results from our advertising and promotional dollars.

In terms of business processes, we are installing state-of-the-art systems and platforms to better interface with our customers, and we now have much better visibility in customer opportunities, so we can effectively and efficiently serve our customer base.

We've been redesigning our workload so we get the most bang for the buck.

SAP plays a big role here and we are in the process of rolling SAP R3 across several functions in the Company, as you have heard us detail before.

This is a necessary building block and it represents the capability our company was lacking, yet it was a capability that we couldn't start installing until we had our portfolio dramatically changed from what it was.

So that's the business process and system piece that's in process.

What I want to address now is the operational work that's going on.

We've several programs underway to be more efficient and effective.

We are reducing both headcount and general and administrative expense.

We are reducing our SKUs, and by that I mean substantially reducing.

We are in the final stages of overhauling our transportation and warehousing assets into an integrated network of mixing centers and we are opportunistically and strategically consolidating our many manufacturing locations.

The scopes of our manufacturing initiatives are far-reaching.

They include how we operate the plants; that means improving yield; it also means improving throughput, efficiency, capacity utilization, as well as ascertaining which plants are going to get further investment and which will eventually be consolidated.

So I want to emphasize that, in fiscal 2006, we are to the point where we can step-up the actions on the three main components of our operating initiatives.

Again, those are rightsizing headcount and corresponding reductions in G&A expense, rightsizing SKUs through substantial SKU reduction, and rightsizing our manufacturing base for optimal utilization.

The groundwork for the headcount reductions and reductions in G&A expense are now set.

Over the last couple of months, we've terminated hundreds from salaried workforce.

This program will essentially be complete during the summer months, so that the headcount run-rate, along with other basic G&A efficiency programs, should account for nearly $100 million in annualized savings, but we will not get all of that run-rate reduction in fiscal 2006, because it takes some time for the run-rate effect to phase in.

I should also note that we may elect to reinvest some of those savings back in the business as we deem necessary.

SKU reduction is a huge opportunity for this company, and it's finally embraced internally as a long-needed strategic focus.

That's mainly because more precise visibility now exists as to how and where the SKU reduction removes complexity all across our supply chain.

Moving from silos in our culture to strategically lengthened supply chain has been a monumental task but in doing so, we've discovered both weaknesses and opportunities.

So far, we've taken out nearly 4,000 SKUs from a starting point of nearly 17,000 across all of our businesses, and I want to thank those who accomplished that task but also say that we're going to continue taking out SKUs over the next two to three fiscal years.

Our intention is that our reductions will be in the double-digit range for certainly the next couple of fiscal years.

While the number of SKUs sounds like a lot, it represents only a very small percentage of our sales.

In short, rightsizing the SKU base is a way of life for us right now and the effort will make our entire supply chain, from ordering to purchasing and from manufacturing to logistics, much more efficient by a very meaningful amount.

The next item I'll focus on today is manufacturing.

As many of you know, we view our manufacturing network to be a significant source of future earning improvement opportunities.

One of the first initiatives is bringing more structure and commonality to the way we measure and operate our facilities.

This means even more disciplined metrics, things like quality, yield, efficiency, fulfillment of schedule and cost per unit, along with more robust shop four (ph) controls and the use of more outward-looking assessments, targets and benchmarks.

As we are getting visibility through our SAP processes and as we are removing SKUs, our team can now see that through simplification we can do a lot more with a lot less.

Therefore, we can consolidate and better utilize the capacity that we need.

That means better fixed cost absorption and therefore higher premium of margins.

We have over 150 plants with a little over 100 of those residing in our Packaged Foods segments, which means the Retail segment and the Foodservice segment.

We can and will make opportunistic changes in the manufacturing base.

As and when there are charges to the P&L associated with these changes, we will be sure to call them out in our earnings releases.

This always makes reporting and comparability more complex for you as well as for us, but that complexity is going to be with us for awhile and you should expect to see those things as we identify and work toward greater efficiency.

Along these lines, in case you haven't seen this, we just recruited a manufacturing leader to drive this effort.

Jim Hardy joined us from Clorox, and he was at P&G before that.

Jim will be calling the shots on this one as the Senior Vice President of Enterprise Manufacturing.

He reports directly to me and he has my endorsement to get on with the task at hand here.

So, 2006 will show an increased focus on the operating items I just discussed.

The heavy lifting in the portfolio changes are over and now the heavy lifting with supply chain is underway.

The last point I'll make in these remarks is that you probably saw my announcement in early May when I let everyone know that I asked the Board to begin to conduct a search for my successor.

I made that decision because I think we've completed the organizational and portfolio transitions that I set out to do, and I think the Company is ready for a leader who has extensive marketing and operating experience.

That makes a lot of sense to me as a shareholder when I think about the strategic repositioning that's been accomplished and the extensive number of complex operating initiatives that we're currently implementing and that we have ahead of us in the future.

I've tried to structure this transition with state-of-the-art governance practices in mind, and that means the search committee is headed up by a Board member and not me.

I've recommended Steve Goldstone and he's now heading this up.

I'm providing input that this selection will be decided by the Board, as it should be.

How much longer I remain part of the Company after we select a candidate will depend on the candidate.

If I'm needed for a period of transition, I will certainly do that.

But again, keeping with what I see as good governance practices by today's standards, it's not my intent to stay for an extended period of time, neither the Board or the management team, once the right person is on board.

I have no further news on that topic today but I did want to address it and when there is more news, we will announce it publicly.

It's been a pleasure to be part of ConAgra Foods.

My association dates back 31 years, so I know from where this company has come.

It's my view that this company's got a great future ahead of it and I think it's going to be rewarding to watch this company as it develops real operating traction.

With that, I will stop my comments and I will turn this over to Dennis O'Brien, who is President and Chief Operating Officer of our Retail Products group.

Thanks, Bruce.

Retail sales for the quarter were 2.1 billion on a comparable basis, up 1%.

Operating profit for the quarter was 243 million, down from last year.

As you can see in the release provided, the packaged meats business remains our key challenge, as it has been the last few quarters.

Retail did post strong numbers for several of our non-meats brands, with positive growth for ACT II, Chef Boyardee, Healthy Choice, Hunt's, Marie Callender's, PAM, Reddi-wip, Snack Pack and others.

Some of these brands have now posted strong share and sales growth on a sustained basis, reflecting the positive impact of our marketing and sales initiatives that Bruce touched on earlier.

Based on strong growth of the brands listed above, the balance of our operations, or over 75% of our business, increased year-over-year profitability in the quarter.

Our meats business, although down versus a year ago, did generate positive profit contribution in the period.

Let me provide more context regarding our packaged meats business.

This segment has been challenged for some time now as input prices remain high.

Although we undertook pricing actions in the period, they were not sufficient to offset the raw material inflation we incurred.

Our pricing action efforts were slowed in part as we worked our way through production capacity gaps and the associated customer service shortfalls we faced in the third quarter.

Those production capacity gaps have now been successfully addressed, and we're now back to normalized customer service levels.

To make this happen, a number of improvements have been made to our internal supply chain capabilities and processes.

Additionally, we have strengthened the general management and functional teams managing this business.

These upgrades have been further strengthened by the information and tools now available to us through the implementation of SAP R3 that Bruce talked about.

What does this mean for the packaged meats business as we move into fiscal 2006?

We believe our supply chain challenges are, for the most part, behind us.

We are now focused on improving the implementation of our customer-specific plans to ensure our distribution, shelving and price point initiatives are being effectively executed on a by-category and customer-specific basis.

We therefore fully expect our share position to solidify, but that may not fully occur until sometime in the second quarter.

While the packaged meats business is getting a lot of focus now and appropriately so, we are continuing to drive those businesses and brands where we have strong momentum and effective marketing and sales plans in-place to take these businesses to the next level.

We continue to focus on the basics to profitably grow share in sales through effective marketing investment, improved product quality and new distribution.

We also remain very focused on driving operational efficiencies through plant productivity, improved logistics execution, and taking non value-added costs out of the network, through aggressive SKU rationalization, to build margin and fund reinvestment in consumer communication.

I look forward to sharing with you the outcomes of these efforts as they come to fruition.

Let me now turn it over to Allan Lutz, President and Chief Operating Officer of our Foodservice business.

Allan?

Thanks, Dennis.

Sales for the quarter for Foodservice were 819 million, essentially flat on a comparable basis.

Operating profit was 56 million, which is below last year on a comparable basis.

Our year was a mixed on as well when you look across the three major product platforms, specialty potato, culinary and seafood.

Specialty potato is our strongest performer.

We are the leading french fry company in North America and the Pacific Rim, and that group just posted another solid year.

They deliver excellent customer service, strong innovation, and are very efficient manufacturers, so they continue to do well even when the environment may be challenging.

Unfortunately, the progress at the potato operation was more than offset by weak results at culinary and, to a lesser extent, seafood.

Culinary is our broadest platform.

It was brought together just over a year ago to integrate our portfolio to include lunch meats, frozen entrees, pizza, dessert toppings, tomato products, condiments, and other items.

We did this so that we could seize opportunities long-term by bundling our products and give our customers better service while leveraging our resources in areas like (indiscernible) development and thus expanding our position with an increasingly sophisticated customer base.

Our Foodservice packaged meats operation are within this culinary platform.

They had a very difficult year with increased input costs, pricing actions which did not fully offset the increased costs, a somewhat-weaker mix of products, as well as manufacturing issues as a result of plant efficiencies.

Our focus is on getting this business back on track, and the key is better mix, fewer SKUs, a focused sales effort, and specific plans to improve our manufacturing performance.

Moving on to seafood, this market has become extremely competitive with added pressure from tariffs placed on shrimp, which has been the case throughout the year.

The market and tariff disruption will be with us for a little while longer, but we have solid plans to get back on track.

Given our market position, we have a great deal of flexibility with our supplier base, and this will help us as we source product more strategically.

So, our focus remains on the items you have heard us talk about as a company, leveraging our portfolio of customer relationships, servicing our customers more effectively and efficiently, seeking out new business opportunities, and improving our cost structure.

I look forward to updating your over the next several quarters.

I will now turn it over to Greg Heckman, President and COO of Food Ingredients.

Thanks, Allan.

As you can see in the release, we just finished a very strong year with comparable sales and profits up considerably.

For the most recent quarter, sales were 795 million, and on a comparable basis, that is up approximately 18%, and operating profit came in at 64 million.

On a comparable basis, that is up approximately 26%.

Most of that increase came from the trade group, our commodity trading and merchandising operations.

Those operations benefit from fluctuating commodity markets, and this year's markets have created a number of opportunities.

Just to emphasize something I get asked often, our trade group does well in these environments, but it's not because we're taking on more risk.

The risk parameters are tightly controlled and have been consistent for many years.

Within our branded ingredients businesses, where we're building value-added ingredient brands, our ConAgra mills brand of flour and grain products had a solid performance.

Additionally, our spice (indiscernible) brand and flavors and seasonings blends also did well.

A third area in our portfolio, Gilroy Foods, a leading and trusted garlic, onion and vegetable ingredient brand, experienced weaker margins in the quarter due to intense cost pressures and continued foreign competition.

We expect improvement to come from efficiencies and successful leveraging of our brands within the entire ConAgra Food Ingredients portfolio.

I'd be very excited to see the trade group perform as well in 2006 as they did in fiscal 2005, but we simply can't plan on that happening because those markets are volatile and unpredictable.

So, our focus will be on other areas of the business in which we can shape our future, for example using our procurement expertise dealt other ConAgra Foods operations achieve savings and buying inputs and by expanding our portfolio of value-added ingredient brands more broadly within the entire food industry to new customers and new channels, and leveraging the resources of ConAgra Foods to result in winning customer solutions.

We remain well-poised, for example, to benefit from continuing customer preferences for whole grains, as well as to leverage our unique ability to meet the flavors and seasoning needs of our consumers.

Before I close, I want to say thank you to the Food Ingredients team for all they did to make fiscal 2005 a fantastic year and also for all they're going to do to help us execute successfully in fiscal year 2006.

Now, I will turn it over to Frank Sklarsky, our CFO.

Thanks, Greg.

I want to make a few remarks about the financial matters before we wind down this portion of the call and go to the Q&A.

Overall, for the fourth quarter, the Company had sales of $3.7 billion, which represented an increase of 4% versus last year was a comparable basis.

Operating profit was $363 million, down on a comparable basis from the prior year.

Earnings per share was $0.20 for the quarter and even adjusting for items impacting comparability, these results were below year-ago levels.

While our overall EPS was weaker than we wanted and margins were lower than where they were last year, there are some favorable items that are worth noting.

We reduced debt by approximately $1.2 billion and as result of prepayments in fiscal 2005, we only have about $100 million in debt due in fiscal 2006.

The Company paid about $550 million in dividends during the year.

CapEx came in about where we projected at approximately $450 million.

We've repurchased a total of approximately $600 million of our stock over the past two fiscal years, $180 million of which was done in fiscal 2005.

And we ended the year with $208 million in cash.

Please also note that we still hold 15.4 million shares of Pilgrim's Pride stock.

We can elect to sell approximately 7 million of these shares later this year and the remainder 12 months thereafter.

We took some actions, including headcount reductions, to lower G&A costs going forward.

As we mentioned in the release, the headcount reduction and other G&A cost reduction programs should benefit our anticipated cost structure by more than $100 million on an annualized basis, after we've completed all of our reduction initiatives.

Most of these should be in place by the second half of the year.

Just to be clear, there were $43 million of severance costs in connection with the headcount reduction program that we recognized in the fourth quarter of fiscal '05.

So with that, I think we will take questions now.

Thanks for your interest in ConAgra Foods.

Now ,we will begin the Q&A. (OPERATOR INSTRUCTIONS).

Bill Leach of Neuberger Berman.

I'd like to thank you for having a Q&A session, to start with.

I was wondering.

Just in terms of the meat business, do you think there's something structural?

You know, you've had growth of other companies like Smithfield -- (technical difficulty) -- impairs your ability to compete because you're not vertically integrated?

I was also wondering if someone could comment on the dividend payout ratio, if you feel comfortable with this very high payout ratio.

I will just start off and just mention just the topline item on the meats, Bill, and maybe let Dennis add to that and then we will come back to the dividend.

But what got us this year in the meats wasn't anything structural; it was purely our execution.

We had about $180 million of input increases.

It was higher than we expected, for longer than we expected, and we did not execute well in the marketplace in terms of dealing a number of those -- in terms of dealing that back.

But Dennis, do you want to add on to that?

Yes, I think Bruce outlined what occurred.

What we're doing about it -- you know, we've got our service levels back to normalized levels if not better than they were prior.

We're now working to restructure our trade deals in terms of how we go to market.

Secondarily, then, we are also working to leverage new product opportunities; we are a little bit late getting the tubs for example.

Those are now going to market on brands like Butterball.

We think the opportunities within the brands as they exist are pretty positive in terms of stabilizing and getting vitality back in these businesses.

On dividends, Bill, I would tell you this, because you've followed the Company for a long time, but I'd kind of put dividends -- you see about five things around that.

First of all, the Board has long seen dividends as a priority in terms of capital allocation and in terms of how we use our free cash flow.

Secondly, they've always seen dividends as important to our shareholder base.

I think that's been key over the years, which kind of brings me to my third thought, which is that's probably why you always saw a strong dividend around here, even when dividends weren't popular, and you can recall times when they weren't popular.

That's probably why you saw a strong dividend even before it was favored under the tax laws.

So over the years, the Board's approach has sort of been to look at not just any one year but view dividends in a context of earnings and cash resources over time.

So if you look back at that and all of the years you've followed us, I think you'd probably say the Board has been pretty thoughtful and firm in its approach, and the Board didn't bend or waiver at any particular point in time or any given one year or over the popularity or trends one way or the other.

So it's sort of been a consistent part of the Company.

Okay, well, good luck to you.

Thanks.

Leonard Teitelbaum with Merrill Lynch.

I just have -- just to follow up on Bill's question for just a minute, I've got about 550 in CapEx for next year and about 450 or -- 450 and kind of about 550 in dividends.

Is that pretty much your call on cash?

Do I have those numbers right?

Leonard, this is Frank.

For next year, the CapEx is about 400, next year being this year, FY06, 400 million.

The dividends -- we paid 550 in FY05.

FY06, obviously that's a Board decision in terms of where they decide to go with that, but 550 is what we paid in FY05, so that would be correct.

Okay, and obviously, unless you make (indiscernible) share repurchase.

So you've got about 1 billion, roughly $1 billion in cash calls?

The way I loot at it, between those two items.

Obviously, you had 200 million in cash, so it would seem to me that your cash flow should be at least, from that standpoint, fairly comfortable, to pay both the dividend and the CapEx.

Is that a good conclusion to come to?

There's no change in the numbers you've just given me?

Yes, if you look at FY05, I think you saw that we had a net income but depreciation that was ample to cover our dividend.

Looking forward, you know, we've said we are hopeful that FY06 will be an improved year versus FY05.

Given the fact that we were able to cover our dividend in FY05, it's reasonable to believe that our cash flow will be adequate to cover our requirements whether it be dividends or CapEx in FY06.

Okay, I just wanted to make sure our numbers were on track.

Second of all, help me out a little bit.

I thought that the cattle inventory that you were basically warehousing for Swift was all presold and I was surprised to see the asset impairment charge on it.

Can you help me out a little bit there?

There's not an asset impairment charge -- (multiple speakers).

Impairment charge on the inventory, excuse me.

(multiple speakers) -- let me clarify what the charge is.

I think you're referring to the Swift & Company note?

Yes.

That was on (indiscernible) $39 million that we took in the fourth quarter to equity.

Let me explain what that was due to.

When we classified that note as an available-for-sale security, that's an accounting term, and the accounting rules require us to look at the valuation of that on a quarterly basis.

Now, the debtor had some restructuring in their balance sheet early in the fourth quarter, found some additional debt.

That allowed us to take a look at what the comparable yield and valuation of our note would be.

Based on that analysis, which was supported by any independent outside analysis, it was determined that about a 15% yield on that note would dictate an approximately 20% valuation, mark-to-market.

Now, that is -- it's classified as a temporary mark-to-market reduction, because we have no information that would lead us to believe that they are any issues associated with collectibility, so we continue to carry the note on our balance sheet, continue to accrue interest.

As you know, it's a payment-in-kind note.

We've merely taken that mark-to-market to the equity as a temporary impairment on an available-for-sale security.

So basically the face value stays the same as far as you're concerned internally at ConAgra?

Yes, but the base value in terms of what is owed to us stays the same.

It includes accrued interest.

It's merely a carrying value through equity that has been mark-to-market.

All right, thanks for clearing that up.

I think the one question I know that I think we all get from sitting over here is if you knew the meat business was bad, why did it take you so long to fix it?

I think we had some problems in the first half that exacerbated themselves in the second.

Now, is there anything structurally that was amiss here, or was it just -- you thought you had a plan and it didn't work, or what?

Lenny, this is Dennis.

Again, as we talked, and we talked a little bit about a few months ago, we incurred service issues coming through.

Behind that or after that, we attempted to take list price increases on our business to offset commodity costs, which were high, as we also talked.

We were not affected there, in that our service levels lead us to essentially placate the trade on those service levels.

We did not hold it or we dealt it back.

We are in the process of fixing that right now.

Service levels, as I said, are back to at or above historical levels.

We feel good about that.

We are in the process of restructuring how our trade deals are set up to make sure we manage price points and merchandising frequency, etc.

Probably most critically, we've made a number of changes within the operating group, in terms of strengthening our tools and capabilities, around how we get visibility to net prices and can better manage retail prices to our own margin.

The tools we put in place too or we talked about are a major part of that solution in terms of real-time access to data and the ability to act on it.

I'd like to ask a question this way and hope I can get an answer.

You know, if we take a look at the operating conditions as you see them from where you are, why would the first quarter not be better than the quarter you've just reported?

This is Frank.

I think, if you look at the challenges we've had, and I think Bruce (indiscernible) his remarks he talked about clearly four key things that we've got on our platter, SKU reduction, headcount and G&A reduction, manufacturing rationalization, and fixing the meats business.

If you look at our running rate where we are now, it's obviously a very difficult time in the meats business.

We think that it's going to take some heavy lifting in the first half of the year to get recovery on that business consistent with the points that Dennis laid out.

If you look at our earnings run rate in Q4, which we said was $2.20 and we had six items impacting comparability, and moving forward, it's going to take some time and it's going to take some internal efforts to get the SKUs out.

We will not see any impact of that benefit in Q1.

We will see a very, very minor benefit, very minor benefit on the G&A in Q1, all right?

We will see some issues in the meats business that I think the Group is addressing right now, but it's going to take a while, going customer by customer, taking a look at how to re-jigger the balance between gross sales and trade and net sales.

That's not something that's going to be fixed overnight.

It didn't deteriorate overnight; it's not going to be fixed overnight.

I think one other thing I would add to that, Lenny, is if you look at the comps in the Ingredients segment year-over-year, they had a great first quarter in '05.

I never banked on that.

From year to year, that will turn out to be what it's going to be.

That would be another thing I would factor into the thought process, sitting where you are sitting.

Well, I wasn't comparing it to first quarter a year ago;

I was comparing it to the quarter that just ended.

But again, Food Ingredients -- (multiple speakers) -- fourth quarter, also.

Okay, thanks.

I want to add my congratulations to having an interactive call here.

I think it's terrific, from our standpoint, and I want to thank you for it.

You're welcome.

Bob Cummins with Shields & Company.

I have a question on your share buyback strategy.

First of all, did you buy any shares in the fourth quarter?

No, we did not buy any shares in the fourth quarter.

It was a $181 million purchase during the year, but nothing in the fourth quarter.

Okay.

I know you paid down a good deal of debt this past year.

Currently, with your stock at the price where it is, it would seem to be a great opportunity to be in the market buying shares.

I'm just wondering if that will be your strategy in fiscal year '06 to take advantage of that situation.

Well, you know, Bruce talked about the importance of the Board with the dividends, okay, so that's one item.

When we look across the landscape in terms of where we have our cash resources and our cash needs, again, we've got -- you know what our running rate was for our dividend; we talked about having about 400 million in CapEx for the next year.

We've got about $100 million of debt to pay off in November.

We're going to take a hard look at our cash resources as we go through the year, as we gain more operating traction and improve the meats business, see where the income and the cash flow comes in and then make a determination of all the things we have on our platter, whether it's the debt reduction that we have coming due, whether it's the dividend, which the Board will decide exactly what that pay-out rate will be and whether it's a share repurchase.

So we have completed 600 million to date of our originally announced $1 billion program, and I think it's important to recognize the reason that we instituted that share repurchase program to begin with had to do with divestitures of noncore assets.

That's what enabled us to divest -- to purchase the shares to date.

As we move forward, as I was saying in the call, we had 15.4 million shares of Pilgrim's Pride stock remaining, so depending upon our operating cash flows and the timing of which we might receive proceeds or monetize those noncore assets, that will be part of the consideration to determine when we get into any additional share repurchase.

Okay, thank you.

Just let me make one final comment here, and it may be premature to say this but, Bruce, I personally am going to miss having you around, so I just wanted to get that point in.

Thanks for everything over the years.

Thanks, Bob.

Eric Katzman with Deutsche Bank.

Good morning, everybody.

I guess the first question goes to Frank.

Frank, you know, not all of these are your fault but we've got about 1 million restatements over the last few years.

It looks like, in '05, that you have again restated the sales, because if I look at the last -- the first three quarters' reported sales versus the full year of 14.6 billion, it looks like there's a 3 or 400 million change versus what you reported in the fourth quarter.

Yes, let me address that specifically.

That is an operation, a meats operation in the culinary business that we exited in the latter half of the year, in the fourth quarter, and it was approximately $400 million of revenue at little or very low margin, very low margin rates.

What it requires us to do is for all -- for current and all prior periods, to adjust that from continuing operations to discontinued operations.

So, I wouldn't really classify that as a restatement; it's an adjustment from continuing ops to discops (ph) and that's required by the accounting rules.

As we unwind certain operations, it's no different than any other divestitures or unwindings that we had over the years.

It's really just moving from one category to the other.

We would agree with you; it makes it difficult to follow but we don't have any choice in that reclassification.

So are you going to give us what the restated first three quarters of the year are?

This is Chris.

In our Q&A document that's on the Web site, the very last question should give you some tables that will help you in that respect.

I didn't see that last page.

It goes by quarter and then for the total year.

Okay, all right.

Then, I guess you also had -- I mean, it's small but you had a penny change in the tax rate in the quarter or restated tax stuff.

What was that all about?

Let me explain what that is.

Most companies will do an estimate related to their taxable federal and state during the year and then adjust as we get to the end of the year in the fourth quarter.

We are no different in that respect.

There's about a $6.5 million adjustment mainly related to state tax rates, which took our overall rate in Q4 up to about 41.2.

That is higher by about 3.5 percentage points versus what we think a sustainable, effective rate is.

That's our reason for calling it out.

We're going to be very transparent in terms of making sure that you all understand what that was due to.

So it's nothing more than a fourth-quarter adjustment, adjusting estimates made previously made in the year and that, compared to what we believe is an ongoing running rate that's sustainable by the Company.,

Okay.

Last question and I will pass it on -- this is to Bruce.

Bruce, you know, you've gone from a lot of changes.

Obviously you've made portfolio adjustments; you've kind of centralized the sales force; you're now on the path towards putting in SAP, and I think you're almost done with the DC centralization.

So is the last thing here the manufacturing?

How long is that going to take?

What kind of savings should we assume come from taking 150 sites down to whatever point you think is reasonable?

Well, there's a sequence of things to do that.

A first piece, Eric, to not lose sight of is, in order to do the manufacturing piece, you do the SKUs as well, because you create that simplification.

I think a lot of people in the industry have done that well ahead of us.

I haven't found any magical way to quantify what you get out of the SKUs from anyone and have looked around and asked and so forth, but that's a significant piece that we know that if you take out numbers of SKUs that don't really account for a lot sales but they clog the system and they clog the pallet spots in the warehouses and so forth, that's the first item.

Second, the manufacturing is key.

I don't know of anybody that has 150-plus manufacturing facilities in any industry, but we do, and you know why that is, from a number of acquisitions over the years and so forth.

I'm not in a position this morning to put a number on that for you because that's what is -- that's what is underway at this point in time.

But that simplification in the manufacturing network is key; it's critical.

I'll also say it's not something we are starting from Ground Zero this morning.

We've been working on this for a period of time.

In fact, we brought Jim Hardy on board for the execution of it.

We've got some great manufacturing and engineering folks here that have got this teed up.

The third piece on that would be all that simplification and bringing -- a number of things -- of bringing things to the center from -- you remember the scattered independent operating companies.

The distinction there is there's a lot of G&A; the headcount has been coming out and continues to come out.

So we'll give some more details on the manufacturing and so forth of those plants when they are finalized.

When you've said in the past -- and then I will let it go.

When you said in the past that I think a 15% operating margin on a run rate exiting the year in packaged food was reasonable, obviously because of the beef, the meat situation, you're not making that.

Like was some of this manufacturing improvement built into that number, or was that a number that just had to do with other centralization efforts and the manufacturing improvement is on top of that?

Eric, this is Chris.

When we talked about the 15% running rate of the operating margins in packaged foods, we anticipated some savings throughout the supply chain, not just limited to manufacturing or SKUs or transportation warehouse or any single item, but the entire supply chain contributing to that.

Frank has got some more thoughts he wants to share on it as well.

I think what we want to do is make sure we break out things that are enablers and initiatives from where the money is manifested.

Bruce talked about SKUs; we've talked about manufacturing productivity and rationalization; we've talked about headcount and G&A.

We've got a lot of initiatives and enablers underway.

That will manifest itself on different line items on the income statement, but when we talk about the 15% packaged food margins, yes, we are 2.5, 3 points away from that now, as we've said in the past.

All of these things are part of the enablers that will cause us to be able to call that back.

When you quantify that, that's several hundred million dollars.

Manufacturing will obviously be an integral part of that.

When you look at the magnitude of the opportunity there and the improvement capacity utilization, for the amount of money that we might have to take at different points in time in non-cash charges and the very modest amount of capital we will have to put in place to move product from one facility to another, we think there's a tremendous amount of payback associated with that.

But again, these are all enablers to getting us to where we want to be and that 15% margin.

John McMillin with Prudential Equity Group.

Good morning.

Thanks for answering questions on the conference call, and Bruce, good luck.

My question is actually for Frank, because I just feel like the dividend questions so far have been, I guess, not as committing as I would like.

I just -- Frank, if we could kind of go through the math?

Right now, your dividend payout is 81%.

It goes higher when first-quarter earnings go down.

There's got to be some capital requirements.

I would be curious to know whether that 400 million stays that way, particularly as plants close and you try to upgrade existing plants.

But you know, as much as it might be a priority to the Board, you know, to pay out dividends -- I know there's a long record of dividend increases that seems kind of certain to stop -- but there's got to be a priority for the incoming CEO, who, Frank, I'm sure you'll work with and are involved with -- to have some kind of financial flexible to do some of the things that Mike Harper did to make this company great some 15 years ago.

So I guess, one, I'd like to know whether it will be management's suggestion to the Board to maintain the dividend or raise it, and whether you've gotten that far.

Two, if you can kind of discuss the capital spending beyond '06, to the extent you can.

Three, just in terms of the obvious issue of an incoming guy wanting some financial flexibility and whether this is a limiting factor in recruiting a candidate -- so if you could kind of address all those points, Frank, starting with you?

Yes, first of all, I just want to clarify, on the CapEx you mentioned, the 400 for next year and what we've got in the plans for the ensuing years we've carefully laid out to include what we think we need to maintain the channels, the enterprise functions, nucleus, as well as money we believe we need to commit in association with the plant rationalization and consolidation.

So we've got that laid out very carefully.

It has required us to get smarter, more lean and more disciplined in the kind of capital we allocate to the individual operating groups.

And the operating groups have been very helpful in showing us where they are segregating their capital between growth initiatives, cost-saving initiatives and fundamental EPA, OSHA, and just fundamentals of keeping the plants running.

But we've got that all laid out by plant on a very robust basis.

We think we've got that covered, including rationalization.

As it relates to the capital allocation priorities, again ,if you look at our cash flows, we have looked at it in detail, including sensitivity analysis, as we go through the next year or two.

If you take operating cash flow plus depreciation, less CapEx, plus or minus some special things that we have going on, we believe we have adequate resources to cover the things that we need to cover.

Now, again, we've got Pilgrim's Pride stock and you know what the value of that is.

Obviously, we have a certain cadence of when we are allowed to unwind that in agreement with Pilgrim's Pride, some later this year and some 12 months thereafter.

The timing of that will obviously have an impact on what we may decide to do or not do as it relates to share repurchase, but as it relates to operating cash flows, CapEx, depreciation and dividends and all of our other requirements, that's relative balance.

Now, I wouldn't want to speculate -- again, dividends, as we said before, are at the discretion of the Board.

I wouldn't want to speculate with respect to what any new CEO might want to do in terms of policy on dividends, share repurchase, whatever.

That will be a discussion we would have at that time, and of course in conjunction with the Board of Directors.

But as it stands right now, we do have adequate cash resources to fund the requirements that we have on an annual basis, and that includes our CapEx and our dividend.

I guess you will tell that to the Board.

That 400 million stays that way looking forward, as far as you can see?

Yes, I don't see any significant uptick in that CapEx.

In fact, we've had, over the last year and over the next year, these -- I'd like to view as higher than normal years because we think we're making intelligent investments in nucleus.

Then if I could just ask Dennis a question, one on the frozen food business, which was a source of real growth in the past, and just kind of an update there.

Then just in terms of, you know, as I look through various Nielsen numbers, which certainly are not all-encompassing, the market share erosion hasn't really gotten any better as far as I can see.

Just kind of how much of a priority is it to kind of hold market share?

How much do you think it will cost?

Specific to frozen foods, John?

Well, let's start with frozen food and then you might address -- we all know about processed meat and so forth, but if you could kind of address the other areas, whether it's oils and peanut butter.

I mean, some of these marketshares, we don't need to go through each one but basically, if ingredients is going to go down, if some of the cyclical earnings -- you've got an 82 pay-out ratio or an 80-plus pay-out ratio a lot of it is from commodity businesses that are going down, I mean, some of the pressure is on your area, Dennis, to start to earn more.

You just kind of wonder, can it happen without further market share erosion?

Sure, let me put some of those tough questions in context.

As we continue to be focused and appropriately sell on the packaged meats business, if you look at the balance of our portfolio this year, our gross profit contribution and earnings were up and up double-digit on the balance of the portfolio.

Some of the businesses you mentioned, specifically frozen, would fall in there.

Our share performance has continued to be strong there, driven by Banquet and Marie Callender's Kid Cuisine.

The one that has been underperforming, relative to our expectations, has been Healthy Choice.

We've seen that solidified.

We've got new work in place there in terms of new positioning and consumer communication.

It's in test right now with very good results.

So our share momentum and our mix, it has been strong; we think it will continue to be strong.

Additionally, based on the strength of the brand, we have taken pricing in this business, a combination of list and net, but I think I would ask you to watch our average net prices, both by branded and composite, going forward.

As it relates to some of the grocery businesses or shelf-stable businesses you talked about, our performance there, both in terms of share, sales and margins, has been very positive.

Businesses that we talk about, like chef and PAM, our Hunt's business has been up, both in the share, sales and profit contribution.

Peanut butter, I think our shares are relatively flat; there's some opportunities there.

But overall, those businesses, as a body of work, our share position, our sales and our margins, have been positive.

You know, we've taken pricing in those businesses; we talked about it not holding in packaged meats.

Our pricing to date has held in those other businesses.

So, we feel pretty good about the momentum there, actually.

Thank you very much.

Eric Larson with Piper Jaffray.

Again, thanks for having the Q&A session and good luck to you, Bruce.

A few questions on SKUs -- 17,000, is that companywide, Foodservice and Retail?

Yes.

The 17,000 is total company.

The split on that is roughly what?

Is Retail -- would it be about half and half?

No, Retail is going to be a significant piece of that, and I would say that obviously that 17,000 was a start point.

We are at about 12,000 now, and we've got about 8,000 -- 6,000 in Retail; we've got about 5,000 over in Foodservice, and then the remainder would be a spread across, including CFI.

Okay, all right, because as I was adding those things up, I said, from 17, you should be able to at least half that can maybe even more.

Well, if you look across the landscape in terms of what we're targeting between now and the end of fiscal '08, we are still looking for double-digit improvements over the next couple of years.

So if you started at 17,000 and we are at 12,000-plus right now, we've got some very aggressive targets to be -- I will just characterize it as significant double-digit percentage reduction over the operating cycle, and we're going to try to frontload that as much as possible because of the opportunities it's going to present us in the supply chain.

Okay, that's terrific.

Then, a question for Frank -- you folks did reduce debt again this year by a significant amount, 1.2 billion.

Do you see a significant debt reduction going forward?

Are you where you are on your balance sheet where you want to be with that, or how would you characterize debt paydown for the next year or two?

If you look at the maturities in our public documents, we don't have a lot coming due in the real near-term.

We've got 100 million coming due this November; we've got 500 million in the following fiscal year.

Then you go out to about 2010, 2011, before you see any significant new maturities.

So, because of some prepayments and some significant paydowns we did through 2005, in the next fiscal year, there will not be any significant requirements to pay down debt.

Now, we've got some other opportunities.

As you know, we've got -- a lot of our debt is fixed and not floating, so we're looking at other kinds of opportunities to structure our debt, given the interest curves and things like that now, but in terms of just straight paydowns, the next two fiscal years, this year and the next fiscal year, there's only 600 million coming due.

Okay, good.

Then maybe the final question here is for Bruce.

Obviously, there's a bit of a change of guard here, so this question could be addressed differently in whatever time period that the new CEO comes in.

But given all the changes you're making to the businesses to date, just your infrastructure, number of plants, number of SKUs, adjusting the Company to be more competitive, logistically, etc., are acquisitions a reduced priority today?

I'm not saying that if a real attractive acquisition came along that you wouldn't pursue it;

I'm sure you would.

But would the acquisition component be further down in your strategic thought process today?

It's a function of opportunism; it isn't a function of where do you put it on a particular level, which if we took that in a long-term horizon from ConAgra's perspective, that would -- in the earlier years and maybe up in through the early '90s, middle '90s, acquisitions might have been the number one item for a number of years.

It would be seen as equivalent to a number of things as opposed to number one priority.

But it's got to be opportunistic; it's got to add to gross margins; it's got to have good returns and so forth.

So we are very selective on that as we look at currently and going forward than perhaps in some years past.

Okay, great.

Thanks, everybody, and again, thanks for the Q&A session.

Pablo Zuanic with JP Morgan.

Thanks again for having these calls.

Just a couple of questions, first for Bruce.

Bruce, one, given the changes in the industry in packaged meats, Tyson's meat (indiscernible) integrating, do you regret having sold this (indiscernible) capacity, in the sense that you would have more secure supplies in port right now?

That's one question.

The second one for you would be just try to expand a little bit in terms of what skills are you looking for in the new CEO that maybe you didn't have?

I know you mentioned marketing, but if you can expand on that?

Then I have a follow-up for Dennis.

The first question was, do we regret getting out of some of the businesses from the vertical integration.

The answer to that is no.

Remember, you're looking at some results right now that relate to a high-cost time, but having been in those businesses for a long period of time, we all know that what goes up comes down, and these are commodities and they are fungible.

There are times when it goes as deep the other way this way, and let me tell you, that leading hurts; we've all been there.

So this is -- the issues you're seeing in meats isn't because we didn't hedge these things right.

Everything rises and falls in the same sea.

Our procurement was fine; it was some -- in terms of how we executed and remember what Dennis said.

When we were going out and attempting to execute on some price increases and so forth, we were doing it sort of hat-in-hand because we had not serviced our customers well.

It's a little tough to go in and try to acquire more for a product when you haven't been too well delivering it and so forth because of some hiccups that we had.

In terms of the qualities of the individual that I'm interested in, it's marketing but it's also operational.

We are moving from a passing game to a running game, okay?

It's blocking and tackling, and that's the kinds of things we're looking at.

What is your next question, a follow-up?

Yes, just for Dennis, Dennis O'Brien -- what I'm trying to understand here, in terms of normalized profit margins, I know you talked about 15% for packaged meats.

That included Retail and Foodservice when you used to have collapsible units in one division before.

So I would assume that, with Foodservice margins at 7%, does that mean a different target for the packaged, for the Retail division?

Let me just expand on that point.

When I look at the packaged food group, on average, the EBIT margins are about 15 to 16%.

The divisional margins for your division in retail are 13%.

They're not far off that level.

I could argue that some of your product lines, especially packaged meats, are probably lower margins.

So just expand in terms of what is the real target, and also if you can expand if you think, in terms of (indiscernible) frozen foods, snacks, groceries and packaged meats, where is there more opportunity there to give margins?

Which margins are higher or lower below the average of 15%?

Hello, Pablo.

This is Chris.

I'm going to start before I hand it off to Dennis.

When you're mentioning the 15% run-rate target for operating margins in the packaged foods business, you are right; that's Retail and Foodservice together.

Just from a practical standpoint, the weighting of it, Retail will be carrying more weight because it's a bigger piece of the math.

It's also true that their margins are a couple, maybe 3 points below most of the peer group that you and I would both look at, but that doesn't mean that both the Retail and Foodservice don't have opportunity in their supply chain and their mix.

So they both should benefit from all of the initiatives we've been talking about that expand those margins.

Dennis, I will turn it back over to you.

Pablo, regarding the opportunities going forward, we talked this year, as we incurred significant inflation costs, that we were not as successful as we needed to be in packaged meats.

We were quite successful in the majority of our other businesses in offsetting inflation through productivity and pricing, which I think reflects some of the current strength of the brand and the future potential.

We believe there is great potential in our convenience meals businesses, some of our sauces and enhancer businesses, our snacks, our wholesome snacks businesses going forward, and have aggressive growth plans in place for those to build both share of sales, value and thereby margin.

Meats, as we talked -- we've got some fundamentals to better execute to leverage some great brands we have there.

Okay, and just a last question for Frank.

Frank, you mentioned that you are comfortable with the free cash flow generation, but can you just give us a sense of what was normalized operating cash flow in fiscal year '05?

I mean, there were a number of adjustments that distort the numbers, so what would you say a normalized level of operating cash flow?

You've already told us what CapEx is.

Well, you know, we've got to be careful when we talk about normalized cash flow because we did having a down year for packaged meats business and we have made significant investments in nucleus, which was a main increase in CapEx versus the year before.

So, you know, if you take our net income and you add back our depreciation for the year, which is about 3.50, okay, and then if you were to try to "normalize packaged meats", and again it's anybody's -- you could have a range of judgments as to how much you would add back in the dip that we took in packaged meats, plus 50 million or so in additional nucleus expenditures.

Then you would get to what I will call a normalized rate.

I hate to put a pinpoint estimate on that because there's some judgment involved in terms of what's normalized with respect to the packaged meat.

But take our net income, add back our deprec., subtract out in the near-term going forward about 50 to $60 million in additional CapEx in excess of depreciation.

Next year, it's going to be about $40 million CapEx over and above depreciation.

Then how -- the bogey is going to be how much can we claw back in the near term from packaged meats, and then how quickly can we get additional traction on the manufacturing and the COGs side from SKU reduction and from manufacturing rationalization.

So you know, is a normal year '05-plus?

Is it '04?

It's difficult to pinpoint at this time.

I can't characterize it any differently than how I have.

That's good.

Thank you.

Phillippe Gusent (ph) with CSFB.

Good morning, gentlemen.

On behalf of the fixed-income community, also many thanks for hosting this call here; it's very helpful for us.

Two questions for Frank, if I may, this morning.

The first one, a couple of days ago, Campbell's soup indicated that they are revisiting the need to have excess (indiscernible) the tier 1 commercial paper market.

We had Heinz, whose ratings were put under review for a downgrade by Moody's following their agreement to purchase some assets from Danone.

In your case, it seems like the easy debt reduction is kind of behind you guys following the asset sales.

Given the mature nature of the industry in which you operate and then the appeal I guess of some shareholders for perhaps a higher dividend or additional share buybacks, what do you see, Frank, as kind of your optimal capital structure?

You (indiscernible) negative outlook from Moody's and triple B+ from S&P?

What do you view going forward based on your current business plan?

What is the ideal structure?

Is it a high triple B?

Is it a mid triple B, or would you like, over time, to kind of go back to kind of a single A type operating?

Well, I think, like you said, we are at the equivalent of a triple B+ from all three agencies right now.

We've got one on negative outlook.

I would want to point out that we are really at a historical low in terms of our total debt to total capitalization, so we are somewhere in the 40, 47 to 48% debt-to-total cap ratio right now.

We have said that an ongoing trend running rate would be 50% or just under 50%.

We have achieved that.

We would like to maintain our current ratings, because we believe it provides us flexibility in the event a strategic acquisition opportunity comes to the forefront.

We will have ample room with respect to financing such a deal, should that be through stock, cash or debt.

So, we think we are in very good shape right now with respect to the strength of our balance sheet.

I would say that I wouldn't be looking for any significant variation to debt-to-total cap from where we are right now.

So should I deduct from that that we should not fear that your rating will come into jeopardy because of, let's say, debt-financed share buybacks?

Is that a fair assessment?

I wouldn't characterize as attributing any buybacks or any debt financing to any specific purpose.

We maintain a debt-to-cap structure and allocate our resource across a number of initiatives.

Now, the rating agencies make their own independent judgments as to how they will view us.

As you said, S&P and Fitch have us at triple B+;

Moody's has us at negative outlook.

They use some slightly different ratios than the other two.

I will tell you that, in our view, the best thing that we can do to maintain our strong balance sheet and our strong ratings and the strong P&L is to pursue the operating initiatives and get operating cash flow back to the where we want it to be.

That is the single most thing that we can focus on.

Okay.

Then my second question -- Frank, you indicated indeed that you do not have a lot of debt coming due over the next few years, yet you are still sitting on some very high coupon debt.

I'm actually looking at your 2021 9.75, your 2030 is 8.75.

They all trade at high-dollar price, obviously, in the current environment.

Would you be willing to pay the premium to kind of refinance this at lower coupons and take advantage of still very low interest rates?

Yes, we've looked at the 400s that are due in 2001, 9.75, and we are exploring some alternatives on those things.

As you know, we are all fixed at this point.

We have no swaps out; we have no floaters out.

Given the interest rate environment, we are continuing taking a very hard look at the things we could do.

Like you said, very high premiums in the marketplace right now and you know, it's difficult to make an economic justification for some of those things, but we are working internally and with a few folks externally just trying to look and see if there are any opportunistic things we can do to extend maturities or do some other creative things, given the industry environment.

Again, ongoing analysis and we will be sure to make sure that you are all aware of what's going on as it occurs.

Nothing imminent right now but we are taking a look at that.

At this time, we're going to conclude our call.

Just as a reminder, this conference is being recorded and will be archived on the Web as detailed in our news release.

As always, we are available for discussions at 402-595-4684.

Thank you very much for your interest in ConAgra Foods.

Ladies and gentlemen, this does conclude ConAgra Foods' fourth-quarter conference call for today.

Again, thank you for participating.

You may now disconnect.