康尼格拉食品 (CAG) 2006 Q1 法說會逐字稿

Good morning.

My name is Dennis and I will be your conference facilitator.

I would like to welcome everyone to the ConAgra Foods first quarter earnings conference call.

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

Later we will conduct a question and answer session. (Operator Instructions).

Thank you.

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' discussion of first-quarter fiscal 2006 results.

I'm Chris Klinefelter, the 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 first-quarter earnings of $0.68 per share.

That includes $0.40 of earnings from the sale of Pilgrim's Pride stock and $0.04 worth of expense from impairment and plant closure costs, as well as another penny of earnings from discontinued operations.

Those items impacting comparability are detailed in the release.

Over the next few minutes, you will hear from Bruce about how he saw the quarter in relation to our broader initiatives and you will hear from Dennis, Allan and Greg about what's taking place in their segments and you'll also hear from Frank about financial matters.

After that, we will have a Q&A session to address any issues or questions that you might have.

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

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

And 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 we will achieve in the future.

So I will refer you to our note on forward-looking statements in our earnings release and if you'd like read more about the factors and risks which can influence and effect our business, I will refer you to the documents that we filed with the SEC.

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

Thanks, Chris.

I would like to start by saying that the quarter was solid.

Progress is building and things are better since our last call.

Operationally, we're getting some traction with pricing and manufacturing in some key areas, specifically the packaged meats operations are improving.

Certainly they're not perfect by any means or even close to what we desire, but they're definitely improving.

In the last half of fiscal '05, you heard a lot from us about our packaged meats business.

That has been our single business operational challenge over the last few quarters due to inflation and some operational issues, but the situation is now improving due to internal process improvements, targeted price increases and methodically changing our customer and product mix.

The team we now have in place is making a big difference there.

I'm not saying that the business is where it needs to be -- it is far from it -- but things do seem to be moving in the right direction.

As we expected and communicated, we will continue to work through some of those challenges over the next couple quarters or so, but we expect things to be better in our second half based on the trends that we have been seeing so far this year.

Across our entire business spectrum, it seems like the rate of input cost increase as a whole has lessened and we're not seeing increases at the same rate as we saw in our last fiscal year.

In some cases, we've even seen some declines, but there are certainly exceptions to that, most notably energy and other petroleum-based costs.

On that point, I want to be clear that the inflationary environment is not easy, but it doesn't seem to be worsening at the rate that it was last year for some of the more significant inputs we buy.

So we continue to deal with that through operating productivity, overall cost management and taking pricing appropriately, which we're watching very, very closely.

And while I'm on the subject of fluctuating input costs, let me say that our trading and merchandising operations within the Food Ingredients segment posted another very strong quarter.

The commodity markets were right for that.

We did not expect the markets to be as favorable or as volatile as they were, but our people took advantage of the environment and so that provided a nice plus but obviously not one we're going to count on every quarter.

Moving on, as most of you know from our communications of about a month and a half ago, we divested all of the remaining shares that we've held in Pilgrim's Pride Corporation.

That was about 15.4 million shares.

It generated more than 480 million in cash this quarter.

You will see that gain on the sale in our financials and called out in our earnings release.

That essentially completed the divestiture of our chicken business.

And after all of that is said and done, that transaction gave us more than $1 billion of proceeds on a pretax basis.

We're obviously pleased with the way that turned out for our shareholders.

Before I conclude, I want to say that we remain focused on the major areas of our business that will enhance our profit margins and returns on capital over time.

That is the intention of the marketing, operating and business process improvement work that is taking place.

As part of that right now, we see a lot of low-hanging fruit in fixing our Branded Meats business, reducing SKUs, rationalizing the manufacturing base and controlling all of our expenses.

I think these items will make a big difference over the next several quarters and I know the team is as focused on these items as they are on satisfying consumers.

I'm sure Gary Rodkin will be pursuing that as well as a number of other initiatives in the weeks and months ahead.

And as you know, we announced a few weeks ago that Gary Rodkin will become the new CEO as of October 1 and Steve Goldstone will become our Chairman on that date as well.

From my perspective, it has been a privilege to have been associated with ConAgra Foods.

I believe the future holds a lot given the things that we have underway, and I thank everyone for their interest in ConAgra Foods.

With that, I will turn it over to Dennis O'Brien, President and Chief Operating Officer of our Retail Products segment.

Thanks, Bruce.

Retail products' operating profits for the first quarter were $211 million, slightly above year ago.

This operating profit performance was driven by stronger than year-ago gross margins, offsetting weaker topline sales.

Net sales for the quarter were 1.9 billion, 4% lower than year-ago.

Pricing was favorable but was offset by unfavorable volume and mix.

Some of the sales decline occurred because we walked away from unprofitable business, specifically in refrigerated meats and I will say more about that in a few minutes.

Within the business, a number of key brands continued to enjoy strong topline growth.

We outlined those in the release.

The majority of the topline challenges experienced in the quarter remain specific to our refrigerated business.

Specific to gross margins, our margins grew year-over-year and supply chain productivity and pricing offset increases in cost of raw materials, packaging, energy and fuel.

Very critically, the gross margins in our refrigerated operations have stabilized as an outcome of actions taken to date.

Let me talk a little bit more about that.

When we last discussed the business, we articulated a number of key steps we were taking regarding the stabilization and then revitalization of our refrigerated business.

The plan we outlined called out four key actions steps we would take.

First, the strengthening of the management team; two, appropriate every day an feature (ph) pricing; three, the restoration of customer service levels and retail distribution; and four, the simplification of the product line to take unprofitable volume out of our mix.

To date, all four of these steps are on schedule.

As an outcome of these actions, we're walking away from volume we have deemed to be unprofitable which is negatively affecting our topline comparisons.

On the other brands we're working aggressively to ensure we have the right distribution, assortment and merchandising in place to profitably grow.

Bottom line, we remained focused and committed to re-establishing profitable growth in the intermediate-term.

Although our refrigerated businesses remain our challenge area, we're pleased with the overall progress of our convenience meals and snacks businesses.

We plan to increase our marketing support behind these businesses, including but not limited to brands such as Banquet, Marie Callender's, Healthy Choice, Snack Pack, Chef Boyardee, Ready Whip and Pam Cooking Spray.

These are brands where we see the tangible opportunity of making appropriate marketing investments and leveraging the new disciplines we've put in place to make sure we get an appropriate return on that marketing investments.

One last comment area.

I referred to business simplification being executed in our refrigerated businesses.

We're also working to rationalize SKUs and sublines across our portfolio so as to take complexity cost out of all of our operations.

We have to date eliminated a significant number of SKUs with more planned over the balance of the year.

I look forward to updating you on our progress as we move forward, and now let me turn it over to Allan Lutz, President and COO of our Foodservice operations.

Allan?

Thanks, Dennis.

Sales for the Foodservice business were $790 million, roughly equal to last year and profits of $80 million were ahead of last year.

There were some items last year that gave us some relatively easy comparisons in terms of profitability and we give those to you in the earnings release.

As most of you know, we focus on three product platforms -- specialty potato, culinary and seafood.

Specialty potato is one of our strongest businesses.

We had solid volume growth with our key customers.

These operations are among the most efficient in the entire company and they have managed to do well regardless of the environment.

Culinary is the broadest platform.

It was brought together to integrate operations such as sliced meats, cheeses, sauces, frozen entrees, pizza, desserts, condiments and other items.

It had some operating challenges in a year-ago period related to plant consolidation.

We have now passed that comparative period.

Culinary unit volumes were favorable for the quarter and profits were up, so the platform is making progress even though we would like the sales mix to be richer, meaning growing our sales with products that have a higher rate of profit, and for the operations to continue to improve from an efficiency standpoint.

That is what we're focused on for the rest of fiscal 2006.

Both specialty potato and Culinary products dealt with increased transportation costs.

We are dealing with these the best we can through cost management efforts and productivity gains, but these increased transportation costs are something that worked against our margins in the quarter.

Moving on to seafood, this business is down a little and the issue is the competitive dynamics as a result of shrimp tariffs, and that has been the case for awhile.

The tariffs had caused some disruption in the market.

The key to regaining a solid base of profitable business is having the flexibility to source products strategically and to make sure our quality, services and capabilities are seen as a point of preference in the marketplace.

That's our focus as we work through this disruption.

Just to reiterate what you heard from Bruce and Dennis, we're very focused on sales and marketing initiatives that should grow our topline over time and we're convinced there is a lot of opportunity in the near-term with operating initiatives such as SKU reduction, manufacturing rationalization and cost management.

To briefly mention the impact of recent hurricane, we do a sizable business in the impacted areas.

We have worked with our customers to assure that they're getting product as required, but as you can imagine the restaurant business has been affected.

We're also working very actively with companies engaged in supplying the needs for the relief effort.

As always, thanks for your interest in us and I will now turn it over to Greg Heckman.

Thanks, Allan.

As you can see in the release, the quarter was very strong with sales up to $631 million and profits up to $76 million.

Sales and profits were both significantly ahead of last year.

Most of that profit increase came from our commodity trading and merchandising operations.

Those operations, which include the trading and merchandising of key inputs such as energy, oil and natural gas, grains and fertilizer benefited from the volatility in the commodity markets.

In this respect, the quarter ended up being much stronger than we expected when we put our plans together.

As I'm sure you are aware, marketing conditions are subject to change which is why we certainly don't expect this type of performance every quarter.

Our flour milling operations marketed under the ConAgra Mills brand also posted a good quarter.

A large part of that is due to improving efficiencies and higher capacity utilization, driven in part by the closure of two facilities during the second half of last fiscal year.

As we look ahead to the balance of fiscal 2006, we certainly don't expect the commodity markets to provide the same level of opportunity to our training operations that they did in fiscal 2005 or the first quarter of this fiscal year, but we do expect to make progress with the same types of operating initiatives that you heard from Dennis and Allan -- manufacturing improvements, SKUs rationalization and cost management along with appropriate price increases to strengthen our business, particularly in our Gilroy foods brand of dehydrated products.

Those operations have had competitive and supply chain challenges for the past few quarters.

We have potential for margin improvement and our team is focused on realizing that potential over time.

That wraps it up for the Food Ingredients segment and I would like to thank the team for excellent execution.

Now I will turn it over to Frank Sklarsky, our Chief Financial Officer.

Thanks, Greg.

Now that you've heard about the major drivers of the operating results, I want to comment on a few other financial matters before we conclude this portion of the call and go to the Q&A.

Bruce mentioned the sale of our remaining shares of Pilgrim's Pride stock.

The net gain on this sale is called out as such on our income statement.

The gain was $329 million before taxes for the quarter.

That's about $0.40 of EPS.

And it is obviously the biggest single item in the quarter that impacts comparability with last year’s performance and will of course impact comparability with next year’s performance.

Another item to mention is that we incurred some impairment and plant closure costs during the quarter. $7 million of this was reported on the Retail products segment and there was another $19 million of costs reported as part of the equity method investment income.

As we continue to make changes to our asset base for reasons of focus or to become more efficient, some of those changes result in charges.

And as we have said before, we intend to be transparent with respect to these items and we will be sure to call them out for you.

Our capital expenditures of $71 million were below prior year capital expenditures and also below the current quarter depreciation and amortization total of $89 million.

We're very focused on capital deployment and the beneficial impact of rigorous management of this area on the free cash flow the business.

We will continue to be very disciplined in this area and use the philosophy of creativity before capital, but clearly we will invest in those areas where we believe the spending will drive profitable growth and returns on capital.

Interest-bearing debt was $4.5 billion, which is about 1.2 billion below the year-ago amount of $5.7 billion.

Because we prepaid significant amounts of debt in fiscal 2005, the amount of debt we're scheduled to repay this fiscal year is only in the range of about $125 million.

As of quarter end, we had around 500 million in cash and equivalents which is adequate to fund our short-term needs including debt repayment.

I'd also want to point out that we did benefit from a slightly lower tax rate during the quarter.

This was approximately 36% and we now anticipate that the tax rate for the year will be in line with this level.

This is lower than what we had previously expected.

The last point I would like to make is that we're very focused on improving our cash conversion cycle and our overall free cash flow, which favorably influences our return on capital.

Our trade working capital is a little higher than it was a year ago.

We have made some progress over the past few months in the areas of receivables and payables, but the big opportunity is mainly in inventories.

And our initiative surrounding SKUs and plant rationalization will be significant enablers toward reducing our working capital and our overall asset base.

This will also reduce the complexity of our business, thereby improving margins over time as well.

Going forward, I look forward to updating you on the progress we're making in this area and it will take a little time, but we're focused and we're on top of it.

So with that, I will turn it back over to our call operator who will help us facilitate the Q&A session.

(Operator Instructions) Leonard Teitelbaum, Merrill Lynch.

Good morning.

It's a pleasure that someone is beating estimates out there.

If I take a look at your margins, if I hear you right, I want to make sure I'm not overbidding this hand, but should margins rise throughout the year, so this would be the lowest quarter you would have in terms of operating margins?

Is that an incorrect conclusion to draw?

I don't know if I would characterize it exactly like that.

Clearly, we had some improvements in margins particularly due to the factors that Dennis laid out there related to the SKU (indiscernible) mix adjustment and some pricing and some cost initiatives.

What's difficult to forecast going forward is there is a lot of uncertainty associated with the commodity markets and our ability to manage that in the competitive environment obviously has some uncertainty.

So I guess the way I would characterize it is we're going to manage what we can control within the competitive environment.

Our goal obviously would be to improve margins over the year.

It is still an open question based on where the commodity markets are going and what we can do with respect to pricing and marketplace.

But clearly the things we can influence are the SKU rat (ph), the plant rat (ph), and the in-plant productivity initiatives.

So we like to say that we're on an improving trend, but making the call for the rest of the year, it's just simply too early to tell.

Well look, we've got to know that the trading and merchandising got held (ph) because you're one of the largest energy traders around.

So I got to guess, as you had said, the market's certainly favorable.

But I would think in refrigerated foods and food service, you've got to have a fairly good peek at what your input costs are going to be, save energy for the rest of the year, no?

If you look at the variety of the commodity inputs, we're getting -- for instance, grocery segment's getting hit with steel increases, okay?

That's still at a very high level.

Anything petroleum-based, while it's helping the trading and merchandising operations, is hitting us in packaging and it's also hitting us in transportation costs across the board.

What we are seeing some moderation in is pork, and that's going to help some of our packaged meats operations, but beef is still pretty high, close to historical highs.

So on balance, we are still a very, very high commodity cost level overall.

I cannot overemphasize the fact that our whole industry is getting hit with this whole transportation cost thing because of what petroleum has done lately.

And certainly the volatility has helped us in that trading and merchandising operations, but it is causing a lot of cost increase across the board in transportation and in plant energy costs and in resins and packaging.

Just two more quick questions.

What's your depreciation estimate for the year and your CapEx for the year?

The CapEx is still on $400 million, depreciation will be about 30 to $40 million below that.

Now I got to go back and check my notes, Frank, but prior to you coming on, I think it was back during the California energy crisis, I think an estimate was made that your total energy bill was something like $400 million a year, and that number seemed awfully high.

Can you give us an estimate of what your energy costs are, just in your industrial costs, not in any of the (indiscernible) -- what's your base energy cost?

We'll have to get back to you on that.

I don't have that number right at hand.

Thank you very much.

Eric, do you have any questions?

No -- thank you.

Christine McCracken, Midwest Research.

Good morning.

I was just wondering if you could comment on how gasoline might be affecting foodservice demand?

Some of your peers and some of the foodservice companies have commented on some weakness there and it sounds like your results are still very strong.

Are you starting to see any change there?

Could you comment, on that?

If I heard your question correctly, you're saying that there's been some softness reported from other foodservice areas and that you're asking in terms of our performance, do we see it continue in a favorable light?

Right.

Yes.

I think in terms of foodservice, I would say that if you go across our businesses, we have business that are performing very well.

Our potato business is doing very well.

But I would put us in a position of improving in some of the other areas like refrigerated meats.

We continue to make improvements there basically in terms of our cost, our conversion costs and so forth.

So from my viewpoint, our business is very strong.

Our volume was up 4% this quarter.

I anticipate us to continue in that vein.

But again, I think it's all about, as Frank mentioned, controlling the cost elements as it relates to T&W going forward, transportation and warehousing, that would be affecting us.

We've been reading of there's been a pretty significant shortfall in the potato crop this year.

Is that something that would affect your business or given your contracts, do you have less of an impact expected over the year?

In terms of our potato business, again, I will reiterate, it has been very strong and continues to be very strong.

In terms of shortness on the crop, as we have line of sight right now, we don't consider that to be an issue for us going forward.

We contract most of our potatoes with our grower base on an annualized basis so we don't think that there's an impact point there as it relates to potato business.

However, I will mention we manage across multiple crops; the Western crop, Midwest crop, and we also have a joint venture in Europe.

So there's a lot of dynamics that come into play there.

But our outlook for the potato business this year is consistent with past years in terms of being strong.

Great.

And then just I guess on the Retail Products group obviously, volume's down there, but it sounds like the majority of that was actually tied to plant SKU rationalization.

I was just wondering, do you have any numbers for us on how much of it was actually SKU rat and how much of it was actual softness in sales?

A portion of it is associated with cleaning up our product lines, most aggressively in refrigerated meats but across the business as well.

So some portion of it is that.

When you also look within our shares, two other things are recurring.

One, we are very focused on driving high-quality share and product mix.

So if you look at our convenience meals and our snacks businesses, you see strong performance there on those businesses where our margin and the competitive position is strongest.

Thirdly, we have priced reflecting some of the inflationary inputs Frank talked about across a number of our businesses, there is some share impact in the short term there as those prices take place in the market.

So some portion of it is business simplification, some portion of it is focused on higher quality products and some portion of it is a functional pricing which will equalize over time.

Okay, great.

Thank you.

Bill Leach, Newburger.

Good morning.

Frank, it seems to me if you take out the Pilgrim's Pride pretax gain and the taxes associated with it, your tax rate was about 32% actually from operations.

Is that correct?

Well, if you look -- I like to look at this is an overall standpoint.

We said that the rate was about 36%.

The Pilgrim's Pride you got to be a little bit careful because there's a little bit of a difference in the tax rates as it's associated with Pilgrim's Pride than normal.

And there was also on one of our other items that we called out separately, one of the JV impairments, that was not a tax-deductible item.

So it's a little bit more complicated than that.

I can take it offline with you, but overall --.

If you could just take the pretax gain, you said the after-tax gain was $0.40 a share, which is (indiscernible) million, you subtract the difference and change -- take that from (ph) your taxes, it comes out to 32%, not 36%.

But that's not the only item.

Some of the other special items did not have the same normal tax rate as either Pilgrim's Pride or the running rate of the business.

What we are saying is overall for the business, we think the normalized tax rate is 36% for the quarter and we will be able to sustain that 36% throughout the year.

And do you have guidance for interest expense?

Interest expense for the year will be approximately in the range of $300 million, perhaps a little bit less.

Thank you.

Bob Cummins, Shields & Co.

Thank you very much, good morning everybody.

I wanted to focus on the ingredient area, since that has obviously been a tremendous benefit to your earnings over the last year or more.

I wondered if -- and certainly those of us in the stock market understand that you don't always make money in trading.

Sometimes you get lucky and sometimes you don't.

But I wondered if you can explain to us what the environment might be that would result in a sharp reduction in your trading profits and what you have been showing in recent quarters?

In other words, would a drop-off in energy costs for example due to a recession or whatever, would that be a less favorable environment?

Or what other kinds of things might conspire to hurt your profits in that business?

Good morning, this is Greg.

I would say if you started probably at a slightly higher level, one of the things about the environments that are probably best for ingredient trading and merchandising operations are probably environments that are probably most difficult for our branded retail and foodservice businesses.

So there's somewhat of a kind of a macro offset that we've see over time.

But generally the opportunity is around those difficult input environments where there is a lot of volatility and a lot of price change.

And I would say looking forward, while we saw a lot more of that the first quarter this year than we did last year if you just look at the second quarter, last year it was very volatile.

So I would doubt that it would be -- the opportunity would be as big in this second quarter and then the balance of the year with the hurricanes and a lot of unknowns.

We will just have to see how it plays out.

Okay, thank you.

David Nelson, CSFB.

Good morning and congratulations.

I guess the question therefore is the why's.

I guess in terms of you had guided lower and you delivered higher, which is always a good thing.

Was the big delta there the change in refrigerated meat and in trading?

And then also on the tax rate, why is it going from 38 to 36% please?

Good morning, David, this is Chris.

I will start with the question about the start for Q1.

Yes, the food ingredients was very, very strong performance, and then also we are making progress in refrigerated meats which is ahead of where we thought we would have been at this point.

Frank, why don't you talk about the taxes.

The taxes is about 2 percentage points versus last year, and I would say the following.

It's a modest improvement, it's worth a few million dollars, but the real improvement of 2 percentage points, we're pursuing some proven strategies that quite honestly we may not have pursued previously that we think are going to provide us a lot of value.

And they are related to permanent differences, but I want to emphasize -- nothing we're doing could be construed in any way as being overly aggressive or unconventional.

Everything we're doing is clearly within the defined rules of the code, things that are available to other companies in our industry and things that other companies pursued successfully and have been accepted.

But the fact is, we have an enhanced capability set of capabilities on the tax team now over the past few months and they are working quite diligently along with some external advisers.

Are we're pursuing opportunities available to us just that are available to other companies.

So that's bearing some fruit.

It's not a huge amount money, but we're gradually bringing the rate down because quite honestly, before it was probably a little bit too high.

So it's no individual factor.

It's a collection of ideas and strategies, proven strategies, conservative strategies that are available to us that we're pursuing.

Anything to do with where you're booking, what jurisdiction you're booking the business in?

No, it really isn't.

One example, for instance, research and development credits -- a lot of work to do there, we're getting some traction in some other things.

Okay.

And then the improvement in your refrigerated meat, you talked about the internal process improvements, somewhat lower pork input costs.

How much would you say is the competitive environment, not just hog costs?

Are competitors behaving more rationally in terms of with the prices they are charging, and therefore allowing you to -- helping allow you to improve your mix?

I'm trying to understand the dynamics of what got better here.

I think the story is mixed.

It really depends by category and competitor.

But if I were to characterize it, I think you'd see some rationality in the marketplace, which I think is favorable.

Okay.

And then on the savings and freight, how much might that be attributed to the consolidation of your distribution centers?

Dave, this is Chris.

When you're talking about savings on freight, we were actually -- in the release, we indicated that transportation was actually up.

So I'm not sure -- if you got something else in your head, let us know what you're thinking.

I thought you had been talk about saving on the -- anyway, I thought I heard something about saving on freight costs relative to the marketplace.

Okay, I will pass it on.

The way I would characterize it is, in our productivity and pricing initiatives in aggregate (multiple speakers) offset inflation most acute in packaging and in fuel.

Okay, are you hedged in energy?

We have some coverage, but of course in an environment like this nobody could foresee it.

So we will have the same challenges as the rest of our competitors.

Okay, thank you.

Eric Larson, Piper Jaffray.

Good morning, everyone.

Two questions.

One, your SG&A expense was up 6%.

I think if you strip out the increase in your corporate overhead, it was up about 4%.

What was your overall marketing spending in the quarter?

And then can you explain the delta in your corporate expenses?

Let me just take the G&A, a more holistic approach here.

On a nominal basis, G&A expenses is showing a modest increase for Q1 and it's driven primarily by three things.

We have some incentive accruals based on projected improved profitability for the year.

We have some charges that we've called out for plant consolidation costs.

We have some professional fees in there for certain trailing issues related to some challenges we've discussed in previous quarters.

And incidentally, some of the professional fees have and will continue to bear some fruit as we're working through some of the tax strategies, and you've seen some of the benefit of that on another line on the income statement obviously.

I guess what I would say is going forward, G&A is probably going to print higher year-over-year for the fiscal year in total, but the published number includes all G&A plus A&P costs.

A&P was down just a little bit.

Accord G&A, excluding the one-timers I talk about, is probably also going to be down.

And this has really been enabled by what I will call the progress we have made on the salary staff right-sizing, we've talked about it.

We've met our targets on that and we're very pleased.

It has gone well and it has been accomplished very smoothly.

So the increase is going to be caused by some of the special items that we've talked about.

And we also referenced before that where we did save on that core G&A, we were going to do some reinvestment in our brands going forward and we were also going to be doing some investments on anticipated manufacturing rationalization initiatives.

So we've been consistent in that message, but I want to reiterate that the core amount of G&A, excluding some of these onetime special items we expect to decline modestly over time.

But you're right, it was up for the quarter.

It was primarily some unique items that hopefully will not recur going forward.

Okay, great, thank you.

And then one more follow-up on a lot of cash on your balance sheet.

You don't have a lot of debt to repay this year and I think you still have about 200 million on your share authorization.

Could you refresh us on that and then what you might do with that big cash balance?

This is a matter of capital allocation.

We're going to look at all of the various elements.

The Company has flexibility, as you pointed out, to do any one of a number of things -- additional debt repayment, dividend, share repurchase and investing in the business.

I will tell you, we have a bias for investing in the business.

We think there is ample opportunity to reinvest in our brands and we're going to use some cash to invest in some of these rationalization initiatives and that takes a little bit of money too.

But we're going to look at all of the alternatives.

It's still early in the year.

We have a lot of options open up to us.

I mentioned debt repayment. it's true.

We only have about 125 million in debt due this year, but we do have some opportunities for some unique strategies we could pursue that we talked about on the last call in relation to maturity extensions where we would prepay some of the longer-term debt that we have out there.

Not committing to anything right now, but we're looking at a variety of strategies.

It's all going to depend on where we get the best return on our money, but the bias will be reinvesting in our business.

And so we're going to take a look at all of the things on the table.

Okay, thank you.

Eric Katzman, Deutsche Bank.

A few questions.

Maybe you could kind of update us on where you stand in terms of SAP?

As you know, this past year, we went through the order to cash transition in our nucleus initiative which includes our SAP software.

Currently we are in the process of transitioning to a trading promotion management tool, and then we will be getting into a supply chain module for Nucleus/SAP over the next couple of years.

We have been very pleased that we're through the transition on the order to cash, and that is behind us now.

It has provided us a tremendous amount of market data that we're able to act on and it has been a huge enabler to some of this SKU reduction we've talked about.

But going forward, we're going to be focusing more and more on the elements of the supply chain.

And we think that it will help us bear fruit in the cost of goods sold line in future years.

It's going to take a little bit of time, it's a couple of years, but it's underway.

So if you had to estimate like a percentage that's done in terms of rolling out SAP, what would you say? 20%?

I would say maybe -- around a third.

Maybe about a third complete?

Yes.

But again, we have two or three years to go before we're through all of the supply chain.

And then after that, there may be some additional initiatives.

Understood.

And then a similar question.

I think Bruce you had mentioned last conference call maybe that there was over 100 manufacturing sites that were clearly earmarked for -- or a portion of them earmarked for rationalization.

Where do you stand -- I realize it has only been a quarter -- but where do you -- did you close any facilities, and what do you expect from the time line in terms of that rationalization?

We closed the Niagara facility, or it's under the process of being closed in this last quarter.

And the beginning of the first quarter is when Jim Hardy joined us, our enterprise leader in manufacturing.

And Jim is getting that strategy together.

But methodically over time, you will see some of those come together.

And so we don't have to confuse anybody when you said it's a portion of the 100.

Obviously it's the core 100 plants that we're dealing with and we're looking within that universe to (indiscernible) those.

We've got -- the other one we closed this quarter over the past few, we've been getting some other ones consolidated.

But I would look out in the next few quarters and see another one, two or three coming to the table.

Okay, and then last question and I will pass it on.

I guess this is probably most applicable to Dennis.

The Company has historically had at least the reputation in the market as being perhaps the more promotional of all of the packaged food companies out there in terms of how you merchandise your brands.

Do you think or what do you think is as SAP kind of rolls out, it sounded like Frank was saying that the trade and promotional management part of SAP is kind of next to come.

How does that affect how you go to market, and do you think that that let's say modus operandi is going to change for you behind the brands, and particularly as Gary comes on in his background?

Sure.

Three thoughts.

One, I think per your point, SAP has given us better insight into what our profitability is by brand, customer and program.

So some of what gets reflected in share softness relative a year ago is a function of making some harder decisions within that to switch that mix.

And to switch that mix up against consumer poll marketing, which over the course of the year will be up double-digit primarily focused in our convenience meals and snacks business, a little bit north of -- or approximately half of our businesses would be in that bucket.

Thirdly though, one of the advantages we have as a company that we're leveraging through the unified sales force and the new tools, is leveraging the breadth of our brands in that our opportunity across market and cross-merchandise in-store where purchase decisions are made, we view as an advantage.

So we will continue to leverage that.

Obviously Gary is going to have an input on this once he is onboard, but is it your view that the brands would be best served by pulling back on promotion and trying to be let's say more of an EDLP kind of model, or do you think that the brands just based on their market position are really more -- they need to the high/low promotion driven?

It really depends given the breadth of our portfolio, but a number of our businesses, we see great opportunity to increase the consumer pull marketing and drive mix and marketing going forward.

A number of our other businesses, we will leverage through bundled merchandising.

So I think it's a combination.

But in aggregate over time, we intend to evolve our mix to be more pull (ph), or more consumer centric.

Alright, thank you.

John McMillin, Prudential Equity Group.

Good morning, thanks for taking my call.

Bruce, good luck to you.

Thank you.

Frank, you can do the math that Bill Leach said and you get to like a 32.7 tax rate doing the joint venture even if you strip it out.

Can you just acknowledge that that kind of math is right arrived and that your 36 tax -- I mean, it wasn't a 31, 32 pure operating quarter with the lower tax rate, and what drove that lower operating tax rate in the first quarter?

I'm not going to disagree with your math.

There's -- every one of these elements has a different tax rate associated with them.

And keep in mind that 1 percentage point in tax rate on the normal operations which were 230 some odd million pre-tax is a couple of million dollars.

And in any given quarter, you might have a handful adjustments going either way that could impact that percentage by a couple of 3 percentage points.

Some I'm not going to disagree with your method at all; it's absolutely correct.

All I'm saying is that on balance, we were at 36% for Q1 and we think because of the strategies we have in place that approximately that level is a sustainable rate going forward throughout the year.

Okay.

I am just -- I've had a number of e-mails just saying sometimes, and trying to be respectful Bruce, but sometimes outgoing CEOs kind of want to go out on an uptick, and there is an incentive to kind of go out in an uptick.

How would you respond to that, that some of this surprise -- you predicted a down quarter.

Clearly, you got more from the food ingredients than you thought, but was there any incentive on your part to kind of go out on an uptick?

Zero, John.

The numbers are the numbers.

These people are doing a number of things to get the fundamentals moving in the right direction.

We had two quarters of a huge amount of inflation as you know and pricing doesn't match that in time.

What we said was that in time, that would catch up.

It did catch up.

There's an entire new team in the refrigerated group up in Chicago.

We took a number of actions there.

We're not plagued with the manufacturing problems that we had in the third and fourth quarter because of all of the efforts that were put into that.

The learning curve that goes with SAP I think Eric asked about, somebody asked about that earlier.

When we installed SAP, that has a learning curve with it.

If you look at my letter to shareholders, I kind of detailed what the good points and what the weak points were of last year and those were pretty well consolidated into the third and fourth quarters.

And so the numbers are what the numbers are.

I don't have any influence over those one way or another.

Okay, I'm just -- hope you understand why I asked the question.

You hired a private-label executive, or an executive with private-label background I think to run your packaged meat business.

Does that reflect -- and again, Gary's going to have a decision on this -- but is the Company exploring ways to better utilize capacity with more private-label initiatives?

Firstly, you're referring to (indiscernible) I believe John.

You said we have some experience on the trade side which we view as an advantage, but the majority of his experience is in branded packaged goods, specifically at Kraft, Mission Foods, et cetera.

We do have -- we do selectively participate in private-label now, but it is less driven by capacity utilization and more where we think it gives us category advantage in terms of being more valuable to the trade.

But it's on a selected or discrete basis.

Frank, you have obviously talked to Gary.

How committed do you think he is to your fiscal '06 business plan and to your dividend?

I think it's more appropriate to ask Gary about that once he is onboard.

We have a plan in-place that we think is an internal plan that's aggressive, stretch but achievable, but as we said there are a lot of uncertainties out there.

Gary is going to come in, he's going to make his own assessment of the plan and the priorities that he is going to have and I just think it would be more appropriate to talk with him about that once he has been on board for a little while and had a chance to take a look at things.

Great, thanks a lot.

Pablo Zuanic, J.P. Morgan.

Good morning, everyone.

Just a question for Dennis.

According to the press release, your price (indiscernible) in the Retail unit was down about 1%.

But here we're talking about the focus on improving the product mix and the client mix.

But what's actually happening in the quarter to be resulting in a negative mix?

And if you actually break down that minus 1%, how much was pricing I think it was up, and how much was mix down if you can quantify that please, thanks.

Sure, Pablo.

Just to reaffirm, net sales were down for specifically around 3.6%.

Price was favorable at roughly 2 points, mix unfavorable a point and volume roughly 3 points.

Within price mix then in aggregate, it's favorable.

So I think within mix, you have some unfavorability in some of the dairy businesses, some selected grocery businesses, favorability in mix around frozen and snacks.

Okay.

And then in terms of the cost savings, when I look at the quarter, clearly income costs were down and the (indiscernible) commodities were up.

Can you quantify what was the benefit from the cost savings initiatives in the quarter in your unit?

Could you put a number there -- 10 million, 20 million on EBIT?

We had characterized it as, we had inflation in aggregate, including transportation inflation, somewhat north of $50 million.

Pricing and productivity in essence offset those.

Okay, that's helpful.

One question for Greg.

Greg, just trying to understand the comp.

You said that out of 76 million in EBIT, 47 million came from commodity trading.

In the first quarter '05, the EBIT was 60 million.

How much of that was commodity trading at that time?

Roughly 19 million higher his quarter versus prior year.

But that's on the total number or on the 47?

The 47 is 19 higher than prior year.

Okay, that's good.

And just the last question for Frank.

Frank, when I'm trying to project the company over the next two or three years, clearly I was trying to factor all the cost savings you talked about and all of the initiatives you have in place.

But the SG&A to sales ratio at ConAgra right now is about 12 to 13%.

The average for the group is about 20 to -- 21 to 22%.

So how should I think of your SG&A to sales ratio, say, over the next three years?

Does it have to migrate to 21, 22%, or is there something structural about your businesses that definitely require an SG&A to sales ratio of 21%?

I think there's some that will go both ways.

One, if we get to a model where we can get the margins and the COGS down to where we want them, we will take the opportunity to provide more investment in our brands.

And that will impact the G&A line, because as you know, that includes A&P.

The thing that's going to make it go the other way and drive further improvement is the fact that because we're going from more of an independent operating mentality to centralized functions in product development, in manufacturing, in technology and shared services, we're going to be bringing some things to the center which may be in manufacturing plants which will now be in G&A perhaps.

So we think that may drive some reductions in core SG&A costs, it may reflect in a higher amount on the G&A line, and we also might have further investments in the A&P line which would also drive that number.

Whether we get to as high a percent as the competition, that certainly would not be our goal to drive it up by 7 or 8 percentage points.

But we may see some modest changes.

But I would not say that will negatively impact the bottom line.

It should positively impact the bottom line because we're going to obviously put that money where we think it makes sense.

Okay, thank you.

(indiscernible), Zasso (ph) Capital.

Thank you, good morning.

I just had a quick question regarding the marketing.

Do you think any of the cost cutting and rationalization will offset any increases in the marketing area?

The goal would be to free up cost that we have on the cost of goods sold line through SKU reduction, through manufacturing consolidation, thereby improving margins and taking a portion of that improvement and reinvesting it in our brands.

And so the goal is not to necessarily to have a one-for-one trade-off because we would obviously like to improve the bottom line in total on a net basis.

So in terms of the direct offset, I would not characterize (indiscernible) that we will do whatever we can to improve our margins and reinvest a portion of that in the brands.

Thank you.

Glen Migliozi (ph), Green Eagle (ph).

Good morning.

I wanted to get an idea of whether the implications of what's going on at Albertson's with regard to sales that you have to them, implications of store closings or consolidation through a strategic buyer?

In terms of Albertson's, I'm (indiscernible) to know if and when they will be sold, so it's business as usual with Albertsons.

They are a valued customer to us and we continue to drive our business with and through them.

The last question I have is with regard to there's been a lot of talk about taxes and what you're paying.

Could I just maybe walk through the statement of the prior taxes and has that all been taken care of and what controls are in place to make sure that taxes are paid when they are supposed to?

We think we have that really behind us.

The restatement -- if you look at the entire span of time that the restatement covers, and it's several years, the net amount impact of the P&L was under $50 million.

We have brought some independent consultants into place, we've hired a highly capable VP of Tax a few months ago and are beefing up the tax team.

We are also greatly enhancing the level of second-level review, in-house external third-party review from the outside as well as a high level of diligent review by our external auditors and we have segregated the duties of tax preparation from tax accounting between our tax department and our controller's office.

So a lot of enhancement on the controls, a lot of double and triple verification, validation and oversight internally and externally.

And we think that we have these issues behind us.

As we have said publicly before, we have found no evidence to date of any conduct or intentional wrongdoing.

These was result (ph) of some unfortunate errors, but we think we have this behind us and we think we are on very solid ground going forward as it relates to tax compliance.

Thank you.

Leonard Teitelbaum, Merrill Lynch.

Asked and answered.

I'm sorry, I just couldn't figure out how to cancel it out.

Thank you.

Thanks to everybody.

This is going to conclude our call.

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

We're available for discussions as always at 402-595-4684, and thank you for much for your interest in our company.

Ladies and gentlemen, at this time this concludes ConAgra Foods first-quarter conference call for today.

Thank you for participating and you may now disconnect.