康尼格拉食品 (CAG) 2006 Q2 法說會逐字稿

Good morning.

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

I would like to welcome everyone to ConAgra Foods’ second quarter conference call.

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

Later we will conduct to a question and answer session.

Thank you.

I would now like to turn the conference over to Gary Rodkin, President and CEO.

Please go ahead Mr. Rodkin.

You may begin your conference.

Good morning.

This is Gary Rodkin and I am here with Frank Sklarsky, our CFO, and Chris Klinefelter, our VP of investor relations.

Earlier today we released earnings of $0.31 per share, consistent with what we communicated to you a couple of weeks ago with our preannouncement.

I'm going to make some comments about the quarter and take your questions.

But before we do, Chris will say a few words about housekeeping matters.

Good morning.

During today's remarks we'll be making some forward-looking statements.

And while we're making those statements in good faith and are confident about our Company's direction, we do not have any guarantee about the results that we will achieve.

So if you would like to learn more about the risks and factors that could influence and affect our business, I will refer you to the documents we file with the SEC which include cautionary language.

Now I will turn it back over to Gary.

Thanks Chris, I'm not going to go into great detail because the important specifics are there in our release.

Retail volumes were below expectations.

Some of it due to tough comparisons, as we had a good quarter this time a year ago.

But we're not achieving consistent volume growth or even stabilization.

Along with the fact that competition has been very aggressive in some categories.

Net net we do have some pockets of strength with some brands in operations as we put in our release and our Q&A document, but we're not where we need to be.

Everyone in our industry is dealing with increased input costs; we are no exception.

Energy, fuel, transportation, packaging and so on.

And without more consistent volume performance, it's hard to get the production efficiencies to offset these increases.

The cost increases are not as bad as we saw last year, but they're still enough to work against us.

The next point is that our commodity trading operations face different market conditions.

They simply didn't have the same type of opportunities they had last quarter or in the last year.

Profits for that business are volatile, and as many of you know it's been very, very good for quite some time.

We may face some difficult comps in that business for a few quarters.

That just goes along with the territory with this type of business.

Even though that means some volatility in the quarter to quarter results, we still see a large benefit to having these operations, particularly when you take into account how much cash they generate in good years and the potential for this training expertise to help us manage input costs.

Moving on to the overall picture, as I said two weeks ago I'm disappointed by the Company's overall performance.

There were bright spots.

For instance, with the continued growth of specialty potatoes and food service or the solid profit gains in our frozen operations.

And the fact that the trends in processed meats, while difficult, are not as severe as last year's second half.

But that's not enough.

So the obvious questions are what are we going to do about it, how quickly can results improve and by how much, and why are we confident that things will get better?

Let me start by saying we will get into these types of details at our March meeting when we discuss in-depth our plans to improve profitability of the business.

There are a lot of things we cannot answer today but I will briefly mention that a lot is going on right now.

We're taking an analytical approach to determine the best actions that will result in value creation.

A lot of these would be obvious, but I will mention a few of them anyway.

First, deciding which brands within our portfolio have the most opportunity for growth and should therefore get the most attention and the most resources and vice versa.

And taking a very hard look at how to best realize the efficiencies within our supply chain.

This is a huge cost center that requires a very detailed look to determine the best course of action.

Another key area of focus is our organizational structure.

We recently decided and have begun work on some big changes that we outlined in the press release a couple of days ago.

I will say more about that in a minute.

And changing our culture so that we are defined by simplicity, accountability and collaboration.

That is something I've been saying since I entered the doors here at ConAgra Foods here in October and I'm convinced that it is key to unlocking the potential of this organization.

All of these things have a major bearing on the income statement and the balance sheet, and of course cash flows and return on capital.

Suffice to say that the types of plans we're putting together are broad in scope.

We're talking about holistic, integrated changes.

Changes that will make real improvements over time.

And briefly, on the initiatives, I want to go out of my way to say the profit enhancing initiatives currently underway -- meaning the ones that you have heard the Company talk about before -- are directionally the right things to do.

But we still have some hard executional work to get those initiatives to the point where they will make a real difference.

At the same time, we have to build long-term strength through thoughtful cultural and organizational changes.

These have already started with the leadership position changes we announced this week.

And of course we are determining now how all of our work should impact our capital allocation policies.

Regarding capital allocation, since there is a fair amount written by those of you follow us regarding our dividend and all of the speculation about whether or not it will be changed, let me just briefly say this.

We know that our investors value our dividend, and we know how important capital allocation is in the overall equation of generating total shareholder returns.

We will approach all of our capital allocation decisions in a way that builds long-term strength of the business.

That is strength from the standpoint of our income statement as well as our balance sheet.

So that obviously relates to debt and cash levels as much as it relates to marketplace activities.

At the core, our intention is to balance the right level of payouts to shareholders with the right level of reinvestment, whether that is brand investment, capital expenditures, systems and so on and to have an overall healthy Company.

All investment decisions will go through rigorous payoff analyses to help determine the right course of action.

My point is that we want to build long-term sustainable strength, so all of our decisions will be thought through from a variety of standpoints and of course the payoff analyses.

In March, you'll see detailed plans to take this business from where it is today to where it can be and where it needs to be, delivering attractive top line and bottom-line growth on a reasonably consistent and predictable basis.

A big part of those plans will be building on the work of the last few years to complete the transition of ConAgra Foods to an integrated operating Company driven by simplicity, accountability and collaboration.

We understand there's no point to having great plans if they're not effectively executed.

And we don't expect credit for merely having good vision.

We expect credit for turning them into reality and for delivering financial results that investors appreciate.

So our March presentation will go into the details and the expected impact on our results so that you can track our progress, know what we expect to accomplish and have confidence that our plans are realistic.

A big part of turning our plans into reality is the appropriate organizational and people changes, so that we get our future structure right.

We put some of those out in a press release a couple of days ago and let me hit some highlights.

Sales and marketing are now reporting directly in to me, and to that end we will be adding a world-class Chief Marketing Officer in the near future.

We are also consolidating procurement, manufacturing, logistics and customer service into one supply chain function reporting to me.

In addition, we're going to consolidate key portions of our food service business and our ingredients business to form a new business group called ConAgra Foods Commercial.

The logical advantage to this combination is that it will let us leverage common opportunities for the two businesses.

And we are combining the information systems and business process improvement initiatives into the finance organization.

These are important steps towards improving execution.

We know the everyday blocking and tackling can make immediate improvements in our operating performance.

It is part of the process of simplifying our business and providing clearer accountability internally.

I hope they illustrate to you that I will have a high level of personal involvement in making sure these functions perform seamlessly with our P&L managers.

Before I turn it over to Frank, let me say there is no question that I feel good about coming to ConAgra Foods.

We have a lot of hard work ahead, but it's a Company with a great deal of opportunity and a group of talented folks with an appetite for big change who want to do the right things.

I am convinced that you will see it the same way over time.

So happy holidays, and now Frank will say a few words about finance.

Thanks Gary.

I would also like to offer my wishes for a happy holiday season to all those participating in today's call.

As Gary mentioned, we're not going to go into a lot of additional detail today, as you get most of that through the release and the Q&A document.

But I would like to point out a few things.

Some of you may be wondering how the organization announcement we made a couple of days ago might impact our financial reporting.

While the reporting relationship specified in that release are effective right away, we are currently in a transition phase that will take a bit more time.

As that transition proceeds, we will assess the impact of the realignments on both our internal and external reporting.

But our current expectation is that these changes which may affect our segment reporting won't be fully effective until at least the fourth quarter.

Once we determine the nature and extent of any reporting changes, we will be sure to communicate with you on these issues and obviously provide historical results on a comparable basis.

Now I would like to point out a couple of things worth noting that might get overlooked by focusing only on the income statement.

The first is that our capital expenditures were significantly less than depreciation this quarter and also significantly less than the year ago capital expenditures.

Some of this year-over-year decline is due to high levels of investment last year related to some information system and facility initiatives.

But the other part of the story is that we continue to improve our capital allocation process and discipline surrounding the approval and execution of capital projects throughout the Company.

This is all about a significantly greater focus on return on invested capital and putting in place a rigorous process for prioritizing where we deploy our financial resources.

Our goal is to improve free cash flow.

This is obviously a very important piece of the equation.

So we are every pleased with the progress we are making in this area, in the capital expenditure to depreciation ratio this quarter.

The other items I would like to point out have to do with cash balances and debt levels.

We ended the quarter with over $680 million of cash on hand.

A big portion of that came from the Pilgrim's Pride shares we liquidated in the first quarter.

But we're also increasing our focus on the cash conversion cycle and favorable working capital management.

We still have a long way to go.

But the healthy cash position at quarter end shows we're making some progress, particularly in a quarter when our working capital needs have historically been very high.

I will, however, again emphasize that the working capital opportunity is still very sizable, so we've got to keep a strong focus on improving that.

Regarding debt, just a few things to point out.

The first is that we paid off approximately $100 million that was due in November.

Another is that we were required to classify about $400 million of long-term debt due in the year 2026 into short-term debt because of a put option the debt holders have.

They can exercise this option next August, which is less than one year, from now so the accounting rules require us to classify that as short-term debt since it could conceivably be repaid within a year.

But given the market conditions and the price at which at which the debt holders would be able to put the bonds to us, it is not very likely those bonds -- those options will get exercised.

So things play out the way we think they will, in all likelihood we will reclassify that $400 million back into long-term debt next fiscal year once that option period has expired.

The last point I would like to make regarding debt is that we have decided to redeem approximately $500 million of debt next month, debt that was originally due next fall.

Our cash resources are sufficient to pay this off so we have decided to take this action.

I want to point out that as we go through the muscle building phase in our business, we believe it's very important to demonstrate our ongoing commitment to a strong balance sheet and solid investment-grade credit ratings.

So from our standpoint, this action is very prudent in the current environment.

In terms of how this relates to our overall capital allocation discipline, you've also just heard Gary say we value a healthy balance sheet.

And reducing this amount debt will give us a little more flexibility to make our balance sheet that much stronger.

We will be sure to give a full picture of our plans in March, which will include details about the overall capital allocation strategy.

So you will hear a lot more about this from us then.

Now I am going to conclude our remarks, and Gary and I will be happy to take your questions.

(OPERATOR INSTRUCTIONS).

David Driscoll, Citigroup Investments.

Hi, good morning everyone and happy holidays.

Gary, and or Frank, the decision on dividends is subjective and up to the Board of Directors.

What I would like to ask both of you is whether the Company has the ability to pay the dividend, which is according to my calculations about $565 million annually?

Dave, this is Frank.

The Company does have the ability to pay the dividend, and we do not really believe this is an issue associated with affordability.

What we want to make sure as we go through our analysis is be get very careful to consider going forward our sources of funds from operations, from potential monetization of assets, for -- wherever that might come from and balance that, again, as Gary said, against capital requirements in the business, choice full (ph) investments in A&P, R&D and other places where we may want to deploy those resources.

So it's going to be a balanced execution of the analysis, which will really focus on where we get the best ROI, and the focus will be on providing best total shareholder return over the long term.

My next question relates to your EPS guidance.

Previously, the Company had stated that 2006 earnings were expected to be above 2005.

Is this still true?

I think I would like to focus on really on that one is the second half.

And as we said in the release, our internal plans call for improvement second half over second half that will obviously be dependent on a variety of factors.

It will depend on the external environment, competitive landscape, general economic conditions, input costs will clearly be a factor, our pricing flexibility, how things go in the training and merchandising operations, and the pace of volume recovery in our business.

So we can -- right now, internal plans are for a better second half.

Obviously we'll be lapping some easy comparisons from last year.

I think that's really our focus right now.

As it relates to the year, we really would like to focus on where we're going to go second half versus the prior year.

Frank, the automatic read through on that is that it's not going to be up year on year, because the first two quarters were already down something like six pennies or so.

So then by saying the back half is going to be up is -- it's difficult for us to gauge the magnitude, but I can tell you right now, the read through here is going to be negative in that folks are now going to say that this is looking to be a less of a recovery in the second half than I think was previously expected.

As we said before we are going through a muscle building phase.

We are going to do what we think is right in terms of the investments we need to make for the long term.

Whether it is going to be a few pennies either way I think it is difficult for all of us to call right now, because we will be dependent on a variety of factors.

We're going to focus on trying to make the second half as good as we can, and our plans are to make that as good as we can versus last year.

Final question for Gary, qualitatively can you just discuss how much lower you found the marketing spending at this Company as a percentage of sales on the relevant sales base versus the prior companies, the branded companies you worked at?

I know you are not wanting to give quantitative measures here, but qualitatively I am just very interested in what your assessment is on marketing.

Clearly, we do not spend to the peer group.

There is no question about that on both A&P or A&M and on R&D.

Now, what I would tell you is that as we look to improve our cost structure and our margins, we are going to invest more in growing our top line.

But it's not going to be just about investing more money and spending more money.

It's going to be much more choiceful and impactful spend.

So I think when you put all those factors together, from a return on investment standpoint it is going to be significant as we look forward.

Christine McCracken, FTN Midwest.

Good morning.

Gary, you have recently made a number of leadership changes, though not bringing in a lot of outside help as of yet.

Wondering when you looked at making these changes, did you consider going from outside the Company and bringing in some other expertise?

Obviously you have some marketing help that you are still looking for.

But can you talk to me about how you analyzed or evaluated your skill set internally versus maybe what you worked with in the past?

Sure.

Christine, I took a real hard, rigorous look and with some help as well to really see what kind of talent we had here.

And I have found that we do have some very good talent.

And in terms of redeploying some of the folks, elevating some, giving more responsibility to some, absolutely I feel very, very good about.

Now, we have brought in a very talented person in our legal regulatory public affairs group, Rob Sharp (ph).

I look to add more people of that ilk.

One will be a Chief Marketing Officer.

We have several other positions I will not go into today that we are clearly looking to source externally, and I think you'll find that we will continue to look hard at our resources inside, but we won't be afraid to go outside where we can make improvement.

With these changes I assume that this new group of people is actively involved with you in developing your strategic plan going forward?

Does that imply that a lot of work has been spend as far just kind of recalibrating, setting up the organizational structure and now you're sitting down to develop the strategic planning?

Can you tell us kind of where you are in that process?

Sure, I would say -- I am in a week 11 or 12 right now.

The first order of business was to get the organization right and to start the culture change.

But I would tell you a very significant amount of work has begun on the strategic side, some with the folks that we have put in these new positions, some with some outside help as well.

And we are on that glide path, clearly not as far along as we are organizationally, but we will be in very good shape obviously by the time we come and talk to you in March.

So we're not starting from ground zero today.

Just on the retail products group, historically, the Company has talked about kind of that 15% margin goal.

Is that something you're still committed to?

Or does that really depend a lot on how you develop the structure and I guess the marketing spend going forward?

There is no question we need to improve in that area.

Clearly, I can tell you that we will talk more about that when we get to March.

But, the portfolio is something that we're going to look very hard at in terms of the mix.

So we're going to invest against parts of the portfolio that can really drive strong top and bottom line growth.

That's going to mean we are going to be much more choiceful than we have in the past, where I would say we have probably been a bit more all brands created equal.

That is not going to be the case.

We clearly have a bead (ph) on some key categories and some key brands that we believe are very under-leveraged.

Getting a much stronger messaging, positioning, spend behind those brands, including innovation, is clearly going to be key to be able to drive that top line.

But at the same time, we will be with an eye on improving our mix so that those margins are clearly going to be on the upswing.

Great.

We will see you in March.

Have a good holiday.

Leonard Teitelbaum, Merrill Lynch.

Good morning.

It seems to be -- maybe it sounds too simplistic -- kind of a clinical approach on some of these (ph) when new execs come in, Gary.

You're going to revamp the product line, increase the advertising and probably get rid of some of the manufacturing assets that may have been more heritage than real.

Is this kind of the broad outline that you're looking at here?

I mean, you certainly have significant manufacturing plants that realignment would indicate would be gone.

And I guess the point in trying to get to is why wouldn't you just kitchen sink the damn thing, lower the bar to the floor and start a base that's realistic that you can build from?

Or is that really going to be the message in March, just to give us some kind of a preview?

I wish you would be a little more candid, Lenny.

Let me take a step back.

I would tell you clearly no one is thinking about lowering the bar to the kitchen sink.

We have to do things responsibly, obviously.

But let me tell you what we are doing.

Again, those are terrific questions and it is clearly the focus of our work.

We will get into a lot more detail in March.

But thematically there are huge opportunities here.

So, I know you have heard this basic model (inaudible) but I tell you I think the opportunity is more significant here, and deeper than I thought several months ago.

And deeper means more opportunity.

So, what we are doing in terms of becoming a true operating Company is very clear in our minds.

We are going to take a hard look at the portfolio and make the right investments in the right brands.

We are going to simplify and standardize our systems.

We are going to rationalize our production and all of our supply chain, including logistics and procurement.

We are going to establish very clear accountabilities;

I call it wiring.

And we are going to collaborate from an organization that historically had been, as you know, many, many independent operating companies through a transition where we are today.

The new organization is going to move us into a place where I really believe that we have got strong P&L ownership and very strong enterprise functions.

And what that is going to do is drive much better execution through both efficiency and effectiveness.

So that model is something you're probably heard before, but I tell you from my perspective we have got more opportunity.

Let me just -- and then I will pass it on.

You came from a couple of pretty well oiled machines in your background, and all of them had something for brands that they could build around on and muscle, if you will, into the retailer.

Do you see reconstructing ConAgra -- and it's almost around when Mike put the Company together, but do you see the -- do you have the power brands if you will, that you see from the inside looking out that maybe I certainly don't see from the outside looking in, that can provide that kind of muscle?

Or do you have to go back and reconstruct that part of it as well?

Again, really good questions.

We will talk more in March, but just to give you just 100,000 feet.

I think we have some terrific brands in some different categories.

One that I would tell you is clearly under-leveraged, and you have followed the Company for a while, you know Healthy Choice.

I have said it before; this is the best equity one could possibly ask for in the health and wellness arena.

And you are going to see as do an awful lot more there.

That is clearly one that we will put more resources against.

And then the one on the other side of the coin from a value standpoint, Chef Boyardee is one that is not very sexy.

But it has a terrific position and has huge opportunities for more growth.

And then there are specific areas like Egg Beaters in particular, or Pam, brands where we have very strong positions, good margins and opportunities for significant growth ahead.

I'm very comfortable that we have some anchor brands or categories we need to be more choiceful in those investments.

We need to execute better.

We need to have more focus and we need to put more resources against them.

But I am very confident that we have the tools to work with when we get our act together.

Well, we wish you very good luck.

I know you are not going to be bored in '06.

I don't think we are too.

I hope everybody has a good holiday season and a great new year.

Good health, everybody.

Todd Duvick, Banc of America Securities.

Good morning, I wanted to ask a bit -- this is probably going to be more for Frank or for Chris.

I wanted to see if you could opine any on any other capital structured initiatives you might have.

Obviously I think the 500 million tender offer goes quite a ways in terms of easing some of the debt.

Do have any other capital structure initiatives in the near-term planned?

Well, I don't want to go into too much detail that we're obviously looking at a full variety of things with our partners in the banking and investment community.

I wouldn't say that anything is off the table.

The first order of business is going to be improving operating cash flow and creating a source of funds on the income statement side.

I think that we have with this $500 million tender a pretty strong balance sheet.

We will maintain solid credit ratings.

And if you look across the spectrum of our debt maturities, that leaves us with no other significant debt that will become payable for about five years.

Does that mean we don't have other opportunities given where the yield curve is right now?

Given where rates are?

We are certainly taking a look at those things, but I would like to leave it at that for now and there will be more to come in a few months.

Fair enough.

I guess with respect to cash flow, one of the things you have identified has to do with your cash conversion cycle.

Can you talk about either specific targets or how you view yourself versus your peers, and who you are benchmarking yourself against?

Sure, no problem at all.

I'll take it one by one.

Receivables made a lot of progress over that -- over the last year.

It's been a huge success story for us and we are at or below the midpoint of our peer group, because we paid very, very close attention to our peer group and benchmarked that very carefully on a monthly, quarterly basis.

So receivables in good shape.

On inventories, a huge area of opportunity particularly in the areas of finished goods in both the retail and commercial side of the business.

We've got some folks working on that very heavily.

Obviously that's going to be highly dependent upon the complexity of our business, what we do with our footprint, what we do with our SKUs and what we do with our warehousing network.

So it is all intertwined and will be part of our strategy going forward to make progress there.

Finally, in the area of payables, we also believe we have a significant opportunity.

We're looking across the landscape of our peer group in terms of what the best practices are out there.

We have a cross functional team looking at that very closely and we think we can make significant progress on that over the next couple of years.

So focused on each elements of that cash conversion cycle, internally focused, very externally focused on the benchmarks and we've got the right cross functional people working on the case.

We will not see progress immediately, but I think once we address the complexity of business we will start seeing some progress there.

Okay.

Very good.

Just one final question with respect to acquisitions and divestitures as it relates to -- I guess tying it in somewhat to your credit facility.

You announced earlier this week a new credit facility of 1.5 billion, which I think I guess increases your financial flexibility.

But it could also raise some concern in terms of near-term acquisition appetite.

Could you speak to that and also any plans that you might have or were thinking about potential divestitures going forward?

This is Gary, let me tackle that.

Right now I would tell you that we are focused on the basics.

You don't need to worry about us running out to go make some major acquisition.

We clearly have communicated the organization and execution.

Getting the foundation set right is priority number one, and that is going to take sometimes.

So we do not have that mindset today.

Okay, with respect to the credit facility I guess it is -- it is what it is; just financial flexibility?

I would say on that, we went from 1 billion in '05 (ph) to 1.5 billion.

There was a very attractive environment for us right now.

We are doing it at virtually the same administrative costs as we were for the smaller facility.

It gives us more flexibility.

It allowed us to do this tender and we have got some renewal options out there each year.

So it was setting us up for both near-term and midterm flexibility, that's all.

Eric Katzman, Deutsche Bank.

Good morning everybody.

I guess I was a little bit surprised, Gary, that you kind of spoke -- I don't want to put words in your mouth this early -- but kind of positively about the trading group.

And if you decide to keep it, are you prepared to accept the idea that with the volatility that brings you should be discounted at a higher cost of capital?

I clearly think we have significant advantage having that group and having spent some time with that group.

I do believe that we are working on ways to potentially mitigate some of that volatility and turn that into an advantage for our business in total.

So I think we have the right mindset.

And I do believe that we can manage it in a way that will truly over the long haul, not looking quarter to quarter but over the long haul, be a significant asset for us.

So I guess this is kind of a follow-up to that, the changes you made organizationally -- I guess it was earlier this week or -- did that -- do you think -- I mean should we view this as now more of a horizontal organization?

And to that extent the volatility of the trading group, that is going to be directly reported in to you if you in fact keep that piece?

I would say yes, the organization is more horizontally organized.

We have got let's call it two vertical groups that purely are P&L and strictly are P&L managers.

So, Dean Hollis and Greg Hechtman basically split the business and own the P&Ls.

We have strengthened and will continue to strengthen the functions on an enterprise basis.

So yes, I would say that we do have more of a horizontal organization and this is a significant change if you look back historically at ConAgra, clearly.

In terms of risk strategies, that will continue to report into Greg Hechtman.

I feel as though I do have my finger on that business, although not directing it clearly from a day-to-day basis.

But we're going to continue to be transparent with you.

We're not going to try and move the key around under the shells.

We'll be transparent about that.

Last one and I will pass it on.

Is it fair to assume that SAP at the moment is kind of at a standstill as you kind of decide what kind manufacturing sites to keep and which brands to keep?

I mean, I guess it was a quarter implemented.

Is that likely to just stay where it is for the time being?

Absolutely not.

SAP is a -- or I should say project nucleus, which importantly we need to understand is about both process and technology.

It is a super-high priority for us.

In fact a higher priority maybe than it has been before.

So we are doing some things in terms of the way we are organized, putting it in -- totally joined at the hip with finance.

That is all to drive this project forward to make sure we're getting the full benefits of it, doing it in the right way and staging it appropriately.

But by no means are we lowering or at a standstill.

We are upping the priority on it.

Thank you.

Good luck.

Eric Larson, Piper Jaffray.

Good morning everyone.

Gary or Frank, could you give us a quick update on the progress of turnaround in the meat business?

Obviously you are up against a fairly easy compares in your second half here, and the way I am looking at it is, it should provide some improvement in that time frame but to you didn't address it too specifically.

Could you give us a quick update on that?

I would tell you and I will let Frank comment on it as well.

We are making sequential progress in this business.

And I would say we clearly have worked on some of the fundamentals in terms of our SKU rationalization and our trade spend rationalization.

So the business, you know, looks quite a bit different and is moving in the right direction.

Not quite as quickly as we would like it to, but clearly is making progress and we'll continue to see that progress up against the easy comps in the back half.

Frank?

Right.

The only thing I can add to that is, as Gary said, we do have some easy comps versus the prior year, and we do expect some improvement second half to second half.

How that phases Q3 to Q4, still a little bit up in the air.

But that team is very, very engaged in getting things turned around as quickly as possible and simplifying that business, and that's what is really going to drive the improvement there.

Okay good, and then going forward, Frank, on tax rate.

Obviously this quarter was a little higher because of the non-deductibility of the charge -- of the impairment charge.

But should we use 36% going forward?

Was this an aberration in the quarter?

Yes, that was an aberration.

It's almost solely due to the non-deductibility impairment charge. 36% would be a good rate going forward.

We think that's good for a tax from operations excluding items that impact operability.

David Nelson, Credit Suisse.

Good morning.

You mentioned you were evaluating all of your brands and to me that seems as important as anything.

Could you talk about the process and criteria you are using for that, please?

David, I won't go into detail.

I think you'll see more of that in March.

But what I can tell you is it's probably as important and maybe more important than anything else.

What we need to do is start with some core points of difference.

Some strength where we can drive good pricing, good competitive strength, meaning from a share standpoint.

Good return on investment and in a category we think has growth prospects.

So, those are some of the basics.

I would tell you that we have got -- I would consider some best in class practices that we will try and spread across some of the other businesses.

But I think most importantly in a couple of things to remember.

One, we will be making much tougher choices about where we spend, so that means fewer bigger things.

We will not be frittering away our dollars.

We will be doing a tough ROI analysis of where we're going to get the best earn.

And that's going to mean that we have some significant differences in terms of how we look at different pieces of our portfolio that are going to play different roles.

Sales execution clearly is going to be another absolute key as we go forward in this, and that's one of the reasons -- the two things I have just said, that we change the organization around to have both the Chief Marketing Officer and let's call him the Chief Sales Officer reporting directly in to me.

John McMillin, Prudential.

Good morning Gary, Frank.

Just a couple of questions.

Is the frozen food business being hurt by Wal-Mart's new line of Sam's Choice products or are those products aimed at somebody else?

John, I was just out there last week, had a great meeting, and I would tell you our frozen food business at Wal-Mart is very strong.

If there is one thing that could hurt our short-term results, it is their inventory reduction.

So they have taken a bit of inventory out of the system at the end of the year.

But our run rate or our take away, if you want to call it that, is very good and I think will continue to get even better.

So no, I would say their private-label business is really not impacting us significantly.

There's other brands that would impact more.

However, I would tell you as with our total portfolio, within our frozen portfolio we have done some SKU rationalization and trade rationalization on particularly our Banquet business.

So the mix of our frozen business has gotten better.

We have good volume growth but even better margin growth.

Great.

I have your -- I know you are reluctant to talk about individual businesses, but I am just trying to gauge the turkey business.

I have it at about 700 million; maybe I'm wrong.

But clearly that benefited this year from kind of cyclically high turkey prices.

Would you agree with that, Gary?

I would tell you that first you're a bit aggressive on how large that turkey business is for us.

We have a very good one, but not quite that large.

It was a very good or has been a very good holiday season.

Clearly, we do benefit from better costs but we also have some very good volume.

I can tell you that we sold every last turkey that we had in the house.

We don't have anything left and that is a good thing.

The service levels were much better than a year ago and our take away was much better than a year ago.

In this muscle building phase, assuming no steroids are used or whatever, but I am sure there will be reports analyzing this.

But it's just obviously going to cost money.

So my basic question, have you ever seen a consistent consumer products company that had a marketing mix so dependent on promotion?

I would tell you yes, I have seen -- clearly seen particular categories and other companies in this boat.

We are going to change that and we are already making progress in that regard.

But that requires us to have some meaningful messaging and positioning against some of these great equities that have been -- I would consider to be very under-leveraged.

And frankly in some of the categories where we're the leaders, we believe that we can drive category growth as well, and that is not going to be driven primarily by trade spend.

Our base business is what is really important to us.

Just from my impression, you've been there a couple of months, you have already made some key decisions and this is -- I'm a ways away, but it just appeared like Dennis O'Brien was one of the few guys I have talked to at ConAgra that over the years had really kind of got it in terms of brand development and so forth.

And I was for one a little disappointed to see him -- I guess the press release didn't mention whether he was leaving the Company.

And maybe you can address that.

But how have you kind of made personnel decisions of this magnitude in such a short period of time?

John, good question.

Happy to tackle it.

Dennis has done some very good things here at the Company.

Clearly one of the best marketers, smartest guys around.

Frankly, he is a victim of this reorganization in terms of what I said before.

Having more direct access to the operating businesses with a Chief Marketing Officer and sales going to report directly into me that basically that takes Dennis' role away.

Dennis is going to help us clearly through the transition and has been very positive about that, and will continue to make good contributions.

But his job per se with me coming into my role is no longer the same as it was before.

Pablo Zuanic, JPMorgan.

Good morning everyone.

Gary, when you talk about muscle strength and brand building does that mean what you see -- the way to portfolio is going to evolve (ph) is mostly with brands that are category leaders?

You don't see room in your portfolio for mid-tier brands, nor do you see room in your portfolio for what I call enterprise (ph) point brands or even private-label?

Can you comment on that just strategically?

Pablo, I would say I clearly see room for different types of brands in our portfolio.

So yes, there will still be value brands.

That is clearly a very important piece of business for us.

We call it store brands in particular is a very good business for us, helps us with our customer relationships and that will clearly be a driver of growth for us.

Other value brands, you might consider brands like Chef Boyardee to be a value brand.

That clearly is going to be in important driver for us.

And than there are health and wellness brands like a Healthy Choice or an Egg Beaters that will clearly be very important for us.

And in some places we have very strong regional leadership.

So it might not show up on the national numbers, but for instance in Texas we have some very, very strong businesses and that's a very big market.

So I see different roles for different brands in the portfolio that will get different level of resources.

But there is room for different types of things in our portfolio.

That is very helpful.

I know you can't talk specifically about all the brands in the portfolio, but can we tackle the same question from a group perspective?

When I think of ConAgra, I think of frozen products, groceries, snacks and then the packaged meats business.

Can you give us a sense, when you think of the Company in that sense, how do you feel about those four groups?

Where do see more category growth?

Where do see more brand strength?

Just very high level comments if you can, please.

Again, great question and clearly focus of our work.

And what I can tell you is that you're going to find out a lot more about that in March.

I would just mention one in particular where I consider some of our best practices to be in frozen.

I think we have it segmented extremely well.

We very strong brands with Healthy Choice, Banquet, Marie Callender and Kid's Cuisine.

And I expect that we are going to see growth continue to come from there, both top and bottom line, and that were going to be able to take some of the disciplines and best practices from that business and spread them to some of our others.

But we'll talk more about that in March.

Great, and just a follow up for Frank.

Frank, what is the CapEx guidance for at the full year again for '06?

And also related to John's question before, I have been really confused on the packaged meat side in the sense that turkey is supposed to be doing very well, but I understand the hog-based products are not doing as well.

Just give us a sense of how relevant is the turkey line within packaged meats.

And then question on CapEx, please.

Good morning Pablo, this is Chris.

I will start with the CapEx and turn it over to Frank.

The guidance we have for the full fiscal '06 is about $400 million.

Okay.

It doesn't change -- okay.

On the other businesses, I mean without going into a lot of detail, so we had a good turkey business this year.

As it relates to the ham business we think that business is very well managed --

But is it about 50-50 Frank?

I mean, I'm just trying to get an idea of ballpark in terms of relevance within the portfolio.

No turkey is not as big as you would make that out to be.

It's a significant piece of business, but it is clearly not to 50% of our business.

Whole hams and whole turkey in general terms are approximately the same order of magnitude in terms of revenues.

That is going to conclude our call this morning.

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

And as always we're available for discussions today at the numbers you see in today's release.

So thank you very much for your interest in our Company.

Happy holidays.

Ladies and gentlemen at this time this concludes ConAgra Foods’ conference call for today.

Thank you for participating.

You may disconnect now.