康尼格拉食品 (CAG) 2006 Q3 法說會逐字稿

I would like to welcome everyone to the ConAgra Foods third-quarter conference call. (OPERATOR INSTRUCTIONS).

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

You may begin your conference.

Thank you and good morning.

Before we get started I need to mention that during today's remarks we will be making some forward-looking statements, and while we are 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.

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 over to Gary Rodkin.

Thank you, Chris, and good morning, everyone.

I want to start by thanking all of you who attended our meeting in New York last week.

For those that didn't attend, I encourage you to access the replay of the event on our Website.

I think it provides an excellent context for our earnings today and for our plans going forward.

This quarter's operating performance was essentially what we expected, jumping slightly ahead of last year on a comparable basis.

At the core, we produced $0.37 after adjusting for items impacting comparability.

And although we showed improvement in a number of areas, we are lapping mediocre results from last year.

Obviously, we expect better things on the horizon as we move into fiscal 2007, driven by the initiatives that we discussed last week.

There were some bright spots.

In Retail Products we saw the underlying strength of some of our highest-opportunity and highest-margin items.

Chef Boyardee, Healthy Choice, Egg Beaters, Marie Callender's, Orville Redenbacher, Hebrew National, Reddi-wip and other core focused brands posted decent sales growth.

Most of these are showing sequential improvement, along with year-over-year improvement.

In the Ingredients segment, we saw another strong performance from our commodity trading and merchandising operations, as trading conditions improved significantly from the second quarter.

And in Foodservice, our Lamb Weston potato business turned in a very strong performance, growing with many key customers.

While overall brand results are mixed, I am encouraged by the durability and potential of some of our major brands, given our inconsistent and relatively low marketing investments.

That's just another example of why I believe our portfolio has more underlying potential.

As I discussed last week, our core plans involve simplifying our portfolio, aggressively attacking costs, increasing investment behind our highest-opportunity brands, and reallocating marketing dollars to increase effectiveness.

We won't see the impact of these actions or the related brand investments before next fiscal year.

In terms of our brands, increased investment and reallocation are highly important.

And although we'll defend our brands as appropriate, we will also resist the temptation to chase unprofitable sales in search of volume.

Just a note on today's release.

No doubt you will all view the document to be rather complex.

It certainly doesn't fit with our simplification mantra.

This is due to the requirements surrounding the reporting of discontinued operations, along with disclosures we are making related to items that impact comparability.

As you know, we're making major changes to how we manage our business and to our portfolio.

Unavoidable soft costs of these actions is having to go through a number of quarters that, between the accounting for disc ops and the litany of items that affect comparability, create some very complex descriptions.

Hopefully the details we provide you can get you what you need to understand it.

The release itself provides a fair amount of detail and it's supplemented by our written Q&A document.

And Frank is going to go through a number of items in the financials that we hope will provide additional clarity.

And if you still need more explanation, feel free to follow up with Chris Klinefelter after the call.

I look forward to future releases that reflect the simplicity we're shooting for and how we plan to run our business.

In our presentation last week we talked about a number of potential leading indicators that we believe are appropriate to gauge our progress.

These include marketing investment levels, gross margin trends, manufacturing efficiency, and general and administrative expense.

These will become a more formal part of our dialogue as we enter fiscal 2007 and beyond, as the applicable initiatives start developing more traction.

I don't necessarily expect there to be perfectly smooth comparability or guaranteed quarter-over-quarter improvement in these metrics, but I promise you we will see directional improvement over time.

Before I turn it over to Frank, I just want to take a minute to thank -- to say thank you to all of our employees, who have been working very hard to stay focused on our core operations, terms and times of transition.

That continues to be extremely important for us as we put together our future plans.

And now I will turn it over to Frank, who will take you through a number of items related to the release.

Thanks, Gary.

Good morning, everyone.

As Gary stated, we achieved some modestly improved results, as compared to a mediocre quarter last year.

We fully realize that this incremental improvement, while certainly welcome, still leaves us with a lot of work to do.

This is consistent with what we communicated to you last week in New York, and we will be aggressively working to drive topline momentum and cost optimization as we move forward.

Things did improve in the third quarter versus last year.

These improvements were a result of continued strong performance from our Lamb Weston potato products within the Foodservice segment, and within the Retail segment, the Company had excellent performance from some of our higher-margin brands, as shown in the press release.

In addition, within the Food Ingredients segment, trading and merchandising operations had another very good quarter.

And we also had directional progress in the profitability of our packaged meat operations, which are in disc ops.

Some of the progress in the business is a little difficult to see, given the split we are now showing between continuing operations and disc ops.

Consistent with the accounting rules governing the reporting of discontinued operations, we've allocated to these businesses only those selling, general and administrative costs that would go away immediately upon disposition.

In addition, in the quarter there were a number of items impacting comparability.

These were specified in the press release we issued this morning.

Just to make everyone understand the numbers as shown, as segregated between continuing ops and disc ops, as well as some of the tax impact in the quarter, let me briefly summarize some key elements of our third-quarter results.

As we stated in the release, the Company reported a diluted loss per share of $0.06, including $0.43 of net expense from items that impact comparability.

Those items are detailed in the release.

Excluding items impacting comparability, third-quarter EPS was $0.37.

Of the $0.37, continuing operations [rounds] to $0.31 and discontinued operations rounds to $0.06.

Now let's first look at the continuing ops component of our earnings.

As shown in the tables in the Q&A accompanying the earnings release, third quarter diluted EPS as reported from continuing operations was $0.18.

This includes approximately $0.14 of expense from items impacting comparability.

Adjusted for rounding, this adds to the $0.31 of earnings from continuing ops, excluding items impacting comparability.

These comparability items include restructuring charges of $0.06, a charge related to a note receivable of $0.06, an adjustment to our litigation reserve of $0.02, and an asset impairment charge of $0.02 related to a joint venture.

Also within continuing ops, we had an approximate $11 million benefit, or about $0.02 per share, related to taxes, associated primarily with state tax strategies and the impact of revised estimates related to certain state tax items, partially offset by the impact of non-deductibility of amounts related to our JV impairment.

So again, including this item, in total we had a net of $0.14 of expense from special items.

There is one more item of note regarding these charges for the quarter.

Many of you have seen the 8-K we filed last week related to costs associated with exit or disposal activities.

This filing indicated that the Company expects to take pre-tax accounting charges estimated to be approximately $183 million.

Of this amount, about 50 million, or $0.06, is what is included in the restructuring charge in items I just mentioned that were taken in the third quarter as part of the items impacting comparability in continuing ops.

The remainder of this charge specified in the 8-K will be taken over succeeding quarters.

Now let's look at discontinued operations.

Diluted EPS from disc ops represented a loss of $0.24 per share.

This included $0.30 of expense from items impacting comparability, making the EPS for disc ops equal to $0.06, excluding comparability items.

Consistent with the earnings release, these results are due to charges of about $170 million on a pre-tax basis, primarily relating to a goodwill impairment associated with businesses planned to be divested.

There's a modest tax benefit of about $16 million associated with this item, related to partial deductibility of the impairment amount, but most of this goodwill impairment is not, however, expected to be deductible for tax purposes.

Again, excluding this comparability item, discontinued operations recorded about $0.06 of EPS, which included normalized taxes at a rate of about 36%.

Please note that the approximate $170 million pre-tax impairment charge is consistent with the 170 million pre-tax non-cash charge referred to in last week's 8-K filing in the material impairments section.

Now, just a couple of additional words on the tax rate you see in continuing ops.

Those of you who have already done the calculations from this morning's release will note that this quarter's tax rate on results from continuing operations is about 27%.

This lower-than-normal tax rate is associated primarily with the impact of the state tax items I just described and the $11 million I mentioned previously.

Our normal tax rate for ongoing operations is still expected to be about 36%.

So, aside from some of the tax impacts associated with the items just described, and the tax impact from other items impacting comparability, the tax rate for ongoing operations is about 36%.

I would just like to review a couple of other items.

Capital expenditures for the quarter totaled about $61 million, as compared to the prior year's third quarter total of about $97 million.

Please note that these amounts include spending for all operations, both continuing and discontinued.

We are currently working on the precise splits, and this information will be available in future quarters.

Depreciation and amortization was approximately $91 million in the third quarter, of which about 78 million applied to continuing ops.

This compares to $91 million in the prior year, of which about 76 million applied to continuing ops.

Regarding spending, this quarter's reduction versus the prior year is due primarily to some timing around Nucleus spend, along with some significant spending last year on certain manufacturing upgrades and initiatives.

In general, our spending figures reflect our continuing discipline over the capital spending process, and directing our dollars to those areas thought to have the most beneficial impact on the business going forward.

As we stated last week, we will continue to subject all capital spending to intense scrutiny, ensuring all of our outlays are analyzed on an ROIC basis.

We do, however, expect that spending will pick up a bit going forward as we get into our plant rationalization initiatives in the very near future.

Also, our cash balance at the end of the quarter was over $230 million, so we are in good shape from the liquidity standpoint, even after paying down $500 million in debt in January.

In addition, as we mentioned last quarter, we were again required to classify $400 million of long-term debt, due in 2026, into short-term debt because of a put option the debtholders have.

They can exercise this option next August, less than a year from now, so the accounting rules require us to put this in the short-term category, since conceivably the debt could be redeemed within one year.

Given the market conditions and the price at which the debtholders will be able to put the bonds to us, we do not currently believe it's very likely those options will be exercised.

If things play out the way we currently believe, we would likely reclassify the $400 million back into long-term debt in the next fiscal year once the option period has expired.

And finally, just as a reminder, our next dividend payment on June 1st has been approved at a level of $0.18 per share.

With that, Gary and I would be happy to take your questions, and I will turn things back over to our operator, Dennis.

Thank you very much.

(OPERATOR INSTRUCTIONS).

David Driscoll, Citigroup Investment Research..

I wanted to ask a little bit about the SKU reduction that's been going on within the business.

So, the topline sales growth actually looks pretty good.

But, Gary, can you talk to us about the SKU reduction activities?

How did it impact sales?

And then where do you see SKU reduction going forward?

At what point -- because this has been a multiyear process; it's been going on, I think, for at least three years now.

Where do you see this headed as you have taken a deep dive looking at these businesses?

I would tell you that we've done a lot of the SKU [red] so far, and you'll see some of it, probably a higher proportion of it in the disc ops side, but clearly, a good amount of it in our continuing operations as well.

I would say while there is a good amount behind us, and it has depressed sales somewhat, despite the fact that you see pretty good comp this quarter -- again, it's against a relatively quarter a year ago -- we do have a significant amount of impact from the SKU red.

I think as we start to get a little further into fiscal '07, we will start to overlap that, and it will become probably less material on a go-forward basis.

And I think combining that with getting out of some of the less -- lesser investments in trade, ones that don't make good sense for us, those two things combined will probably still continue to put a little bit of a lid on our volume.

But it will benefit us by being much more focused realistic as we go forward and set a much stronger foundation.

Do you have a quantification, though, as to what the SKU reduction would have impacted sales by for the quarter?

This is Frank.

It's About $80 million, but about two-thirds of that is probably in the disc ops, so 25 to 30 million in continuing ops.

So, it was relatively modest in continuing operations.

Gary, you mentioned here that the year-over-year comparison was easy in the quarter.

Can we drill down a little bit, though, because you do have a separate -- a separation now between the ongoing and the discontinued operations.

I understand that the discontinued operations have the meat operations, and that's my understanding as to where the real shortfall was in the year ago period.

I fell like, though, in your comments you might be suggesting that there was also weak performance in the continuing operations Retail Products segment, i.e. that the 3% number was on top of some easy comp in the year ago.

Is that right?

Can you give me some color here?

I'm going to defer that, the specific numbers to Frank.

I will tell you in general it was a fairly modest quarter last year, because we had some service issues overall -- certainly much tougher on the disc ops side, on the meat side of the business.

Frank, do you have some specifics on that?

One good example is Hebrew National, which is in continuing ops, and that's much improved versus the prior year.

We had some difficulties last year in some of the manufacturing transition and were impacted by some deliveries and service rates to our customers.

That's rebounded very nicely.

The potato business continues to have a good quarter and is up modestly versus last year.

And the frozen business, while it did well last year, had a very good business in those products in the current year.

So, I'd say that while some of that improvement is in disc ops, there were some elements in continuing ops that did have some significant improvement.

This is a fairly important question for those of us on the outside here trying to decide what these divested businesses are going to be worth.

In your presentations, you included some appendix slides talking about $200 million in EBIT from the businesses that you intend to divest.

That number -- I'm a little bit confused if that number is a trailing number and it includes all the problems from the third quarter of fiscal '05, or is that a forward-looking number as to what you think that business would be doing over the -- because I think you wrote on your particular appendices that they were F'07 run rates.

So, can you give me a little color here as to what that $200 million in [that] profit represented?

That 200 million really is, I would call, a run rate trajectory, as we look in the recent past and the near future, what the contribution margin would be from those businesses, before looking at the amount of allocated costs to those businesses.

So, it's really a product contribution margin type of a look, and a real EBIT look. (multiple speakers)

Does it include the impact, though, from that real negative period in 3Q '05 and (indiscernible) 3Q '06 -- excuse me -- 4Q '06?

I would say it really represents a current run rate, so I wouldn't be going back into time and try to tie that to this number.

It really is the current run rate trajectory as we see it right now.

That's clear.

One last question on commodity cost inflation.

General Mills just was talking about the moderation in commodity cost inflation on their conference call.

Can you guys address it as to what you see happening with your mix of businesses?

Where do you see it in fiscal '06.

And also, I actually don't remember if you mentioned that for fiscal '07.

But could you remind me what you expect commodity cost inflation to do in F '07?

If you look at where we are in this quarter, it has moderated versus the prior year, particularly in the area of some proteins.

And as we know, the crude oil, while at very high levels, has been in a relative trading range recently.

That impacts our energy costs and our resins in packaging.

But somewhere in the range of 20 to $30 million in the quarter from inflation, which is down a bit from where we were in the previous quarters.

Looking ahead, given our mix of businesses -- and again, this is anybody's guess, but circa the 3% range or so over the next operating cycle would be about as close as we could get it, [guess] it right now.

A lot of uncertainties, obviously, around crude, around natural gas, around some of the proteins and things like that.

The good news is, going forward in the continuing ops part of our business, if you peel off the meats piece, we will be less subject to the fluctuations in some of the proteins we saw in the past, just because of our changing mix.

Just to clear something up from a couple of minutes ago when you were asking about the comp on retail, it's probably about flat to minus one last year.

So, that puts it in context.

Christine McCracken, FTN Midwest.

I just wanted to touch a little bit more on what you said in the press release relative to culinary.

It looked like profitability in that piece of the segment was down.

And at the same time you had suggested there had been kind of a turnaround last week.

I'm wondering, can you talk about that disconnect and maybe what's happened there?

I would tell you on culinary, that business, that foodservice business is a lot of timing issues in terms of programming.

So I think that is probably the biggest factor.

The second is the fact that we've walked away from some deals that, frankly, were unprofitable.

So we're trying to get the foundation set there as well.

And we have reorganized, so we now have the culinary business basically together with the retail business, the same brands, and we think that's going to provide some benefit on a go-forward basis, the way it's managed.

So, you would be looking for a stronger outlook, I guess, for that piece of the business (indiscernible) into the next fiscal year.

Is that fair?

Yes.

As we go forward, I wouldn't say that that's -- we should get super optimistic in terms of how quickly we're going to impact that side of the business, because there are a lot of different dynamics there.

But I would say over the longer haul that that business, integrated more with our retail brands and the same management, I think, will give us improvement as we go forward.

You mentioned during your comments that you were looking to get out of some of these less effective trade deals.

I guess they're kind of over a year period or so.

Can you talk about or give us a general sense as to how these deals are structured, or how the benefits from getting out of less effective trade promotion might help over the balance of the year?

I think as we look forward, we're already starting to set the foundation of basically looking at everything on an ROI basis.

And I would say at times in the past, there have been some occasions where we've chased volume a little bit more than maybe we should have.

And we talked about changing the incentive system on that.

We want to set a more solid foundation.

We showed some examples last week, where some basic blocking and tackling in terms of the way we set our price points, the multiples that we use, the discipline in terms of the execution, all are good things in terms of a win-win, both for the customer as well as us.

So, it could mean that we trade off just a little bit of volume here and there, but it will be actually an improvement on our bottom-line, because it will help our margins without the ineffective trade spend.

It looks like you wrote off or have classified a piece of your investment in Swift as impaired.

Can you talk about your decision to do that, or is that strictly an accounting policy?

That relates to the note that remains on the balance sheet from the sale of Swift, the Swift business to Swift Foods.

And it is an accounting issue.

We had about a $35 million impairment that had been run through equity.

It is now going through the P&L at a slightly higher amount, and it relates to our current assessment with respect to our current intentions as to whether to hold that security until maturity.

Previously, our intention was more likely than not to hold that to maturity.

Our current assessment as of this quarter is that it may be more likely than not that we would not necessarily hold that security until maturity.

And as such, the accounting rules require us to run that impairment through the P&L as opposed through equity.

Fair enough.

A follow-up question to Dave's question on your commodity outlook.

Drought has been a pretty big deal on the wheat crop.

I'm wondering, is this a concern, given your size in the milling business?

Or is it kind of going to be passed through (technical difficulty)?

I think that we don't see a significant impact on the profitability on the milling business going forward.

That team has been pretty highly capable in managing the commodity prices and the pass-through to the customer.

So currently -- not a sure thing -- but currently we don't see a significant impact on profitability because of the potential price changes.

Leonard Teitelbaum, Merrill Lynch.

I had a similar question, I think, to Christine's.

Why would you give up -- unless you thought there was a collectibility problem, why would you give up $35 million from an otherwise good asset? (multiple speakers) a time value of money, but that seems like an awful expensive one.

Again, remember, we had -- we recorded this impairment in previous quarters.

It's for the last couple (multiple speakers)

I didn't understand it then either.

And really, what we've got to keep in mind is the impairment itself, the dollar amount itself, is based upon a yield analysis on the marketplace.

And about a year ago, almost exactly a year ago, there was an event where the entity put on some additional debt.

That required us to do a current yield analysis.

And at that time, because of that, we computed this clinical impairment and ran it through equity.

The current assessment is, again, we have to take a look at all things in balance, whether it's more likely than not that we will hold those securities to maturity or not.

And we think it's prudent at this time to run it through the P&L.

What's the current rate of interest on the note?

The note is a payment in-kind interest and the interest rates fluctuate, they escalate between now and the time of maturity.

So it runs between around 8 and 10% over the next four years.

I'll follow-up off-line on that, but let me continue on.

Just one quick question on debt.

I got on a little late, so if you answered it, just tell me to call back and I'll be glad to do so.

If you're going to take a look at the debt you've got on the books, are you going to associate any of that debt with the assets to be sold, or are they going to be sold clean and the proceeds will be used to retire debt?

We will not be selling any of the debt with the assets, as far as we currently know.

That debt remains on ConAgra's balance sheet.

With respect to the use of any divestiture proceeds, consistent with the discussion last week, let's get the cash in the door, and then we've got a variety of options open to us, whether it be a debt or whether it be a returning cash to the shareholders.

The issue with retiring debt obviously is we don't have anything due until the 2010/2011 time frame, so I would leave the door open to looking at coupon reductions or maturity extensions or things like that.

It's got to be based on a real NPV analysis, because there are premiums out there in the marketplace.

So (multiple speakers) take a very close look at it at the time we get the proceeds to see what the most economically beneficial thing is to do.

I've got to make an assumption, and here's why are I'm going to need your help; maybe some other people have already got it.

But it would seem to me that on the assets, certainly, that you're going to look to sell, you've written them down to what you presume to be, or will be realizable value.

I think under the tax code you have to do that.

Does this basically suggest that the asset value that is now carried in those entities to be sold represents your best guess as to what you're going to get for them, or is it still an open bid?

I think what you have to keep in mind is that the estimates that we have and the impairments that we recorded represent a midpoint of a range of estimates.

And certainly, the amount of eventual proceeds will be highly dependent upon the type of buyer, the timing of the transaction and the ultimate price.

But there is a range that we're looking at here, and the rules require us to take the midpoint of that range.

So, I don't know that you could imply that picking the number and backing into the asset base necessarily implies a set of proceeds there.

One final question.

I can't remember if you discussed it last week or not, but I'm sure the books are either sent out or about to be sent out.

What would you expect to see some type of transaction on the assets to be sold?

I wasn't quite sure what you're referring to there, Len.

When do you expect to see the first sale or the first transaction related to the businesses that are going to be put on the market?

We already announced Cook's and we announced (multiple speakers) seafood.

The books will be going out (multiple speakers)

But (indiscernible) has only got so much money.

Right.

The books will be going out sometime in the next few weeks.

And as we said previously, a transaction could take up to 12 months, and it depends on a whole variety of factors.

So, we don't have a specific timetable right now as to when the transaction might take place.

John McMillin, Prudential.

I have no trouble with you monetizing Swift debt.

Frank, to get to the $0.37, what tax rate are you using?

Because I'm having trouble building the model.

Let me try to clarify that, because I know that's a very convoluted quarter from that respect.

If you look at the financials which are baked in, you could come up with this 27% rate, which is up about $127 million in continuing ops.

If you add back the $11 million, that $0.02 which we called out as a comparability item, you will get back to about a 36% rate.

The one thing to keep in mind also is all of the other comparability items have a tax impact associated with them.

And just to be very transparent with you, of the items in the release, and they're all called out in the main section of the release, all those comparability items carry an approximate tax impact of about 38%, which is our incremental tax rate.

Except for the impairment, the $9 million impairment on the JV investment, that carries no tax benefit.

So, if you do a weighted average of the tax impact on all the comparability items, it also happens to come out to about 36%.

So, the $11 million, whether it's applied to the earnings before comparability items or to the continuing ops afterwards, that $11 million get you back to a 36% on ongoing operations.

So, a 36 rate to get to the 37 EPS number?

That would be correct.

In the 37 EPS, that's 31 EPS from continuing operations, which is where the tax rate is relevant.

To get to $0.31 of normalized EPS from continuing operations, it's a 36% tax rate.

And just in terms of the SKU [reds], let's say you have a business that you're keeping, like Egg Beaters, but you're discontinuing some SKUs in Egg Beaters.

You're not putting those discontinued SKUs in discontinued operations, are you?

No.

Clearly, continuing operations is based on keeping that product line.

So when you said SKU [reds] are in discontinued items, you just meant for those discontinued businesses?

Meat items happen to be disproportionate in terms of our total SKU [red].

And the options expense, that 37 number is with options expense?

I know it's only a penny a quarter.

Is that right?

No.

We have not put options expense in yet.

That will commence in FY '07.

The 37 number, that includes -- that excludes the $0.04 debt expense, correct?

Yes.

That is a comparability item.

Eric Katzman, Deutsche Bank.

A few questions.

I guess first, obviously, we're all going through a bunch of changes here with the numbers and the models, etcetera.

But how much now of the 2.9 billion in sales -- I mean, is there going to be a lot of seasonality based on the ongoing operations off of that number?

In other words, is the fourth quarter going to have materially higher sales due to Easter?

Or is there much seasonality?

Because this is just, obviously, the first quarter where we've had a view of what the ongoing business is going to look like.

And similarly, how does that relate to the $0.31 of ongoing earnings, and what I think is a 10.7% operating margin tied to that?

There's always some seasonality associated with this whole thing.

The 2.8 [billion] is an annualized number that we talked about last week.

There will of course be the typical seasonality.

Now, in those operations, for instance, you have Easter.

If it falls in a different time of year, as it's a little bit later this year -- it's about a month later this year than it was last year -- that will SKU things a little bit for that.

And if I look -- looking forward, typically our Q4 is reduced modestly versus Q3.

And there's also -- in the continuing ops, you have an anomaly where the summer is normally our stronger period in the grocery business, and hopefully in the Hebrew National business.

So, there are seasonality impacts, both in continuing ops and in disc ops.

The other thing I would like to point out at this juncture is looking forward, since you raised the issue, let's keep in mind as we move into fourth quarter from third quarter, the trading and merchandising operations were strong and probably above trend in the third quarter, as you could tell from the release, as they were in last year's third quarter.

So, while not a seasonality item, that would be add a calendarization item looking forward as you model the next couple of quarters.

And then, Gary, maybe you could touch base on the fact that your operating margin, 16.3% in the quarter, ex items for retail -- I mean, that's a pretty good number.

And so I guess there's just a wave of spending to come, and that's what's going to have -- or what drove the kind of the 10% consolidated number that you were talking about, I guess it was last week.

I think, Frank, maybe you can shed a little color on that, and then I'll come back.

Let me make sure I clarify your question (indiscernible).

The 10% you're referring to --

You said 10% consolidated, right, is where you guys are starting out on the [new co].

And that's going to go eventually to 12.

But that's clearly driven by retail.

And retail has got a 16% operating margin this quarter.

So, is the [A&P] spending going to be so significant that that's what's going to, in essence, drive down -- in other words, I'm trying to understand how -- what looks like a much lower operating margin for the consolidated company that you started out with, i.e. 10%, how that jibes with what looks like could be a much higher number.

I'm going to start that before I turn it over to Frank.

One of the things that we do need to point out is that we have not yet started the program of increased marketing investment.

So, when you're looking at the base you've got now, there is some increased investment that's going to come on top of that.

Frank, did you --

That's the main factor.

And again, 10% is across all the businesses.

And to your point before, there is some seasonality.

The third quarter is stronger than the fourth.

And I think if you look at the year in total, and the way we've modeled it internally post-divestiture, it's going to normalize at about 10%, with the goal going towards 12, as we get the topline going and we [claw] back costs and reinvest in the business.

So, on an annualized basis, if you look at -- and taking seasonality out of the whole thing, you're still going to be at about -- we see around circa 10%, with the goal being 12.

Last question and I will pass it on.

I don't think at the meeting, or since you commented on what is the kind of either strategy, outlook for the income from unconsolidated ops.

I mean, that's been accounting for 5, 6, 7% of your net income.

What is still in there?

What's the plan?

And how do we kind of model that within the $1.10 to $1.15 of earnings for '07?

You're talking about the equity earnings, primarily?

Right.

It was like 40 -- last year, for example, it was close to $43 million (multiple speakers) items.

Somewhere in the 30 to 40 range is probably a good trend estimate.

Okay.

And what is still in there?

A variety of entities around the world, including -- one of the larger ones would be our potato joint venture over in Europe.

That would be probably a most significant item.

We also have some (indiscernible) JVs, we have some cooking oil things here and there -- lots of smaller thing that in aggregate make up the line.

Is it kind of the intention to keep most of that for the time being, or is that monetized over time?

Gary, what's your kind of view on that line item?

Clearly, the biggest one is our JV on our potato business, the biggest being in Europe.

Clearly, that's a growth area for us.

I think there may be a few puts and takes in that number.

For the most part, I think you can kind of count on that as being relatively stable.

Eric Larson, Piper Jaffray.

A quick question on revenue for the quarter.

When I look at the revenue growth in the quarter and your volume growth, they pretty much match up.

So, it looks like all the other variables that drive topline are rather static.

Yet we all know that in the last year or so there's been a lot of pricing decisions made on product lines, promotional decisions.

Can you give us a little more flavor of what's going on in your -- in (indiscernible) your top core brands, your top 30 brands, in terms of the pricing and the promotional environment?

It certainly doesn't show it in the topline this quarter.

It looks just like it's all unit volume-driven.

I can tell you that we are continuing to exercise discipline in our trade spend.

We have had some situations competitively where we've needed to be a little bit more agile, and have gone a little deeper here and there for strategic purposes.

But for the most part, we are basically trying to manage our mix toward the higher-margin products.

We are trying to do a better job in terms of the investment we make and the execution we have on the retail side.

But I would tell you, in terms of our core brands, we're pretty pleased with at least the traction that we are beginning to get.

And it gives us more optimism as we move into '07 and beyond that there's plenty of opportunity here, as we really focus against the core.

If you were to just make a rough guesstimate of what sort of maybe net pricing or absolute pricing, regardless of what you actually had in net realized pricing, over the last year in your brands, what would that number from a portfolio point of view roughly be?

Rather than off the top of my head, I'm going to give that to Frank.

Let us look into it and get back to you on that one.

I don't have an answer for you right now.

Pablo Zuanic, JP Morgan.

Gary, I just want to focus on the commodity trading and merchandising gains.

I'm really impressed by the numbers that you report there.

The way I calculate the numbers, you accounted for about $0.06 of EPS in this quarter.

If I benchmark that against the $0.18 in continuing operations reported, that's one-third of EPS.

If I look at it on a before-charges basis, it's $0.06 versus $0.31.

It's still 20% of the business.

I know we get on this 20% of the earnings is a line that says commodity trading and merchandising services.

And I know you talked about it last week, but I think that a comment and a question -- we need a lot more disclosure in that business.

I think investors are buying a packaged food company, and from what I understand, there is a lot of complexity there. (indiscernible) being bought overseas, taking long-term positions, bringing them in, which is very far from consumer packaged goods and, if I understand, from your own background.

So, can you just comment on that?

Why does it continue to be so large?

And there's a lot of volatility.

Last quarter the number was down 55% year-on-year.

Now the number is flat year-on-year.

I don't really know -- I don't think I know how to [put in] that number.

Help me out here, please.

Pablo, as we said last week, we look at this business, particularly when you're talking about on a longer-term basis -- and there are going to be -- we understand there are going to be swings quarter to quarter.

But what I'd basically say from a headline standpoint is, you can look at these as commodity businesses, just like we would say we're getting out of some of the commodity businesses that we're divesting.

But these are businesses that we believe truly are run optimally, as opposed to the ones we're divesting that we, clearly, were not running from an optimal standpoint.

So, here we've got ROICs that are pretty good, pretty stable if you look on a long-term basis -- not a distraction to us because of the way they are run, as I said; different strokes for different businesses.

And these are run fairly autonomously and self-contained, and they are run well.

And they do provide -- especially as we look forward, it will provide help to the rest of the enterprise in terms of the way we manage some of the things, both in terms of the ingredient product that we can use as well as the logistics that they can manage.

So, I understand that you'd like to have things broken a little more granularly.

At this point this is a line of business that basically, we believe, all have the same basic trading and merchandising characteristics to them, and belong in one business.

(indiscernible) follow-up with Frank.

In terms of -- is there a timetable for the charges, Frank?

Are you going to provide that, or just (indiscernible) the fourth quarter?

And related to that, how should I think for fiscal year '07 and '08 in terms of the $75 million in higher marketing costs versus the cost savings?

When do the cost savings start trickling in?

I know that question was asked before, but I think I want some more detail there.

On the charges, like I said, we took -- of $183 million we talked about in our 8-K last week, we took 50 in this quarter.

I don't have a precise estimate right now, because it's all going to depend on the cadence of some of the things that we're taking the charges for, and how we identify specific initiatives to back up the charges, and how precise the accounting rules will allow us to take those .

I would say that most of the charges, most of the 183 will be completed by the end of FY '07.

We think the vast majority of that will.

We might have another significant amount in the fourth quarter that could be in line or similar to the amount in the third quarter, but I can't say that with precision right now.

As it relates to the marketing costs and the cost savings, the intention is that $75 million plus that Gary talked about last week in this incremental investment in marketing and innovation, the intention is to spend that incremental amount in FY '07.

But we also fully intend to match that with cost savings in that amount or greater.

As we said, we're trying to get $100 million in G&A savings by FY '09.

We would love to [front-load] that as much as possible, and there's a lot of work going on right now to try to identify specific areas that we can go after immediately.

On that point, (indiscernible) that you will get to the (indiscernible) savings (indiscernible) in a linear fashion -- about a third in '07, two-thirds by '08, and then full number by '09? (indiscernible).

Give us some more color there.

Without giving exact percentages, we are trying to front-load that, so we would like to get more than half of it in FY '07.

There's no assurance we will do that, but that would be a goal.

One last follow-up, Frank.

When I try to look at the diluted EPS number, $0.06, and if I add the charges, it's really $0.06 before charges.

The discontinued operations EPS is $0.06 before charges.

If I annualize that, that's $0.24.

That would be in line with what you talked about of $0.25 dilution from the businesses that will be sold.

My question there would be -- are those -- do those numbers include those corporate expenses that were supposed -- that were being absorbed by those businesses that were being allocated to those businesses?

But were they allocated from an accounting point of view here?

A couple of things on that point.

The $0.06 you see, remember, is for this quarter.

You can't necessarily annualize the third-quarter number.

I would characterize it as something like a $0.20 on an annualized basis, around there.

Remember, there's the cost of goods sold impact that we talked about last week.

Those costs are allocated to the discontinued operations, but don't necessarily go away upon the disposition of those businesses.

So you have to take that $0.20 and add another nickel (indiscernible) characterize it as up to $0.07 to $0.08 last week of further dilution.

Your question about what costs were allocated -- in arriving at that $0.06, the only things we're allowed to allocate to that $0.06 are direct costs consumed by those businesses, according to the accounting rules.

So, when we look at -- when we look at the whole picture, I would characterize this as somewhere between $0.18 and $0.20 from the dilution, from disc ops, plus the cost of goods sold impact, and probably a little bit more from the administrative costs that are not allocated to these businesses.

So, it does fit in the $0.25 range of dilution that we were talking about last week, when you take all those factors into consideration.

That's very helpful.

Just one last one, Frank.

Those 200 million (indiscernible) [204] million in terms of EBIT for the businesses that are being sold, is that -- I know it's a run rate, but does that number include what the natural corporate expenses of that business would be?

Or should a buyer think that there are some corporate expenses that should be included in the numbers, so that number will actually come down?

It doesn't include all the corporate expenses, but it includes what costs those businesses are currently absorbing in terms of general administrative costs.

Some of it is direct cost.

Some of it is allocated costs.

There are some elements of pure corporate overhead that would not be in there, but there is a significant portion of general -- general overhead, divisional overhead and other administrative costs allocated, not in arriving at the $200 million.

The $200 million is before the allocation of those costs.

The dilution would include (multiple speakers) allocations.

The D&A on those 200 million -- what would be the EBITDA equivalent if there were 2% of sales D&A for those businesses roughly?

The depreciation -- like we said in the release, there was about -- this quarter, for instance, about $13 million.

It's about a 50 to $60 million depreciation and amortization number associated with disc ops.

So, whereas our total depreciation and amortization is between 350 and 360, it will be between 300 and 310 from continuing operations, and another 50 to 60 for disc ops.

David Driscoll, Citigroup Investment Research.

Just a simple question.

What's the book value of the divested assets, and what's the goodwill associated with those?

We haven't disclosed the specific book values and goodwill of the individual assets.

You've got the impairment charge, but we're not prepared right now to disclose the exact book value and goodwill amounts specifically related to the divested businesses at this time.

That's going to conclude our call today.

So, just as a reminder, this conference is being recorded.

It will be archived on the Web, as detailed in our news release.

And as always, we're available for discussions.

So we're going to conclude our call.

Thank you very much for your interest in our company.

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

Thank you for participating, and you may now disconnect.