康尼格拉食品 (CAG) 2007 Q2 法說會逐字稿

Good morning and welcome to today's ConAgra Foods second-quarter earnings conference call.

This program is being recorded.

My name is [John Daniels] and I will be your conference facilitator.

All audience lines are currently in a listen-only mode.

However, our speakers will address your questions at the end of the presentation during the formal question-and-answer session.

At this time, I'd like to introduce your host for today's program, Gary Rodkin, Chief Executive Officer of ConAgra Foods.

Please go ahead, Mr. Gary Rodkin.

Thank you.

Good morning.

This is Gary Rodkin, and I am here with Andre Hawaux, who recently joined us as CFO, and Chris Klinefelter, our VP of Investor Relations.

I'm going to say a few words about the strong results we just posted for our second quarter and our outlook for the rest of fiscal 2007, given the broader initiatives that are underway.

Andre will then hit some financial highlights and after that, we will take your questions.

Before we get started, Chris will say a few words about housekeeping matters.

Good morning.

During today's remarks, we will make some forward-looking statements.

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.

Reconciliations of the non-GAAP financial measures discussed today can be found in our earnings release and on our Web site at www.ConAgrafoods.com/investors.

Now, I will turn it back over to Gary.

Thanks, Chris.

We released EPS of $0.43, which includes $0.03 of earnings from several items impacting comparability.

Excluding those items, EPS was $0.40 for the quarter.

That compares with $0.29 a year ago.

That's a very strong year-over-year growth and ahead of our original expectations.

It's driven largely by five factors--earlier than expected completion of the meats divestiture; excellent progress on cost savings, which more than offset relatively modest inflation so far this year; favorable sales mix; more effective trade spending; and solid Trading & Merchandising results.

Across the Company, advertising and promotion increased $20 million over prior-year amounts.

Most of this marketing increase was in our consumer operations and focused on a handful of priority investment brands.

This fits with our ROI-based approach of allocating marketing dollars and increasing marketing effectiveness to move toward our goal of delivering bottom-line improvement through sustainable topline growth.

I will say more on this in a few minutes.

We're very pleased with the strong first-half we've posted and want to thank and congratulate our team because of the focus on the organizational and operating initiatives that we outlined last March.

We've said before that improving our execution is the key to attaining a potential, and it's clear to me that we are on the right track.

Let me turn to segment performance.

The most significant profit improvement was in our Consumer Foods segment.

Operating margins there expanded more than 200 basis points as reported, and expanded 400 basis points when you adjust for the items impacting comparability, reflecting more effective trade spend, cost savings, and better mix.

As reported, profit growth for this segment was up 17% versus last year with comparable profit growth up more than 25% on top of absorbing an increase in marketing spend.

That's very strong year-over-year improvement, even after taking into account last year's relatively weak profit performance in the second quarter.

Although inflation has been moderate, improved execution is driving most of the progress.

Sales for the Consumer Foods segments were flat overall, but there are a lot of good things happening underneath that are worth mentioning.

Across the segment, better sales mix, more effective trade spending and pricing collectively offset the impact of selling or divesting our refrigerated pizza business and declines in foodservice and private-label, including a good amount of low-margin business that we are just not going to chase.

When added to some of the Chef Boyardee foodservice business that we didn't expect to repeat, this resulted in a 3% volume decline but a disproportionately low impact on profits.

In a nutshell, we're beginning to get some traction on our priority investment brands.

Our marketing investments are a long-term play as we start to rebuild the equity on our brands.

We are also carefully managing our lower priority consumer business for a more sustainable model.

The priority investment brands, which are about three-quarters of the segment, were up 2% as a whole.

A few highlights this quarter were Healthy Choice, Slim Jim, Hebrew National and Orville Redenbacher, all of which have begun using new ad campaigns over the last few months.

We also saw good growth on Marie Callender, Kids Cuisine, Reddi-Wip and Swiss Miss.

We've been increasing investments behind the brands that show the most potential and making the investments that will clearly demonstrate increased effectiveness in rebuilding our brand equities.

Together with increased focus on innovation, these marketplace investments are the key to delivering sustainable, profitable topline growth that will more than drop through to the bottom line over time.

Our Gold Store initiative is also playing an important role in the health of key brands.

That initiative focuses on optimal distribution and shelf placement for the most important and profitable SKUs within key categories.

Gold Store is in and of itself a deliberate mix improvement initiative because we are prioritizing our high-margin products through assortment.

Importantly, our efforts are a win-win, good for us but good for the retailer, too.

An example here would be putting more resources against Orville Redenbacher's premium position and less on Act II's value proposition in certain targeted accounts.

You can see that in the relative performance of the two brands this quarter.

It's also worth mentioning that our trade spending is becoming more effective and efficient.

We are very focused on getting more trade spend bang for the buck.

That means getting more lift for the right products at price points that support quality positioning for key brands.

That's the right kind of price/value equation.

The pace of improvement in this area will likely slow a bit beginning next quarter as we start to lap our initial efforts in this area in the third quarter last year.

But don't think for a second that we will lose our focus on trade spending.

We will not allow ourselves to slip back to being addicted to the rented volume that some of these deals drove.

A prime example as we go forward will be to no longer fund 10 for $10 price points on Healthy Choice frozen entrees.

That kind of merchandising price point doesn't make sense for us, for the brand equity, or for the retailer.

Let me turn to the items that flattened the topline performance for the segment this quarter.

The decline was not driven by the lower-priority branded products, like Wesson oil.

Sales for those brands were up 1% and profits a lot more.

These are the brands that we are managing entrepreneurially with virtually no A&P spend.

Some of the decline came from divesting a refrigerated pizza business in mid-quarter that had annual revenues of less than $70 million and very little margin.

The rest of the decline was almost entirely in the foodservice and private-label business.

There were a number of situations where we were deliberately phasing out unprofitable business.

We think of it as migrating from a chase-the-case mentality to one of drive-the-base.

I continue to reiterate all volume is not created equal.

There were other bright spots across the Company.

In our Food & Ingredients segment, Lamb Weston continues to find ways to profitably grew volume because of outstanding products, strong innovation, great customer service and efficient operations.

They have long stood as a benchmark of efficiency throughout our company and continue to do so this quarter with their strong results.

Also in this segment, we have good performance from our dehydrated vegetable and spice operations from a combination of volume and pricing.

I do want to note that a good portion of substantial increase in revenues for this segment came from higher flour prices that were simply passing on higher wheat costs.

That partially explains why profits didn't grow quite as fast as sales for the overall segment.

Our international business was mixed, but in Canada and Mexico, we're making headway in key categories while continuing to improve customer and product mix, as reflected in the margin improvement.

The last item I will mention about segments is the strong performance for our Trading & Merchandising group.

We were ahead of last year's performance.

The team was able to capitalize on some opportunities within the energy markets to offset challenges in the agricultural markets.

For context, we consistently plan conservatively for this group.

They have proven to be excellent stewards of opportunity in the past and operate within very well-defined risk control limits.

When they have a good quarter, we consider that extra cash that we may put to work elsewhere.

As I've said before, their solid performance certainly played a role in our over-delivery this quarter, and as we look forward, we will continue to plan conservatively and simply do not expect for them to match or exceed prior-year results in the near future.

Moving onto broader issues, our significant margin progress is helping us to build the foundation for future growth.

It's giving us the flexibility to increase marketing investments while simultaneously posting strong bottom-line results.

That is at the core of the plan we outlined last March, and it's the key to our goal of producing sustainable and consistent topline growth that drives the bottom line.

That's our model, that's our game plan, and we've made a very good start.

A lot of that progress has come in the gross margins, as I've discussed before, everything from procurement, manufacturing and logistics, on the one hand, to the mix improvement and increased trade effectiveness on the other.

But we are also making very good progress on reducing nonessential SG&A.

Although it's tough for you to see externally, we have a lot of focus against what I think of as our overhead SG&A.

We view increased expenditures on marketing and innovation to be investment SG&A and we will continue to give you transparency on those items.

Overhead SG&A is trending exactly the way we want and is another important source of investment fuel.

While a great deal of our cost savings progress has come from successfully executing the core operating goals we've previously outlined, we are also benefiting from completing the divestiture program early.

That's helped us attack the overhead costs and get better visibility on how to make our cost saving plans a reality.

You've heard us say before that the margin expansion initiatives underway come first and will deliver more rapid progress than our topline initiatives.

The numbers show that we've benefited from rapidly achieving cost savings while utilizing much more of an ROI mentality on consumer marketing programs, on trade customer promotions, SKUs, and entire lines of business.

Although we expect the back half to begin to show some traction on the topline, we will keep a continued, intense focus on margins.

Quality margins and sustainable earnings are the key to the strong foundation we are pursuing.

As you know from the release, we took our earnings up for the year, and although we certainly plan for a solid back half of the year, there's a couple of things to note.

First, we faced our toughest comparison for the whole year in the third quarter because our trade and merchandising group posted an extremely strong third quarter last year.

It was their best quarter for all of last year, so we don't expect to match last year's performance in those operations.

It would not be healthy for us to plan for that.

The second thing to note is that we plan to accelerate our marketing investment in the second half of the year.

That's part of the program for more and better marketing.

The rate of increase in the second half of the fiscal year should be faster than the increase you saw in the first half.

We gave a targeted increase of $0.08 to $0.10 per share of increased marketing expense for the full year when we shared our plans last March.

In reality, we may end up spending more than that if the opportunities are worth it.

The focus is as much on the effectiveness as it is on the dollar increase.

As I said before, our plan all along has been for topline growth to play a greater role in our future EPS growth, and that requires marketing and innovation investments now to make that happen in the future.

I will also tell you that our innovation pipeline is clearly improving.

We are looking for and developing product platforms that have staying power.

I think we're making excellent progress.

You can expect us to share these ideas with you later this spring when we get nearer to our fiscal '08 launch dates.

The last point I will make is that we are appropriately cautious about inflation.

No one can predict this perfectly, but our plans are for inflation to be somewhat more of a headwind over the next few quarters and into fiscal '08 than it has been recently.

We will look for smart pricing actions to help offset this pressure.

You'll hear more from us over time on this.

Thanks very much for your interest in ConAgra Foods and have a great holiday season.

Now, I will turn it over to Andre.

Thanks very much, Gary, and good morning, everything.

As Gary described, I joined the Company a few weeks ago as CFO.

I joined from the Pepsi system, where I had been for 25 years.

I'm very excited to be at ConAgra Foods, not only to work with Gary again but also because of the company itself.

From the outside, I viewed ConAgra Foods as a company with significant opportunity throughout its brands and its supply chain.

In my first month here, everything I've seen has confirmed my original view.

Now, I only saw the last couple of weeks of the quarter we are reporting on today, so I'm not going to go into a great deal of detail or try to give the impression that I am close to every aspect of the quarter's performance.

But I will hit on some important highlights.

Just to reiterate a point that Gary made, the quarter showed strong cost savings, some of which came from completing our divestitures earlier than planned--good mix, more effective trade spend, and good trading profits.

The basic model we outlined for you last March, that of creating a more efficient margin structure and redeploying some of the savings into marketing for key brands, is coming together nicely.

This is essential to enable sustainable topline growth that drives the bottom line, which has been our mantra all along.

The margin expansion is obviously ahead of schedule.

The Company's operating margins were significantly improved as reported and on a comparable basis.

Most of that came from the Consumer Foods segment, as you heard Gary talk about earlier, which posted a comparable 400 basis point improvement.

All in all, the overall quarterly progress was very strong, and it's the traction with cost savings, trade spend and mix that has given us the confidence to raise our fiscal 2007 guidance as we did today.

But for contacts, when we offered our guidance of EPS in the range of $1.28 to $1.33, that excludes items impacting compatibility.

The actual amount we deliver will obviously vary based on a variety of factors, including how much we take marketing up, how much inflation will work against us, and how trading will lap last year's strong second-half performance.

The range of $1.28 to $1.33 is our sense right now.

Next, I want to move onto some capital highlights.

We continue to focus on working capital opportunities.

That's a specific focus area for us because of the low-hanging fruit there, particularly in inventories.

We will continue to focus on this indefinitely because of the cash flow potential resulting from better management of this part of the Company.

Capital expenditures were $66 million in the quarter, slightly higher than year-ago amounts, and our year-to-date CapEx was $111 million.

Our expectation for the year is still $450 million, as we had outlined in March.

Dividends were 92 million.

We're still at the payment rate established when we laid out our plans last March.

We will evaluate increases as we continue to progress with our operating initiatives.

Interest expense was $52 million and it benefited from interest income that will not repeat due to large cash balances generated by divestitures.

We will likely put that cash to work towards higher margins as time goes on, which means better returns elsewhere but less interest income.

So when we look at interest expense for the rest of the year, it will trend higher than this quarterly run rate.

We took that into consideration when we gave you the $225 million estimate for this year's full-year interest expense.

We completed several divestitures during the quarter, specifically our packaged meats operation, oat milling operations, the Swift Note receivable, our interest in a [malt] joint venture, and a small refrigerated pizza business that was part of Consumer Foods.

You've heard about them before, and the details are provided in the release, so I won't dwell on them.

Collectively, these divestitures brought us about $740 million before tax.

But more importantly, because they were distractions that we're now rid of, we've been able to get visibility to the cost pools that can be reduced and attack costs earlier than expected.

As we've said before, we benchmark all our capital allocation decisions against the benefits of share repurchase.

We repurchased about $150 million of our shares during the quarter, so that means our remaining authorization is about 500 million.

The 150 million is not enough to move the needle in terms of EPS significantly for the remainder of the fiscal year.

The repurchased simply occurred too late to do that.

But it will give us more than $0.01 of full-year EPS in 2008 and beyond.

We also announced for financing plans for about $500 million of our debt.

The details of that were finalized this week and are included in the release.

This isn't a reduction of debt; it's an exchange that simply changes when the debt is due and it makes our maturity schedule less lumpy a few years out.

We are paying around $90 million in premiums sometime today to finish this transaction, and it will result in a different maturity schedule, as well as some slight interest savings that we will take into consideration when the give you our full-year interest outlook for fiscal 2008 in a few months.

I have a couple of other items to mention before I conclude.

As you know, we're very focused on attacking overhead costs, and things are trending in the right direction in that respect.

Finishing our divestiture program early has helped with overhead goals.

As Gary mentioned, there may be some difficulty seeing our progress in reported SG&A numbers because there will be some noise there.

Increased marketing and innovation investments, which we want to go up, will clearly offset the reductions that we're taking in all core G&A.

Another item impacting SG&A is some of the post-transaction arrangements that we have with buyers of our businesses.

As we have divested businesses, we've entered into some transition service agreements with the buyers for items like logistics, information technology, billing, and various other back-office activities.

There are reimbursement agreements with them that will show up as income benefiting our SG&A.

Our view is that the income received now will be in the range of what we have targeted in terms of cost reductions later on.

So it's sort of a conceptual wash, if you will.

I can assure you that we have identified appropriate changes to our overhead structure to call back as much of these costs as possible when these services and revenue tail off.

I will conclude by saying that I'm happy to be here.

As the new CFO, I'm committed to helping our investors and analysts understand the important dynamics of our business and our progress.

I look forward to working with all of you in the future.

Thanks, and have a wonderful holidays.

Now, our operator will turn it over to Q&A.

Thank you.

Now, we'd like to get to an important part of today's call, taking your questions.

The question-and-answer session will be conducted via the telephone. (OPERATOR INSTRUCTIONS) Andrew Lazar, Lehman Brothers.

Good morning, everyone.

Gary, when you talk about your Gold Store initiative and kind of the on-the-shelf presence, etc., do you believe something like an ACV distribution is a good venture to look at if we're trying to sort of judge progress there?

Because as you've said, we haven't necessarily seem out of the volume get to you want it to be yet, but I think, if we look at ACV, you know, either for your priority brands or even for just the Gold Store sort of initiative brands, you do see or I have seen kind of an uptick around ACV let's say in the last quarter.

Is that a good leading indicator for what's to come and what you're expecting to drive it or not?

Andrew, that's one element in Gold Store.

Clearly, we do expect to have some modest improvement in terms of our ACV, but more importantly, it's got to be the right mix, so it's the particular SKUs that we want to make sure we've got on the shelf, again, in the right assortment.

So you'll see it a bit in the ACV but some of it won't show up in the numbers until you actually see what happens in terms of our gross margin improvement.

That is what we're really looking at.

Okay.

Then just lastly, just so I'm clear, and I apologize if I didn't get this from the prepared remarks.

In terms of the proceeds that you've taken in, just so I'm clear, how much of that has now been sort of applied or put to work, if you will, and how much is still left to do so?

Thanks a lot.

I think about 700 million has been applied.

No, 700 still to be applied.

Right, we've bought back about $150 million worth of stock thus far.

(multiple speakers)

David Driscoll, Citigroup Investment Research.

Good morning, everyone, and congratulations on a very nice result, Gary.

Two fast questions kind of responding to some of the comments you guys made--the $90 million in the premium that you paid to do the debt exchange, is that part of your guidance for the fiscal year?

Yes.

Yes.

Okay.

Then the second question to that 700 million you just said that was still to be applied, is that to be applied to future share repurchase, or is it a mix of share repurchase and debt repurchase?

David, it's Chris.

We have $500 million left on our share repurchase authorization as of the end of this quarter.

That is the default by which we benchmark our capital.

We do not have any burning platform to reduce any more debt.

When we've done it, it's been as part of a balancing act, so share repurchases are our default.

Bill Leach, Neuberger Berman.

Good morning.

I just wanted to clarify.

When you're talking about the $0.40 for the quarter in the annual guidance, are you excluding or including the $0.02 discontinued operations?

Bill, good morning.

It's Chris.

Our guidance is based on continuing operations excluding items impacting comparability.

So the $0.40 excludes discontinued operations?

That's right.

The $0.40 has no contribution from discontinued operations in it.

What should we use for the tax rate for the second half?

36%.

36%, okay.

Thank you very much.

John McMillin, Prudential Equity Group.

Congratulations and Andre, welcome.

Thanks, John.

Just, you know, you've raised full-year guidance now almost 15%, I guess 14%.

I'm just trying to--I guess about half of that, and correct me if I'm wrong, has come from the timing of divestitures and share repurchase, which was not part of your original plan.

I guess I'm just trying to calculate, one, if that's right and two, how sustainable, you know, are these--are you raising guidance because you're more comfortable with the runway in front of you, Gary and you--or I'm just kind of--why wouldn't you put more in your back pocket and kind of build marketing a little bit further?

I don't know what first half--you said 20 million in this quarter.

I don't know what it is for the first half.

But just kind of why wouldn't you put more in your back pocket to kind of run a three, four-year kind of plan?

Yes, John, on the last point, the 20 million, that's about the total increase.

The first quarter was about flat in terms of A&P.

We actually do plan to spend significantly more from an increase, from a delta standpoint in the back half, so that is already built into that guidance.

You know, we will continue to spend against opportunities that we believe are good returns on investment.

You're I would say approximately correct in terms of your assessment, in terms of the divestitures kind of pulling forward.

That's probably responsible for about half of the increase.

You know, the excellent execution, both from a supply chain standpoint as well as a sales mix and trade effectiveness standpoint, those operating results and execution are really actually better than what we had planned.

So that I would say is what we've got for the back, for the other half of the increased guidance.

But again, back to the--why wouldn't we put it more back into spending, we are planning to be up very significantly in the back half on our A&P.

Some of that you'll see in marketing and some of that in preparation for some innovation that we're getting ready to launch in fiscal '08.

No, just as of follow-up, I see the 3% volume decline, which I guess you stated it.

I didn't see it anywhere.

At the end of the day, once you get your cost saves and so forth, you're going to have to grow that number at some point down the road.

You talk about mix but I see Chef Boyardee come down;

I see Banquet, which was a core business, down.

I see frozen foods trends that are still--I guess at some point, you know, you're just going to have to grow the number sooner or later.

When do you expect to kind of see that needle turn?

Yes, you are absolutely right and that is exactly what the plan has been.

We've said to you all along that we've consistently kind of earmarked this fiscal year as one of building muscle to do blocking and tackling to solidify our foundation, you might even say to become more fiscally fit.

But what we've got in the plan and I think we will start to see a little bit of traction develop in the back half, but you really start to see what we have in our algorithm in fiscal '08.

Again, we are very, very pleased with the way we are operating from a mix standpoint.

The brands that you mentioned, Chef Boyardee, most of that volume decline is attributable to a piece of foodservice business that was just not repeatable, not--so it's really not an apples-to-apples for us.

Banquet, that's an area that's not one of our highest-margin opportunities, but it's an important brand that we're working very hard on.

Most of the core of our priority brands in those upper two quadrants, which make up 75% of our business, were actually up.

So you are right.

We are clearly looking to build a model that will grow the bottom line through the top line, and basically we feel very good about where we are today in that regard.

Eric Serotta, Merrill Lynch.

Good morning.

Gary, back in March, you spoke about the private-label business that you have and the benefits for continuing to participate in that business.

It seems, from the recent quarter, that you certainly backed away from sizable parts of that.

Should we read a broader trend into this?

Has there been a change in strategy towards the private label?

Actually, Eric, no, it is really similar to what we talked about on the branded goods.

It's really all about mix.

So we had a good bit of business that was absolutely not profitable.

In many cases, its real objective was just to fill capacity, and actually we are taking that at the root cause, not by chasing volumes.

So, that's really--the foodservice business decline is solely attributable to that.

The foundation for the--I'm sorry, not foodservice--private-label business is really getting much, much stronger.

Our margins are improving dramatically and we see some very good opportunities, and it will continue to be a priority for us.

Okay.

Along those lines, are you still comfortable with the strategy of having private-label offerings in categories in which you also offer branded products?

Yes, but very, very selectively.

In segments where we've got very strong positions, we will continue to look for those kinds of opportunities.

Ann Gurkin, Davenport.

Good morning.

I wanted to find out if you are getting the lift or the sales lift in your renewed focus on either--if you want to call it cross-marketing or moving products around the stores to get better visibility.

I'm not sure I understand the question, Ann.

For example, you all talk about moving Reddi-Wip near the strawberries, those kinds of programs.

Are you getting the lift you expected?

Oh, yes, absolutely.

That is one great example, putting the Reddi-Wip near its host foods.

Clearly, it has shown terrific growth.

Putting the Egg Beaters near shelled eggs is another good example.

That's what we're trying to do, move our selling much more towards those kind of insights and tools that are a win-win for the customer as well as us, versus just talking trade deal to trade deal.

So you're getting the volume lift and the sales lift that you expected from those programs?

Yes, we are.

Then can you update us on the strategy for the third-tier brands.

It kind of seemed like it was to drive growth in the top ten brands and then you would move onto emphasizing the third-tier brands.

Where are we in that progress?

Yes, if you take a look at kind of the lower two quadrants, about the last 25% of our business in consumer, we're managing them very entrepreneurially.

By that, I mean we're not spending marketing dollars.

What we're doing is looking for supply chain savings, and we are looking for very smart customer opportunities to move in the seams.

We've got some very good success stories in there.

One of them that I could talk about from this last quarter is Wesson oil, which Wesson Oil.

Which has a great trans-free positioning and we're making some very good progress there, but those are brands where we will not spend marketing dollars.

We will market them with some veteran folks who've been around for a while and really understand what it takes to make those kinds of brands move.

So, we're very pleased with the progress there.

Eric Katzman, Deutsche Bank.

Good morning, everybody.

Andre, welcome.

I guess we should have more people from the beverage industry come into food.

It's some pretty good results.

Sure!

I guess, Gary, my first question has to do with operating margins of 18%.

Maybe this kind of tags on to John's question earlier, but you know, most of the food companies probably we would argue probably peak out or optimize margins at, let's say, kind of 17, 18%.

You've kind of run that back very quickly.

Where do you think is a reasonable margin target for you U.S. retail?

Then I have some follow-ups.

Good morning, Eric.

This is Chris.

I will add something and then Gary will finish the thought, but when you look at our segment margins as reported, we are very pleased with the direction but the thing to keep in mind is, when we're talking about comparing to the peer group, there would need to be a corporate expense allocation below that line.

So if you're talking about 18% at the consumer line, and we've got corporate expense of about 3, that will put you more in the 14 to 15% to compare to the peer group.

But we look at our peer group somewhere between the 15.5 and 17 for most of the broad-based companies.

Yes, I would agree with that, Chris.

You know, we shouldn't be compared to companies like a PepsiCo or Wrigley or Hershey, but for some other folks in this space, we think we're moving towards that peer group average, and we're going to keep moving towards that goal.

Then as--okay, as a follow-up, I understand, from some industry contracts, Gary, that you have been out talking aggressively with retailers, which is to be expected, but you've decided not to introduce the new products or the bulk of them until June 1, and yet you're telling us that you're going to spend aggressively on advertising and promotion in the fiscal second half.

That doesn't make sense to me.

Is that right and what's the timing difference?

Yes.

In the bulk of our innovation will come starting in the first quarter, which is June of calendar '07; that's the first quarter of '08 fiscal.

We've got a lot of work to do to get ready for those, for those introductions, so clearly some of that spend is against the innovation from an R&D standpoint, from a market research standpoint, so there is a lot of prep that has to go on.

Then on our core business, you know, we have dramatically raised the bar in terms of the effectiveness of the spend, developed some new campaigns on some of the products like a Healthy Choice or an Orville Redenbacher.

Those are long-term, equity-building plays that you will see us be more visible as the year goes on.

That's what's going to build the sustainable, profitable core growth.

That's the organic growth.

So we don't see it as "spend this quarter and see the impact this quarter", necessarily.

It's a long-term play, sustainable.

Todd Duvick, Banc of America Securities.

Good morning.

I wanted to ask about working capital and how it might impact your cash flow.

It looks like cash flow is going to benefit from pretty strong earnings for the year.

As I recall, some of the businesses that you sold off were pretty working-capital intensive, so I'm wanting to know if you could give us some guidance on what you expect cash flow to be for the year, up or down or flat, and how working capital may play into that.

Good morning, Todd.

It's Chris.

I'm going to start with this and turn it over to Andre.

We are not in a position to give a cash flow guidance right now.

We've given you some earnings.

You know the relationship, probably between CapEx at 450 and depreciation is probably going to be somewhere in the mid-3s.

The working capital, as we mentioned back in the March presentation, we are targeting between 50 to 75 million worth of cash generation from that, organically.

So by the time you're talking about divesting businesses, those would be--that's kind of a different measurement that would be pulled out of the organic working capital measurement, if you will.

So we don't have a specific cash flow measurement to give you, but those are some components that you can think through.

Andre?

Yes.

I would just reiterate what Chris said.

I think we're looking for about a $75 million improvement in our working capital.

Again, as I mentioned in my prepared remarks, the real focus there is going to be in the area of inventory and again in the area of what--we've also done good work in the area of accounts receivable.

So I think you can continue to see us do that, and I think that's what we are targeting in our fiscal year '07, about 75 million.

Okay.

Then with respect to the divestitures, you've still got a fair bit of cash on the balance sheet and I think you had indicated that, generally, you plan on reinvesting that in the business.

But I'm just wondering, in terms of other uses of cash, you bought back some shares; you've still got some authorization.

Are you looking at additional share repurchases which I understand is your benchmark, where you measure all other investments?

Are you looking to do maybe some other debt exchanges or looking at anything on the debt side?

No.

As we talked about earlier, we're looking at--we've still got authorization for 500 million to do, so that's one of the areas that we're going to go ahead and execute over the time frame that we've been given.

Then, again, we've just done the exchangeables on the debt.

We don't see anything, any movement in the short-term there on paying down any debt.

So I think that's what we're comfortable with in terms of talking about right now.

Eric Larson, Piper Jaffray.

Good morning, everyone.

I want to go back to kind of a question that John was coming at.

If you go back to March and your 2009 EPS guidance, I think it was $1.35 to $1.40 run rate by then.

It excluded, if I recall correctly, any benefit from divestiture, reinvestment from divestiture proceeds.

So if you look at that number today, now that you've got divestitures done and a bunch of your guidance has been because of benefit from the earlier disasters, now you haven't reinvested a lot of the proceeds, I mean, how should we look at your '09 run-rate number?

Good morning, Eric.

This is Chris.

I will start.

The thing to keep in mind is we're still sorting through whether or not the operating progress is really an issue of more savings or earlier savings.

So from the core operating numbers we put out, we are not in a position to revise that.

If you are asking what would have happened to that '09 algorithm just due to share repurchases up to this point, it would probably be somewhere between $0.03 to $0.04.

We bought $200 million worth of share repurchases last spring.

We've done another 200 to date as of now.

Each 100 million is roughly $0.01.

So that would put you between $0.03 and $0.04.

Okay.

The follow-up questions that is why are you not more aggressive in reinvesting those proceeds?

Because the earlier you get that reinvested, the more benefit you get in the out years from those reinvestment activities.

Everything is really based, Eric, on a return on investment.

So you know, we're looking to be smart across all of our business, both on the P&L side and the balance sheet side, and we're just going to leave it at that.

Pablo Zuanic, JPMorgan.

Good morning, everyone.

Gary, you know, a couple of strategic questions.

I mean, in terms of your long-term guidance, the long-term algorithm of 2 to 3% sales growth, how should we think there in terms of prioritized brands?

Obviously they want to grow at a much faster pace than some of the other ones (indiscernible) maintain (indiscernible) cash, maybe flat or decline.

Help us understand that.

How do you get to a 2 to 3% based on the goals for each of the four ways that you've segmented the brand portfolio?

Pablo, I don't have exact black-and-white numbers for that, but I would probably say 4 to 5 on the priority brands and somewhere close to flat on the rest.

Okay.

But you see, the question comes from the fact that when I look at your margins going back to the questions that people are asking in terms of profit margins, based on the numbers you gave in the March conference when you said that prioritized was about 52% (indiscernible) EBIT and about 43% to your revenues, if my math is right, at that time, that implied around 15, 16% on those prioritized brands.

Do you think that, given they are considered prioritized brands and if I were going to compare them with other priority brands at other companies, that that piece alone could have margins north of 20%, in terms of operating margins?

Pablo, it's Chris.

I'm going to offer one thing before turning it over to Gary.

That is that when we're talking about our priority investment universe, it is not just the top quadrant that we identify with the presentation last March.

It was the first two quadrants, and so those are now about three-quarters of the segment.

So take that into consideration with your math.

Gary, do you have any--?

Yes, so it really is about 75% of our consumer business today.

We will continue to move towards that what we consider to be comp company peer group margins.

We think we are on track to be able to get there.

David Driscoll, Citigroup Investment Research.

Thanks a lot.

Just to follow-up Gary, I was hoping you could give us just a bit more color on sort of the early feedback that you've had on some of the new advertising campaigns.

Is there any just stories that you could share with us in terms of either customer feedback from the retailers on these campaigns and/or any improvements in the sales trends from those particular, those particular brands?

Yes, I could tell you, clearly, Orville Redenbacher, bringing the character Orville Redenbacher back has been a huge win for us and you can see double-digit growth on that business, and our customers have given us great feedback in terms of being able to start to revitalize that part of the store, that section.

So we few really good about the feedback on Orville.

Healthy Choice on the frozen meals business, we've got base volume that's been up significantly, which has really helped offset some of the trade monies that we're starting to remove, like the 10 for 10 pricing.

And that's a really good thing.

Then if you go into convenience stores, we've had great feedback on Slim Jims in convenience stores and all sort of channels.

We've done extremely well and the new spots have been received very enthusiastically.

Well, great.

Thanks a lot, and once again, congratulations.

Thank you.

This concludes our question-and-answer session.

Mr. Klinefelter, I will handle the conference back to you for final remarks or closing comments.

Thank you.

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

As always, we are available for discussion.

So thank you very much for your interest in ConAgra Foods and have a happy holidays.

This concludes today's ConAgra Foods' second-quarter earnings conference call.

Thank you again for attending, and have a good day.