康尼格拉食品 (CAG) 2007 Q3 法說會逐字稿

Good morning.

And welcome to today's ConAgra Foods' third quarter earnings conference call.

This program is being recorded.

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

(OPERATOR INSTRUCTIONS).

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

Please go ahead, Mr.

Rodkin.

Good morning.

This is Gary Rodkin, and I am here with Andre Hawaux, our CFO; and Chris Klinefelter, our VP of Investor Relations.

I'm going to start with a few words about our very strong EPS we just posted, and then I will make some comments about the broader initiatives that are underway.

Andre will then discuss financial matters, and after that we will take your questions.

But 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.

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 result that we will achieve.

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

Now I will turn it back over to Gary.

We just released EPS of $0.38 for our third quarter.

This was ahead of what we originally expected, and it is very strong when you take into consideration the fact that we incurred $0.06 of costs related to the peanut butter recall, and increased our advertising and promotion investments by more than $25 million.

You have heard us say that we're a different Company now, and the results are demonstrating this.

The strong EPS was driven by a few key factors, continued productivity in Consumer Foods, resulting from our teams very aggressive focus on efficiencies.

We are so enjoyed some mix improvement.

Together, these allowed us to significantly increase our marketing investments to build for the future.

As we have said before, we have a long runway ahead of us in terms of cost savings and efficiencies.

And that long runway will provide important fuel for brand reinvestment for quite some time.

A very strong performance from our Food Ingredients operations, where all of our major productlines posted sales and profit growth.

Extremely strong results from Trading and Merchandising.

That group posted record operating profit, which is something we certainly didn't plan for.

And the benefit of prior year actions to pay down debt and repurchase our stock.

Overall, it was a much stronger EPS delivery than we planned, and again I congratulate our team on this strong performance.

Let me say a few words about the segments.

Consumer Foods continued its successes with strong cost savings and solid mix improvement.

Together those allowed us to increase advertising and promotion by about $26 million, focused on high-priority brands.

Earlier this year we told you we would start increasing marketing spend in the second half as we focus our investment behind our most promising brand equities.

That is exactly what we're doing.

This is going to result in a strong foundation for future growth by reconnecting with our consumers.

We are just getting started here, and I expect the next few quarters to show a similar pattern of increased investment.

Because of the impact of the peanut butter recall, and the recent divestiture of our refrigerated pizza business, it is tough to make sense of the reported Consumer Foods sales numbers.

As we indicate in the release when we look at ongoing operations, excluding peanut butter and divested businesses, we showed topline growth of 1%.

Sales for our priority investment brands as a whole, which were slightly more than 75% of the segment, were up slightly, excluding peanut butter.

The number of key brands, including Hebrew National, Orville Redenbacher's, Marie Callender's, Manwich, PAM and Snack Pack posted strong sales results of more than 5% for the quarter.

It tells me that many of our brand equities have legs and strong revitalization potential.

Now we have some great raw materials to work with here.

The favorable response to more and better marketing for these brands is what we were expecting from our new approach with a prioritized portfolio and ROI-based marketing.

It takes some time to rebuild brand equities, and we're going about it very methodically, finding the true north of key brands and driving marketing through consumer insights.

For example, with Marie Callender's it is knowing that its essence is food like grandma made, and making sure that comes through in how we took about the brand, the package graphics, and the homemade delight of each byte.

As we get further along with our increased marketing investment and our innovation pipeline, we expect more traction with more of our priority investment brands as a whole.

Building a healthy base is something that has required some tough choices on our part, whether it is phasing out unprofitable promotions, selling noncore brands or rationalizing products and programs, these are all deliberate choices we're making to strengthen the base of the business.

This type of activity weighs on the topline, but what it is really doing is getting rid of rented volume, unprofitable volume that doesn't sustain without deep discounting.

Getting rid of Healthy Choice 10 for $10 promotions has been our poster child for dropping rented volume.

We had a major 10 for 10 program in last year's third quarter that we didn't repeat this past quarter.

We made more money on better quality, lower volume this year, and don't have to worry about trying to lap it next year because our foundation is much more solid.

Mix management is also important.

A great example is in popcorn, where we're focusing more resources on Orville Redenbacher.

While this has cost us X2 sales, it has resulted in very strong Orville growth and more total margin dollars from popcorn for us and for our customers.

We also showed progress in the rest of the Consumer Foods segment, which was up slightly after excluding the impact of the recent divestiture of our refrigerated pizza business.

Moving on to our Food and Ingredients segment, this segment had a very strong quarter, with profits up 36%.

All of our major product commercial brands, Lamb Weston potatoes, ConAgra Mills, Gilroy Foods vegetables, and Spicetec seasoning blends and flavors showed strong sales and profit growth.

The overall segment performance reflects good volumes, mix, some pricing, as well as a continued focus on costs.

We're also doing a great job of innovation in these businesses, working with our foodservice customers.

Key examples this quarter are the addition of Lamb Weston's Cheesy Tots to Burger King's all-day menu, and the use of Gilroy Foods controlled moisture vegetables and Garden Frost purees and new items at key quick serve restaurants and fast casual dining customers.

This segment's profit performance was excellent, and I congratulate our team again on their success.

Trading and Merchandising had an outstanding quarter, even exceeding last year's record performance.

Opportunities in fertilizer and agricultural commodities helped us offset lower profits for energy trading.

As you have heard me say before, we don't, and we won't, plan for this segment to perform this well on a regular basis, but when they do, it is very good upside.

But it would simply not be smart for us to consider this quarter's performance typical.

Our International retail branded business also showed profit growth largely due to strong results for Canada.

For the segment overall we had sales growth for key brands like Hunt's, Chef Boyardee, Act II, Orville and Swiss Miss.

As you have heard me say before, we're steadily building a strong base here, and I expect it that it will benefit from increased focus over time.

As far as our broader initiatives go, we outlined them in detail at last month's CAGNY presentation, which is archived on our website.

I won't try to cover all of them in a forum like this, but I will remind our listeners of the core elements of our plans.

As we have said before, our plan is producing sustainable and consistent topline growth that drives bottom line growth.

To make this happen, we're implementing important cultural, organizational, portfolio and operating changes.

Those are core of our six most dos.

The big area of progress this year, and indeed the key to having the entire plan come together the way we expect, is a more efficient supply chain, which along with more efficient overhead SG&A, is providing savings that allow us to both increase marketing investment and deliver earnings growth along the way.

So our cost savings and early marketing investment are setting the foundation for profitable future growth as we look ahead.

At CAGNY we reiterated that our supply chain still has significant runway to continue generating savings.

We also told you that as we move forward in fiscal 2008 and beyond our story should transition from one of cost savings progress to one of continued productivity that fuels profitable topline growth.

As you have heard me say before, we remain committed to trade spending efficiencies, developing alternative channels for our products, optimizing our SKUs and shelf placement through our Gold Store initiative, prioritizing our brands to focus our investment behind the brands with the most opportunity, more and better marketing, which boils down to an ROI-based approach to deploying marketing dollars, increasing the amount of the investment, while at the same time improving the effectiveness of the investment.

This is evidenced by the strong performance for a number of key brands this quarter, telling us that these brands have strong equity with consumers.

And importantly to my we're very committed to building and delivering a meaningful innovation pipeline to go hand and hand with brand revitalization.

You will start to see our innovation efforts in the marketplace early in our fiscal 2008.

We have been working hard on that front, and we will share some details on product specifics in the near future.

Chris will give you some details for our Tasting Day in June for analysts and institutional investors.

Because of all the things I just mentioned, we have a great deal of excitement about the next few years.

I think our team is set to unlock the power of this Company in the marketplace with the types of initiatives I have just discussed.

This is truly a great time to be at ConAgra Foods.

Before I turn it over to Andre, I want to address two more items.

The first is that with today's very strong EPS performance, we now expect to be toward the high end of the EPS range we previously cited for 2007.

For the remaining quarter of this fiscal year we're increasing our foundational marketing investment and facing higher inflation, and we certainly won't count on a continuation of record trade profits.

Furthermore, we will have no peanut butter business in our fourth quarter.

There's no way around it.

We have taken all those into consideration in our guidance.

Regarding peanut butter, I believe all our investors know that we initiated a recall of 100% of our peanut butter products during the third quarter, immediately after receiving information from the FDA concerning Salmonella contamination.

We put consumer safety first with no compromise.

We have received a significant number of claims, which we intend to resolve fairly and expeditiously.

I believe that the numbers we shared with you the our press release reflect our current best estimate of related costs.

You should know that we're taking additional steps to assume an industry leadership role in food safety to reduce the possibility for any similar incident on our products in the future, whether related to peanut butter or otherwise.

I am convinced that this event will make us a stronger and better Company.

From a business standpoint, there are several decisions we're still working through on the peanut butter business.

We're working hard on a plan to get Peter Pan back on the shelves.

We're not in a position to share any specifics on brand communication or product strategy yet; however, I will say that Peter Pan has many loyal consumers and trade customers who want it and want it back.

They have let us know this, and we do plan on being back in the market in a meaningful way.

We're anticipating no peanut butter sales or profits during our fiscal 2007 fourth quarter.

Our original estimate of the cost of the recall, $50 million to $60 million, still holds.

This figure does not take into consideration lost business, it is just the cost of the recall.

However, we have taken lost business into consideration with our fiscal 2007 full year EPS guidance.

More importantly though we don't expect the recent peanut butter events to get in the way of achieving our longer-term financial goals that we shared with you a month ago.

That concludes my remarks.

Thank you for your continued interest in ConAgra Foods.

And now I will turn it over to Andre.

Good morning everyone.

I will touch on the financial highlights before we turn in over to Q&A.

Let me start by saying that I'm extremely pleased with the quarter.

Posting a $0.38 quarter after absorbing $0.06 in recall costs, as well as making significant marketing investments, shows the progress we're making across all segments, and speaks highly of our team's focus on the initiatives we outlined for you as we design the new ConAgra Foods.

It also shows the benefit of share repurchases and repaying debt over the last few quarters.

We continue to make progress with gross margins in Consumer Foods.

Although it is tough to see the underlying progress given the impact of the recall, when we adjust for restructuring and the recall cost, margins are moving in the right direction and are giving us important fuel for growth and reinvestment.

Continued cost savings progress and the benefit of mix improvement from brand prioritization initiatives are clearly paying off.

Higher inflation is a fact of life, but this directional pattern is what we expected when we gave our second half guidance last quarter.

As far as Food and Ingredients and Trading and Trading and Merchandising are concerned, they both had extremely strong quarters.

Food Ingredients and profits were up 36% due to strong topline, meaning volumes, mix and price across all major productlines.

Cost focus also played a key role.

Trading and Merchandising posted a record quarter due to opportunities in fertilizer and agricultural trading.

This is particularly impressive when you consider that they topped last year's Q3 which was a record in and of itself.

While we couldn't be more pleased with the way things turned out for those two segments, I just want to reiterate what Gary said.

We do not plan for Trading and Merchandising to post this type of performance on a regular basis.

And as such, we have not assumed this type of performance in our long-term guidance of 8 to 10% EPS growth.

Now with 14 million fewer shares than in year ago quarter, and $13 million less in interest expense than a year ago, it is clear that the benefit of our capital allocation strategy over the last several quarters is paying off for our shareholders.

While we are on the topic of capital allocation, I want to make a few comments.

Capital expenditures of $147 million are much higher than a year ago.

The year's investments are being concentrated in the second half.

We expected this.

Our fourth quarter will also show significant CapEx investment for the same reason.

The total year should be in the range of $400 million.

We contributed another $106 million to our pension plans.

We have put in approximately $170 million so far this year, which is much higher than amounts we fund in most years.

As we are long on cash and we value a strong pension position, we opted to contribute a high amount this year.

We bought back $197 million of stock this quarter.

As we have said before, we benchmark our capital allocation decisions against the benefit of share repurchase.

Our remaining authorization is about $300 million.

Dividends were $92 million, a very strong payout and a good yield.

And as we have said before, our Board will valuate the appropriateness of dividend increases over time.

In the quarter our working capital increased significantly, primarily due to increases in derivative assets, margin account balances, and increases in agricultural commodity inventory within our Trading and Merchandising Group.

We would not tie up this money in assets if we could not generate solid profits.

So it is not just about working capital, it is about free cash flow as a whole.

By year-end we believe our overall working capital will be a modest source of cash year-over-year.

The debt exchange that we mentioned again in the release is not news.

We talked about it last quarter, and are almost finished with all the housekeeping items around it.

Net net our debt maturity schedules will be more balanced.

Doing this exchange resulted in $90 million of premium payment this quarter that is being amortized over the life of the new debt, which is about ten years.

So you do not see a $90 million onetime expense this year in our income statement because that is not the way the item is being treated.

So when we talk about EPS, excluding items impacting comparability this $90 million of payment is not applicable.

As we consider the impact of tax credits and changes in our business during the quarter, we have lowered our estimated effective tax rate for the fiscal year.

We now see it as 35% instead of 36%.

The 33% effective tax rate in our third quarter reflects the year-to-date revision.

We have adjusted for the lower-than-expected quarterly rate and our items impacting comparability.

The last item I want to mention is that, as Gary discussed, and as you saw in the press release, we're now comfortable with the high end of the range of our previous estimate for fiscal 2007.

As we told you at CAGNY, we see the 2008 to 20010 timeframe as one of 8 to 10% EPS growth, excluding items impacting comparability.

When we finish up our fiscal year next quarter, we will share our point of view about what the peanut butter recall and the usually strong trading profits this year mean to the EPS base on which to apply the growth rate.

We believe this discussion will be critical in making sure we're on the same page as we move forward.

We will continue our open dialog and transparency as we set the foundation for a strong fiscal year 2008.

Thank you for your interest in ConAgra Foods.

I look forward to updating you on our progress.

Now our operator will turn over to Q&A.

(OPERATOR INSTRUCTIONS).

Dave Driscoll, Citigroup.

A couple of questions if I may.

Andre, just an immediate response to your statement there, are you trying to tell us about the fiscal 2008 guidance that you're going to have to lower the '07 base because of better than expected earnings in the Trading division?

I'm not saying that right now.

What I think we're trying to do is make sure that when we come out of the fourth quarter there's a couple of things we've got to talk about.

How do we want to treat peanut butter, and how do we want to talk about profits, the over delivery in profits for instance in Trading?

What we want to do is I want to try to set up that dialog so that we can actually have a discussion amongst ourselves to say, where should you really say be thinking about us?

What is the point of departure for this 8 to 10% going forward?

The bottom line, this $1.33 it is just -- we can't be simplistic and say $1.33 times 8 to 10% and there you go.

You're going to change that base on us, and then we're going to have some other way that we need to think about this.

Is that what you're trying to tell us?

No, if you want to take $1.33 and grow it off -- go 8 to 10% off on that, I think we would be fine with that.

That's critical.

Gary, certainly it has been impressive what has been going on on the profit side of the equation.

And I think your message is loud and clear about getting rid of those bad trade spends.

But can you talk to us a little bit about marketshare trends?

In particular in the frozen case we continue to see the Heinz' Smart Ones brand just running at rates that are -- in my opinion they are very unusual because they are so strong.

And it either suggests one of two things, that they have a product offering and compelling -- of such a compelling nature that consumers are really flocking to it, and/or it is really related to issues from their competitors, of which obviously you guys are a major one.

Can you just talk to us about the marketshare trends that you see going on within the frozen case?

Are you concerned about it?

And what is your confidence going forward for that particular business?

I am very confident as we look forward you're going to start to see us grow marketshare next year.

I would tell you that we are working very hard on our foundation.

The base business in Healthy Choice is very good, responding to our advertising.

We are getting rid of some bad business and deep discounting.

But maybe most importantly, we have stayed out of the innovation game this year, but we are loaded up as we look forward into next year in our key categories.

This being one of them.

So I think it is going to be very different picture as we look forward.

The foundation much more solid.

We do have one kind of structural issue in our Banquet business -- in our chicken business, where frankly is a big tonnage business, but a low margin business that we've got some competitive issues on.

But aside from that, we feel very good that our frozen business will be very strong next year.

Andrew Lazar, Lehman Brothers.

Just two quick things.

Gary, if you could just expand a little bit on what you're seeing on the nonpriority brands, the ones you have been pulling the resources from as you go forward.

You're probably getting some more learnings about either the resiliency of these brands or gaining some additional comfort maybe around how those are going to look as you go forward.

And then I just got a quick follow-up.

I would tell you that this quarter we are actually up slightly on those brands.

And we're feeling quite good that management of those brands is in good hands.

Again, we're managing it in a much more entrepreneurial way, looking for the seams in the sales channels, looking at how we can improve our margins.

And just being much smarter about how we use them as our total portfolio.

So I believe that we're not going to position them for growth.

On the other hand we're not looking to fall off a cliff on those businesses either.

It doesn't seem like you had had any at least sort of big surprises either way there yet.

No, we haven't.

I would say we're quite pleased with the management of the businesses there.

The topline is modest, but the bottom line is very strong.

Then just the last thing.

With your strategy shift in terms of -- well, not strategy, but your shift obviously in SKU more towards topline growth as you go into your fiscal '08, behind the spending and the innovation and such, have you -- I'm just curious if you have had to change or think about the way you incentivize your salesforce, as an example, to make sure they go after the topline, but in the way that you want them to get there, because there's obviously a lot of ways to get it?

Has that already been built into the way they are already thinking about it?

Or how do you make sure they are incentivized to do the right thing there?

Because I'm still -- these can be one-off things, but I still hear these one-off things that in certain brands, whether it is Healthy Choice or others, there are still some promotional sort of actions out there that maybe don't make as much sense regarding what you're talking about on the whole.

I would say those are very isolated and getting less and less.

Our salesforce has been incented basically as general managers.

And they know that the way that they will make their incentives is to sell more volume at better mix margins.

And they are operating that way, and that is the way our Gold Store initiative is geared.

And I am very confident that they are moving in the right direction again.

We are still not totally out of getting rid of all the rented volume.

This past quarter was a great example of a very big 10 for 10 promotion in Q3 '06 on Healthy Choice, was a coupon rebate on top of it.

This year we didn't repeat it at all.

And frankly we gave up a good chunk of volume there, but made a lot more money on much higher quality foundational volume.

Eric Serotta, Merrill Lynch.

I am just wondering whether you could update us on what has changed behind your guidance since CAGNY.

At CAGNY you talked about the peanut butter recall being offset by stronger than expected performance in the base business, driving results still towards the lower end of your guidance range.

And that was with about a week or two left in the quarter.

Now you're talking about things being at the upper end of the guidance range for the year.

Is the delta there purely in the Trading and Merchandising business, the delta over the past months since CAGNY?

Yes, the bulk of that really was in over performance late in the quarter from our Trading business, which is always possible.

Andre, do you want to add to that?

No, I think that is the bulk of where the upside came from.

Then to follow up on Dave's first question, I'm not sure if I fully caught what you said there.

It seemed like the first part of your answer to his question was, well, we will have to talk about the appropriate base of which we're growing 8 to 10 off -- 8 to 10% from.

And then you responded him that 8 to 10% off $1.33 seemed reasonable.

The two seem contradictory to me, or the first one seems to imply that there would be a lower base.

Could you just qualify that -- could you just clarify that please?

This is Chris Klinefelter.

Why don't I start with that.

Andre's point was that if we had another really strong quarter in terms of Trading like we did in Q3, we would have to take that into consideration in the base.

In other words, of our numbers printed higher than $1.28 to $1.33 by the time we got to the fourth quarter, we would have to have a discussion at that point about what a decent base was from which to grow.

We also want to make sure that in the numbers that the investment community is using that the treatment of the recall is done uniformly in the right way.

So those were the two variables that are moving around.

As Andre said, if that lands on the $1.28 to $1.33 from the beginning point, we do not have any hesitation that we will grow 8 to 10% off of that number.

Let me just reiterate, we are very confident in our range, in being on the high end of our range.

What we're really talking about is anything that goes over and above that.

Eric Katzman, Deutsche Bank.

I guess I am curious, Gary, if you could comment on is there any impact from the fact that you were making peanut butter for Wal-Mart's private-label business point, if that's correct.

And then how does that kind of play into the new product launches?

Are they, or other retailers for that matter, upset?

Does that get you a little less shelf space for even other products, or is this at this point just a peanut butter issue?

And then I have a follow-up.

I would tell you that the way that we, and in particular the salesforce, in this instance has managed through this recall has been first-class.

We have gotten very, very good feedback from our customers, including Wal-Mart, in terms of how proactive and thorough we have been.

So we see no impact beyond the peanut butter business.

Frankly, we have gotten a very strong response from our consumers and our customers that say we want Peter Pan back.

We have got to put the right plans in place.

We will take a bit of time to get everything lined up.

But we're confident that we will be back in the Peter Pan business.

Okay.

Thank you for that.

Then the Food and Ingredients margins were quite strong.

That is obviously more of a back of the house type of business, along with the milling operations.

I think based on my model, I think that 12.8% operating margin was a record.

What is a reasonable margin for that business where we don't really have that much kind of exposure to it?

I think that goes a bit beyond the level of detail that I want to go into.

But what I can tell you is that these are very strong businesses.

They had been performing very strongly, very consistently from a top and bottom line for quite some time now.

There is just a very strong foundation, run very well operationally.

And some very good opportunities from an innovation standpoint, as a shared a few with you before.

So we are feeling very, very good about this business, both what you might call back of the house foodservice, but at the same time the impact that these businesses can have on the innovation on our retail side.

Robert Moskow, Credit Suisse.

I believe at CAGNY, Gary, you had said that you would probably need some pricing to offset a higher inflationary environment in fiscal '08.

And I am just wondering what kind of package, so to speak, or how will you look at pricing across your line?

Will you do it in areas where you had very strong innovation?

Will you do it just in areas where you have higher commodity costs, or will you do it in areas where you think you've just got more insight for the trade -- effectiveness of trade promotion?

I think it is a mix basically of all the above.

And we're actually going through all of our planning right now to take a look at our input costs, to take a look at our competitive situation, and then we will make a final determination how we make sure our margins are set.

It is really all about looking at gross and net.

Net sales is what is really important.

There's a little what different input into it; pricing is one of them.

Would you say the innovation is a strong one as well though, like you need to have strong new product in order to justify pricing in some cases?

I wouldn't say that is universally true, but we clearly believe the innovation that we're introducing in the marketplace will be accretive from a margin standpoint.

Christine McCracken, Cleveland Research.

This is [Michael Piking] calling in on Christine's behalf.

Just a quick question regarding your Trading operations.

In particular you cited some strength in the fertilizer.

And we were just wondering if that is sort of a one time occurrence, or given the strong demand for fertilizer, recognizing that this is primarily Trading operations, is this a seasonal thing, or is this something we might see at least for one or two more quarters?

This is Chris Klinefelter.

I will start.

While the business is very strong that is part of a group called Trading and Merchandising, and there is a reason that we don't sign up for commenting on a normalized rate of earnings in that.

The fertilizer distribution there are opportunities.

Just essentially think of it in some degree as arbitrage, and we do not sign up for a normalized number.

However, it is looking strong recently.

And it could keep going for the near future.

Andre, do you had anything else you want --?

No, I think that is pretty consistent.

We find ourselves in a pretty good position right now relative to supply and demand, so we are -- our group is in a very good place.

And to Chris' point, I think we see some of that performance certainly happening as we go into to planting season.

Eric Larson, Piper Jaffray.

My question is on the Consumer Foods division, and correct if I'm wrong, when I make all the adjustments, including the product recall, for your operating profits I get an 18% EBIT margin for the quarter.

I think that is correct.

If it is not, please do so.

Is that -- that margin is obviously extremely strong.

Would you expect that margin to stay there or -- and now you're starting to increase your marketing investment pretty substantially, is there a lag in marketing expense where we would maybe see that margin tweak down 150, 200 basis points as you get some marketing spend against that?

We've got, we believe, a lot of momentum on the margin front in Consumer Foods.

We expect that will continue.

We have got a bit of inflation headwinds coming our way, and that is where in our planning process we need to make sure that we take all those input costs into account.

But basically this margin jumps around a little bit over time, pluses and minuses, but I think the basic overall trend, as you look over the long haul is we will continue to seek margin improvement in Consumer Foods.

In the quarter, did you get -- have you started to implement some pricing in that division, or is that forthcoming and maybe more of a fiscal '08 potential impact?

Remember, again, it is net sales so some of that comes in the form of taking trade reductions, which we have done.

Again, it is all about the net sales, how that shows up as pricing.

And the answer is yes.

Edgar Roesch, Banc of America Securities.

Congratulations on the quarter.

I just want to touch base on the Food and Ingredients side.

I know already had a question there, but the margin performance was quite strong.

I am just trying to understand some of the dynamics.

You have 8% topline growth.

Do you get some leverage naturally in the business that supports those margins?

Separately, could there be a similar dynamic with less promotion on that side of the business as well that is helping on the margin?

I would tell you the dynamics in that business are quite different.

We don't need to have the kind of level of spending from an A&P -- advertising and promotion standpoint.

This is really an operationally driven business, a sales, customer driven business.

And, yes, we certainly do get leverage with more volume.

There's no question about that.

However, it is just a business that we haven't talked a lot about, but it has performed extremely well, very consistently, very sound from a service level, from a customer relationship level, and from a cost management standpoint.

So a very, very strong business, and we're very proud of the performance this quarter, but it is not inconsistent to see them perform well.

Great.

Looking forward it is well-positioned, or is it well-positioned with respect to some of the trans fat free solutions that people are looking for in foodservice on the potato side?

Yes, absolutely.

On the potato side we have some terrific products, trans free products, fat reduced products.

We've got some great innovation there that is starting to get some traction in some of our customers.

Pablo Zuanic, JP Morgan.

I had a couple of questions.

So first I will ask one, and then hopefully I don't get cut off and I will ask a follow-up.

Just, Gary, when I think over the acquisition front and I listen to what Kraft is saying and Sara Lee is saying, they seem to the giving cash there for their positions.

On your side it seems it is more about returning cash to shareholders.

I'm sure a lot of people like that.

Just remind me in terms of how should we think about your debt target ratios?

And then in terms of is there going to be acquisitions, if they are a priority?

What is the role they are going to play?

Which parts of the portfolio do you want to complement with acquisitions, if they are indeed a factor to take into account?

And then I have a follow-up.

First I would tell you that we're not in the acquisition market.

As have I said many times, we have got to get our foundation more solid first.

We're still working on that, and therefore acquisitions somewhere down the road may be part of the game plan but not today, except in an exceptional case.

One might be, in our Lamb Weston business, particularly as we look globally.

That has been a place where we have been active and we may continue to be.

However, acquisitions as a strategy, not on the front burner today.

Andre, do you want to tackle the debt?

Yes, with respect to the debt to capital ratio, we're about a 42.7%, and I think we're very comfortable with that.

We don't again see the need to gear or lever up any more.

I think we're very comfortable with we're at.

Then the follow-up.

When I think of the evolution of the Consumer Foods portfolio, Gary, how should I think about that?

Is it going to be -- and you have talked partly about this before -- is it going to be more trying to go into convenience, more frozen, more health and wellness, or is a going to be more about taking your strong brands like Orville, PAM, Reddi-Wip, the frozen dinner brands and extending them into new categories?

Help me think how you are going to change over time the profile of the product portfolio in Consumer Foods.

A good question.

I would tell you that first and foremost it is a given that everything has to taste good, and it has to be convenient.

But I could also tell you that 75% plus of our innovation resources, our R&D resources, are going against health and wellness, and you are going to see that more and more.

We've got some great base products to work with, both on the commercial side and retail side.

So you're going to see that as probably our biggest priority.

The other thing I would like to mention is from an innovation standpoint, again, we will stress the word platform.

We're not looking to do a lot of one-off line extensions.

We're looking to really get the leverage of fewer, bigger, better, looking at our innovation as platforms.

David Driscoll, Citigroup.

Just a quick question, Gary.

You said you didn't want to talk too much about Peter Pan, but can you tell us if the plant has been restarted?

Are you building up inventory, that is you can begin the plant to restock the shelves with?

We have not restarted the plant up.

We are taking absolutely no shortcuts, no chances.

We're committed to the absolute highest quality and the safest products in the industry.

We've got no higher priority than that.

And we're making sure that we turn over every stone.

So we have not started back up again yet.

We're still working through the plans for that.

No estimate on when you would restart it?

I will probably talk about that next quarter.

Just one question on the procurement side and the raw material side.

What is the estimate for raw material cost inflation for the full year?

And can you give us the progress to date on how your procurement savings have been against those higher raw material costs?

Go ahead, Chris, you want to do part of it and I will do some of it as well?

Sure, I will start, Andre.

As we have communicated on a couple of occasions, we generally look to 2 to 3% on an annualized basis for the algorithms that we have set out.

It is probably going to be more of a headwind than that in the near term.

At as far as the specific progress this quarter, not just procurement, but when we talk about the positive things as a whole relative to the inflation, and this is really a Consumer Foods discussion, is about a $25 million benefit of the cost savings outpacing the inflation.

That means that the rest of the margin benefit came from mix.

Andre, do you have --?

No, that is exactly what I would have said.

And I think for -- if we look forward to Q4, as we mentioned earlier in our prepared remarks, is I think we're going to see inflation in Q4 be slightly higher than what we have seen.

And therefore the spread between our ConAgra cost reduction initiatives and inflation will be actually a lot closer.

What you saw in Q3 is probably going to be slightly smaller relative to positive impact.

Eric Larson, Piper Jaffray.

Just another quick follow-up on the Consumer Foods side, Gary, just to drill down a little bit further on your margin.

You quoted several times I think, including your comments, that you still feel you have significant cost saves in that division.

Which it makes sense, because you're sharing some services and you're getting paid for those obviously.

But you haven't addressed some of the SG&A issues yet.

Within that context, what percent of your increased marketing spend can be funded -- or just give us a feel -- could be funded by reduced costs in that Consumer Foods division?

I can tell you that our formula is to continue to use productivity as the fuel for our marketing investment.

So it is as simple as that.

We don't look at marketing investment to be a drag on our overall operating margins.

We look for it to be funded through productivity.

Eric Katzman, Deutsche Bank.

I guess my -- one question is when you talk about the peanut butter recall cost, I mean, looking out to '08, this year for example we have included that is a cost of doing business.

I guess that is how you're -- I assume you're reflecting it in your GAAP numbers.

And is it fair to have assumed that you're going to continue to think -- or to guide us in that way?

This is Chris.

Yes, we are.

If you look at the way we have phrased our guidance, our guidance is including the cost of the recall, but excluding any other items that impact comparability.

Yes, we are living with that cost in the guidance we're giving you.

As a follow-up to Andre, I think you were talking a lot about capital allocation, and you're fairly comfortable with the debt levels, so your buying back a fair amount of stock.

I assume that is based on kind of a DCF model.

So when you do that, what -- I guess longer-term what kind of assumptions do you make for what is a volatile kind of trading business?

How do you make that judgment as to -- given that that is a decent percentage of profitability, what do you assume in that business over time?

I guess I'm not sure I understand your question relative to are they co-mingled or are they separate?

Are there two questions there or (multiple speakers)?

You are buying back stock because your model is telling you it is accretive.

And obviously certain assumptions based on your segments have to go into that model.

And given that a large -- well, a decent part, not obviously large, but a decent part of profits comes from Trading, I guess I'm just trying to figure out how do you think about the Trading business as a component to the cash flow stream that you're discounting to then decide whether you buy back stock or not?

I think what we have said all along is with respect to the Trading and Merchandising operations, we plan that very conservatively.

We assume that conservative nature of those profits embedded in our DCF models.

There is also a component that you know is inside of that business that is also service related, that we also sort of count on, that is pretty consistent for us.

I think what I would say is we plan very conservatively, and so far it has really worked out for us.

I just might want to add to that.

We have very strong controls in that business, and therefore we're very comfortable with how we're able to limit the downside volatility.

We're very fortunate when the upside comes, but we don't plan for it.

When we get it, it is great.

In many cases we can use it to fuel investment in other parts of our business.

But the way we plan, as Andre said, we have a core level of what we might call service or ancillary business within there that we know is not nearly as volatile, and we continue to plan in a very conserve way.

So the upside is all a good thing.

This concludes our question-and-answer session.

Mr.

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

Thank you.

Before we conclude our conference call, I wanted to mention that on Monday, June 11 we will have a new Product Tasting Day for analysts and institutional investors that will take place here in Omaha in our corporate headquarters from 1 to 3 in the afternoon.

And if you are interested in attending that and that day works for you, please let us know.

You can call the number on the front of the press release so that we can get a pretty good sense of the headcount for planning.

And we look forward to it.

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

And as always we're available for discussions.

Thank you very much for your interest in our Company.

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

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