康尼格拉食品 (CAG) 2008 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 would like 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'm here with Andre Hawaux, our CFO and Chris Klinefelter, our VP of Investor Relations.

I'm going to start with a few words about the EPS we just posted and the main drivers of the performance.

After that, Andre will discuss more specifics about financial matters and then we will take your questions.

And Dean Hollis, President of Consumer Operations and Greg Heckman, President of Commercial Operations, will join us for that portion of the call.

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 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 filed with the SEC which include cautionary language.

Also, we'll be discussing some non-GAAP financial measures during the call today and the reconciliations of those measures for Regulation G compliance can be found on our website at investorConAgraFoods.com under the Financial Reports and Filings link, and then choosing non-GAAP reconciliations.

Now I will turn it back over to Gary.

Thanks, Chris.

We just released EPS of $0.50 for the quarter which includes $0.03 of costs from the recent pot pie recall.

That's a very strong quarterly EPS, certainly higher than what we had originally expected.

However, the source of the earnings growth was different from what we had originally planned.

In a nutshell, our commercial operations, meaning our Food and Ingredients segment and our Trading and Merchandising segment, posted absolutely outstanding performance.

The comparable operating profit numbers for those segments were far better than what we had planned.

Most importantly, the over delivery from those operations more than offset the margin pressures in our largest segment, Consumer Foods and is allowing us to take our full year fiscal 2008 EPS expectations up.

And while there was plenty of progress in Consumer Foods for important brands, overall the performance for that business is not where it needs to be.

I'm not satisfied with it, but I am satisfied with the way we're going to address it in the back half of the year.

You know from our previous comments that our priorities for the Consumer Foods segment are to grow the bottom line through healthy top-line performance.

That involves appropriate pricing actions -- volume growth through innovation, better marketing and more focused selling, and of course improving the efficiency of our product supply operations.

Those are the cornerstones of our agenda for this segment to achieve its potential.

I will touch on all of those in my discussion of this segment's quarterly performance and our near-term outlook.

Consumer Foods posted a decent top-line performance this quarter.

Unit volumes and sales were up 3% on a comparable basis, a pretty solid number, especially given some significant distractions.

As most of you know, we're very focused on more effective marketing and meaningful innovation.

Our brand performance this quarter shows we're making progress.

A number of priority investment brands including Chef Boyardee, Egg Beaters, Healthy Choice, Hebrew National, Marie Callender's, PAM, Reddi-wip, Slim Jim, Snack Pak and others continue to post solid growth, validating our assessment of their opportunity.

Demand for Healthy Choice Cafe Steamers has been extremely strong, certainly more than we forecast.

We're adding more capacity as we speak and with current trends, we expect annual sales of that product line to be well north of $100 million as we look into fiscal '09 and beyond.

That is a huge success, we're very excited about it, and I congratulate our team on finding a sweet spot with consumers in this important platform and technology.

Now a few words about pricing.

We did take some pricing in Q1 and even more in Q2.

The obvious question is -- why don't we have more benefit from pricing in Q2?

While we took pricing up just as we said we would do, we also had some aggressive trade promotion spending that offset most of it and negatively weighed on the price mix spread.

That trade promotion spending was done to protect trade commitments to customers for some heavily promoted categories.

Overall, the quarter's level of trade spend was too high, but it was done for a reason.

I want to be fully transparent on this and brutally candid.

It was designed to keep customer relationships healthy in light of customer service shortfalls resulting from our two recalls in the past year, as well as changes we were making in our manufacturing network.

I'm confident the dynamics going forward will be different and I will talk more about that in a moment.

Regarding mix, the fact that our enabler brands which on average have a lower price per case grew 5% while our priority brands grew about 2.5% creates a negative sales mix.

As we go forward, our plans are firmly in place to be aggressive on our pricing actions and more disciplined on our trade spending because what really counts is net realized price for the overall portfolio.

Our net pricing will start to improve in Q3 and will improve significantly in Q4 and into fiscal '09.

Believe me, I have spent considerable time with our operating people these past few months getting into granular detail on their pricing actions.

I'm convinced our execution will be far better than what we have seen to date.

This is part of our continuing evolution toward becoming a more finely tuned operating company which I consider as my number one personal priority.

We're still building muscles and we expect the evidence to be clear as we get closer to year end.

Moving onto Consumer Foods profits, the real issue is inflation.

Our cost of goods sold increased by almost $100 million.

Let me emphasize, that's inflation of more than 8%, and while we did generate meaningful cost savings in the range of $60 million, that still leaves a big gap.

Another important point is the production and start-up inefficiencies we discussed in the first quarter which negatively impacted us in the range of $30 million then were nowhere near as significant this quarter, nor do we believe they will be significant in the back half of the year.

Those production inefficiencies stemmed from taking on too many transformational supply chain projects simultaneously.

We spread our resources too thinly.

These same issues are relevant to our customer service metrics.

We missed some sales due to our service shortfalls.

That is also relevant to why our sales growth was only okay this quarter as opposed to very good like we saw in Q1.

I think it is important to note that our service issues were concentrated in a few key manufacturing areas, rather than any issue with our overall systems or logistics.

In other words, we're well along the way to resolution of those hiccups, and importantly there is no systemic issue.

I will move onto our Food and Ingredients segment.

Comparable sales were up double digits and comparable profits up more than 40%.

Lamb Weston benefited during the quarter from continued momentum, appropriate pricing actions as well as strong export volumes and good response to their appetizer innovations.

As usual, they continue to be exemplary in efficiencies and customer service.

Lamb Weston is our single biggest brand and we certainly consider it one of our most important core businesses and we look for continuing high impact results.

Also in the Food and Ingredients segment, our milling operations are dealing with much higher input costs which they have largely passed on as higher prices during the quarter, and they're also very focused on expanding their value-added product lines, like Ultragrain and Sustagrain and running very efficient operations.

So I congratulate the entire Food and Ingredients team on a stellar performance for the quarter, and more broadly, I would like to recognize them as a model of collaboration in their approach to new business and customer service opportunities.

They do a great job with an outstanding product and service portfolio and a strong understanding of our customer service needs.

One recent example of this is our work with McDonald's to develop the new McSkillet Burrito, a breakfast burrito that includes several of our ingredients -- Lamb Weston potatoes, Gilroy Foods' controlled moisture vegetables and Spicetec seasonings.

This is a major new national breakfast item for McDonald's, supported by a national ad campaign and this product demonstrates our ability to leverage our portfolio and reputation for strong customer service to find new avenues for growth.

Our Trading and Merchandising operations posted another very, very strong quarter.

Profits there were almost four-X last year's dollar amounts.

The results speak for themselves.

We did very well in fertilizer and agricultural merchandising during the quarter.

Our folks have capitalized on [near-in] demand opportunities and market volatility.

Energy also did well during the quarter, but not quite up to last year's levels.

Given that this is a Trading and Merchandising operation and that each quarter presents a new set of opportunities and a different set of positions, it's difficult to offer predictions for this business.

Therefore, we don't plan for repeats of quarters like these, which is why our guidance assumes more conservative levels of profits in the back half of the year.

Our International operations showed some traction with pricing and good results in key categories like popcorn and canned pasta, and we look forward to developing more momentum as time goes on.

Let me switch to a few broader topics.

Most of you know we're very excited about our innovation pipeline.

When I joined the Company a little over two years ago, the new product pipeline was pretty empty.

We have been very focused on building that pipeline and making our plans for gradual introductions into the marketplace.

We had a round of product introductions late summer and we will have another next midwinter, some of which we'll discuss at CAGNY.

Another item I would like to touch on is senior leadership.

As many of you know who follow us closely, during the quarter we had two announcements about senior team members.

The first is Dean Hollis, currently President and COO of Consumer Foods and International who will leave the Company this summer as he searches for a CEO job.

Dean spent 20 years at ConAgra Foods making a huge contribution and wants to lead a company, so he has made his desires public and is beginning a search.

I appreciate his openness and his commitment to a smooth transition.

Dean wanted to do this in a way that minimized disruption for all involved, so he has agreed to help transition for six more months.

Another significant senior team announcement was that King Pouw, who headed our IT and Product Supply operations, is leaving the Company to go back to his former employer.

We appreciated King's contributions while he was here.

We have split his job into two separate functions.

One is the information systems which will now be led by [Garrett Shutee] our new Chief Information Office, a very strong veteran of ConAgra Foods.

He's going on 10 years with us and has been a key leader in our very successful general ledger SAP conversion process.

Garrett will report into Andre Hawaux, our CFO.

We have also promoted Greg Smith, formerly Senior Vice President of Product Supply, to now run the entire product supply organization and report directly to me.

Greg has been with us for six years across several senior roles and developed a strong background in consumer products operations even before he joined us in 2001.

Greg has had P&L responsibility for our grocery business in the past and has been a very valuable senior leader of the product supply team.

I have full confidence in Greg and I am certain we won't miss a beat.

Before I turn it over to Andre, I will close by saying that we've taken our full year's diluted EPS expectations up.

We now expect to be slightly above $1.55 excluding the pot pie recall costs and the other items impacting comparability, which is obviously an increase from the $1.48 or so we were originally planning on the same basis.

The Consumer Foods progress that we're planning for is now more concentrated in the fourth quarter and into the first part of '09.

It's a little later that we thought originally and it mostly has to do with the execution of our pricing actions.

We continue to be convinced that there are substantial earnings growth opportunities and better brand management and more efficient operations, and that will be apparent in the numbers going forward.

While we cannot control inflation, we can control execution, and that is exactly what we are focused on and where I'm rolling up my sleeves and spending a significant amount of my own time to ensure we deliver our commitments.

Now I will turn it over to Andre.

Thanks very much, Gary, and good morning everyone.

I will hit on what I consider to be some important highlights.

The main areas I will touch on are operating trends, earnings guidance and capital items.

With respect to operating trends, a $0.50 quarter, including $0.03 or recall costs, is very strong.

I congratulate our Food Ingredients and our Trading and Merchandising teams on their outstanding results.

The operating profit performance for those businesses was excellent.

It defined our quarter and provided us the ability to take the year up.

Our Consumer Foods segment also had some bright spots with important brands and sizable cost savings initiatives and the production inefficiencies we saw earlier in the year improved this quarter.

All that is certainly good, however to reiterate Gary's points, we need to be more aggressive on pricing.

More aggressive price increases are planned for the balance of the fiscal year, most significantly in our fourth quarter.

Inflation in Consumer Foods was slightly north of 8%.

That is more severe than we had expected when we put our 2008 plans together.

And while we have a robust agenda of cost savings, it cannot offset 8% inflation.

That's simply too steep a hill to climb.

And while I'm on the topic of cost savings, I would like to go out of my way to say that we had $60 million of cost savings this quarter and that is pretty good fuel.

In a normal inflationary environment, that would be a net positive.

This quarter was obviously different, seeing as we had about $100 million of inflation which drove our profit shortfall in that segment.

Now moving on to SG&A, as you have heard us say before, SG&A expense reduction remains an important opportunity for the Company.

In this context, I'm not talking about advertising and promotion, but the other components of SG&A.

This quarter, overall SG&A at our operating segments as well as at corporate trended higher on a comparable basis, reflecting several factors but in no particular order they were the following.

Investments in systems and processes as we strengthen and advance continuous quality improvement initiatives and continue to install our SAP suite of systems.

Some negative impact on ForEx derivatives we hold at corporate which is only a timing issue and will reverse in quarters three and four.

And then incentive accruals expense related to the Trading and Merchandising performance you saw in the quarter.

Overhead SG&A expense reduction remains a key area of focus for us.

It is one of my top priorities as well as pricing.

Our back half will show significant deceleration in that component of our SG&A.

Moving onto earnings guidance, our current view is that EPS excluding items impacting comparability will be slightly above $1.55.

Now given our full year guidance, you can get a sense of what we are expecting in the back half.

Our Q1 was $0.34 excluding items impacting comparability, our Q2 was $0.53 excluding items impacting comparability; that is a subtotal of $0.87.

So given that the full-year is expected to be slightly above $1.55 on the same basis then we're thinking of back half altogether as something close to $0.70 excluding items impacting comparability.

That's a little less than current consensus.

As an aside, we see the third quarter as having slightly more EPS than the fourth quarter.

Building on comments I made during the Q1 call, we expect our Consumer Foods segment to show margin improvement in the back half of the fiscal year.

I don't expect margin improvement for Consumer Foods in Q3.

It will likely be in Q4 and as we enter fiscal 2009.

And while we expect to be at a much better run rate for Q4, I don't expect it to make Consumer Foods' fiscal 2008 full-year profit results ahead of or equal to last year's normalized operating profit dollars.

Another point I would like to make is that, as most of you know, we have gone into a fair amount of specificity in the past on our cost savings goals by year, by source, etc.

I want to say clearly and definitively that we have lots of productivity to work with, plenty of runway to advance our goals.

But the world has changed a fair amount since we articulated those goals.

We are finding that some of what we used to think as fixed opportunities may indeed be overshadowed by variable opportunities which change our plans for plant closures.

We are seeing our top line grow faster than we thought, which begs the issue of the role of sales and mix in our algorithm versus the role of cost savings and we're seeing inflation at more than twice what we thought last year at CAGNY when we shared our goals.

Because of the impact of inflation and pricing in our margin percentage, we need to instead focus on dollar goals.

We are very comfortable with our longer-term EPS goals, but the source of the EPS growth may end up being different, specifically meaning the contributions of our top line versus the contribution of cost savings.

So we need to avoid specifics in granularity on cost goals that we established under very different circumstances.

Over time, we know that we can narrow our margin percentage gap with our peer group and that goal is still relevant, but inflation and pricing movements in the market slow progress on that metric.

Now moving on to the balance sheet, focusing on working capital, our working capital position increased significantly compared with last year.

Our Trading and Merchandising operations require working capital to pursue opportunities, and you as you can see from the quarter's results there have been several profitable opportunities for them.

Combine that with the inflation-driven cost increase from many of our inventory components and you get significantly higher working capital, some of which was funded by commercial paper in this quarter.

It's normal for us to use a fair amount of working capital early in our year; typically it's in Q1 and Q2.

That's a function of our business mix and taking concentrated deliveries of items like potatoes, tomatoes, wheat and garlic and storing them after the harvest season.

But our overall working capital use this quarter was higher than that, normal -- higher normal due to cost inflation and the opportunities for our Trading and Merchandising segment.

Over time, working capital levels will come down.

To repeat a point I have made with many of you in the past, we wouldn't let our Trading and Merchandising group utilize the capital if they had not demonstrated an excellent track record of providing strong returns on the capital put to work within strict risk control parameters.

Our interest expense was $64 million this quarter, higher than last year because of the short-term debt used to finance our working capital requirements.

CapEx increased this quarter to $111 million from $66 million last year.

That increase relates to our plant efficiency and quality initiatives and some capacity expansion.

Our current thinking is that the year will now show approximately $475 million of CapEx which is slightly higher than thought earlier driven by innovation and quality investments.

Our dividends were $88 million, slightly below last year's amount due to the impact of our share repurchase program.

Our tax rate projection for the year is between 34 and 35%.

On another note, we received authorization from our Board to purchase another $500 million of our stock in the future.

We'll act on that as market conditions and operating cash flow allow.

Given our working capital use this quarter, free cash flow did not allow for share repurchases.

We will update you on this in the customary quarterly discussions we have.

Before I conclude, I will mention that we passed an important milestone this quarter when we converted our general ledger to SAP and updated to the newest version of [Order to Cash] in SAP.

That transition went very, very well and I thank all of our team for their efforts.

As you know from Gary's remarks earlier, I now have responsibility for IT.

I have an outstanding team handling it, led by our new CIO Garrett Shutee and I look forward to discussing additional progress in converting SAP into our plant network which begins in earnest in February.

With that, I will conclude my remarks, wish you a warm holiday season.

Thank you for your interest in ConAgra Foods.

And now, I will turn it over to the operator for questions and answers.

(OPERATOR INSTRUCTIONS) David Driscoll, Citi Investment Research.

Certainly congratulations on the quarter.

Andre, you made some prepared comments on cost savings and the plant closures, and I think that there is going to be a lot of questions that we're going to get today on this.

Can we get a little further into it?

Were you really trying to tell us that you want to back away from your targeted monetary goals for cost savings?

And if you're really saying that, I don't understand the rationale for why.

I will start the answer, and I think maybe get some support from Chris.

I think what I'm trying to say is, we have a long runway on costs and a long runway on productivity at ConAgra Foods.

That is not changing, but I think what we got ourselves into a little bit of trouble in a different environment is the fact that we got into fixed and variable components and corporate components, etc., etc., and that gives us therefore no flexibility to do what's right.

So I think we have a very long runway, I think productivity is still going to be one of our key drivers of our algorithm at ConAgra Foods.

But I do not want to keep getting trapped into this fixed and variable issue as we go forward.

If we just simplify it then from our view on the outside, you do whatever it is that you think is the right answer, but can you say that the aggregate between fixed and variable, however it ultimately determines, I don't know that I care, I just care that the aggregate dollar number actually turns out to be somewhere in the range of the prior expectation.

Is that still true?

I'm going to start with that.

Just to echo Andre's point, we do have a lot of productivity to work with.

You'll remember these figures.

In 2007, we generated about $275 million of cost savings to our cost of goods sold through the programs that you've heard us talk about.

Fixed cost efforts weren't really a big piece of that, this was really we're talking about variable.

If you look at the run rate this year, we've gotten $55 million in the first quarter and another 60 in the second.

That puts you at a year's run rate of $225 million.

So those comparisons are what they are.

Like I said, we have a lot of fuel to work with, but referencing the things that we've gone into in the past probably isn't helpful given that circumstances have changed.

And Dave, just to pile on one last comment, we're not backing off our commitment that we're going to get our margins up to the comparable peer group average over time in Consumer Foods.

So, that stays constant as well as our commitment to the algorithm of 8 to 10%.

I hope I have time for one more question.

Gary, just wanted to come and ask you a question here on the gold store initiative.

I noticed four categories that showed up on sales declines within your additional disclosure -- Kid Cuisine, Manwich, Orville and Pemmican.

Can you talk to us -- I'm kind of surprised to see really almost any category from gold store showing sales declines.

What are your thoughts on what's driving this?

Well, I would tell you, there many other categories.

Gold store initiative is doing extremely well.

There are a couple of particular issues, for instance on Manwich, that is just a pure timing issue.

We do have some issues that we are dealing through on our Pemmican business, but that is not really one of our priority brands.

I think the most important one is popcorn, and there we have been dealing with a one consumer issue on diacetyl and I don't want to go into a lot of detail on that, David.

But what I can tell you is that we have now removed the diacetyl flavoring from all of our popcorn and that the packaging, the marketing and the PR will all commence very shortly and we're confident that we're going to gradually win back sales in this category which is important to us because we have a 40-plus share.

So I would say net-net, gold store doing extremely well and maybe even more importantly a number of our priority brands did show consistent growth this quarter.

Eric Serotta, Merrill Lynch.

I wanted to follow-up on Dave's question a little bit.

Gary, you commented that you're not backing off on your commitment of getting to a consumer peer group operating margin over time.

If I remember correctly, the commitment was something like in excess of 250 basis points of gross margin -- of consumer operating margin expansion from -- I think it was end of fiscal '07 to fiscal 2010.

Are you backing away from that commitment and now saying it's doable but it won't be over the same time period?

The 250 basis points was the commitment from supply chain.

That was the primary ingredient to the overall operating margin expansion, which was targeted to go from where we projected '07 at around 16 to be 18 to 20 by the end of '010.

That is really -- that is what it would take for us to get to the peer group margins.

In an environment like what we are seeing now, pricing and cost change the percentage margin structure.

So we need to take some time and see how that plays out.

But to Gary's point, we are committed to narrowing that gap over time.

And I think it's also really important to remember, this is an industry issue.

The inflation that we have and we will be right in there with the peer group.

We will take the appropriate actions, just like they will.

Ken Goldman, Bear Stearns.

I am wondering -- it looks like a lot of your high expectations for the fourth quarter and for next year are built on pricing, but I'm wondering how much elasticity you're factoring in there.

We did not see volumes exactly shoot through the roof this quarter, even though your price gaps are probably a little wider than you want and even though trade promotion is probably higher than you want.

I am wondering why, Gary, you were very optimistic about the turnaround for Consumer Foods in the fourth quarter and next year.

What beyond the pricing is giving you such high hopes?

First of all, on pricing, of course we always need to keep our eyes open and watch the price gaps and competitive movement.

But given the continued high level of inflation and so much news and noise about the escalating input costs across almost all of the food commodities and materials and energy, it's a very, very different environment when we present our pricing actions.

Everybody, all competitors are under pressure, including private label.

So this makes us less nervous, much less nervous, about passing on some significant pricing.

It's just hard to argue with that logic.

But again back to your question, we have really three basic pieces that I would say are important to be positive about.

Why we think we will really start to generate some momentum, and that is much more effective marketing.

We're already seeing the effects of that.

Innovation, clearly we've demonstrated already this year, a couple of examples being our Cafe Steamers and our Panini's, and much more focused execution across our entire operation, whether that's focused selling or in our supply chain where we will be lapping some of the hiccups that we brought on ourselves by trying to do too much too quickly.

So I think when I put that all together, it gives me a high degree of confidence that we will start to see the Consumer Foods business move in the right direction, starting in the back and continuing into F '09.

Okay, and then just one more question.

The cash generated by Trading and Merchandising, how do you prioritize use of that?

Is it exclusively to go back into Consumer Foods?

And if so, is that more for marketing or more for R&D?

Just wondering how you think about that.

I think clearly what we've said in the past, Ken, is we will look at the highest ROI return projects, and we have those that come up through the Consumer side of the business, we -- through marketing and innovation excellence.

And then I would say that there's also -- we have been finding and you can see the results of that -- we have been finding a lot of opportunities to expand our Food Ingredients business led by one of our true diamond brands, and that would be Lamb Weston.

So we would look and prioritize our investments from overdelivery in that space against highest ROI project that this Corporation has to bring forward.

And right now, what is that?

Well, there's a couple of things.

One, we would look at innovation in terms of what we are seeing go forward.

I did say Lamb Weston as well, we have some things that we're doing both in the potato space and in the appetizer space there, and I think we will always look at, we've said this before, that share repurchase is also a lens in which we take a strong look at what the ROI is on that.

Christine McCracken, Cleveland Research.

Just to go back to the plant, the comments relative to your plant closures and your plans for the future, you did have obviously some management changes relative to supply chains over the past year.

When we look at your progress in terms of how that process has proceeded here over the last year, I guess relative to that, is it that you had the wrong plan from the beginning, or is it just a function that the market has actually changed relative to your needs for a plant?

Did you have the right plant?

Did you move maybe too quickly to redo kind of your entire supply chain and plant system, or is it that as you kind of pulled back the covers, you actually found more opportunity with different structures?

Maybe just provide a little color around that.

Christine, I think that is a very fair question and I would answer it two basic buckets.

We have talked about both before.

The first is, we truly did take on too much at once.

We got ahead of the headlights, ahead of our own headlights, put too many significant transformation projects on the board simultaneously and basically found when they reached a certain point that we had spread our resources too thinly.

So we clearly have gone back, rescoped and repaced and re-resourced those projects and we are now starting to make progress on each one of those.

The other big issue unfortunately, in the space of nine months we had two recalls and that became a major distraction for us.

It's tough to rebuild across the organization, and I have to be honest with you that it takes a lot of resources.

It's like student body left, student body right when you have issues like this.

And when we put that all together, I can tell you that that's behind us.

We are now moving forward.

We have much better resource plans in place and I am very, very confident that we're going to start to get on the path of productivity that we talked about.

These distractions, it has been a bit tough over the past months, but we now see a light at the end of the tunnel.

And with [Hardy], now you have kind of gone through a management change there, you have made a couple of additional or in the process of making a couple of additional management changes.

That takes time I would assume to settle in too.

Granted, you are moving some people internally.

Is it that you don't expect any disruption from all of these management changes?

Did you maybe have the wrong guys by bringing in outside people?

How do you look at your current management base, your senior managers, and are you comfortable with the people you have in place now, or should we expect more turnover?

I could tell you, Christine, I'm extremely comfortable.

And as it pertains to product supply, Greg Smith was -- we're very fortunate to be able to so smoothly transition.

Greg is extremely on top of virtually all of the issues, having been a very senior player in the product supply organization, and we truly won't miss a beat.

And Greg clearly is someone who has delivered outstanding results in his last role, particularly in transportation and warehousing.

We are in large part responsible for some of the significant hundreds of basis points of margin improvement that we have put on the board.

So we are very fortunate.

Greg has already hit the ground running.

There really is basically no transition time.

So we are very comfortable there.

And then across the board, I can tell you as I will reiterate again, one of the reasons I have as much confidence in our future is because of the senior management team I have.

Robert Moskow, Credit Suisse.

I won't take credit for this question because it came from a very smart client of mine, but I guess the question is, you're providing your traders with more capital, and therefore, you're taking on more risk.

But at the same time, you're also saying that you expect your trading business to normalize.

So I don't profess to understand the trading business as well as others, but if you're providing them with more capital, does that mean that you're also expecting higher returns going forward from those traders?

And should we expect higher returns going forward from those traders?

Let me answer that in a couple of ways.

First, as we have always said, we plan very conservatively.

So we don't have a crystal ball and look to replicate these terrific earnings, but the market will dictate what happens.

Second, we have extremely strong controls in place on this business so we're not rolling the dice, shooting for the moon.

We clearly have control mechanisms from a VAR -- value at risk standpoint -- daily, weekly, monthly, quarterly, and the control mechanisms go right up through Andre, our CFO.

So I can tell you, this is a business that has done exceedingly well in this environment, and I have Greg Heckman right here with me, maybe he can mention, give a little more color.

If I would just put a finer point on Andre's comment that you referred to about using additional working capital in this quarter, I think Andre's point was, you saw higher working capital, you also saw the returns for that.

So that is a decision that we can make very much in the short-term based on opportunity.

So that will go into our planning.

There are absolutely higher prices across the board which is part of it, but we also saw increased volume in the inventory and then to put through in our fertilizer and in our grain areas in our physical distribution businesses.

So that is really what we're talking to and we will size the working capital as well as the risk capital to ensure that we get appropriate risk-adjusted returns.

I would just end by saying, we expect to track the returns, but the capital will vary up-and-down based on the opportunities.

So it really isn't about a desire to take on more risk, it's a desire to earn more money for the Company.

Let me ask you about fertilizer.

What kind of assets do you have in fertilizer merchandising?

Do you have warehouses, do you have access to ports, do you have just excellent business connections and you can set up trades around the world?

What do you have?

We're one of the leading importers of liquid and dry fertilizers into North America.

We're one of the largest sourcers of basic fertilizer components.

We have one of the best wholesale distribution systems here in North America, which is a huge market and growing with the food and fuel convergence, as well as what we have seen going on with acres and yields.

So we have a very good distribution business, a very good position, and customer suppliers as well as people on the consuming side that are customers that we're helping connect the value chain for them.

You know, the UAP business that you guys sold several years ago just got sold again for maybe three or four times the original value.

Do you think that your assets in fertilizer are worth three or four times more than they were?

These are very different businesses.

Remember, UAP is primarily retail, they're in the seed business selling the technology there.

They're in the chemical and they're in the retail fertilizer.

We have a wholesale commodity fertilizer distribution business, so that's a very strong business, you really cannot compare the two.

Eric Katzman, Deutsche Bank.

You know, I think the comments that you made in the outlook on the consumer business are industry-wide and they're logical and they make sense, but the overwhelming kind of questions that I get actually revolve around the trading group to kind of somewhat follow up on Rob's questioning.

I guess it's really -- how do we kind of value -- or how do you suggest we value that business with the understanding that you're being cautious and logically conservative as to kind of what goes forward?

Maybe I'm asking -- I don't want to kind of point you into a sum of the parts analysis, but how do we kind of capitalize the value that's being created out of that business?

I don't know that we are in a position to craft some type of dialogue for external valuation of that business.

That's really going to have to be -- that would be beyond the scope of this discussion.

But what I will say is that, obviously that business creates earnings fuel that is, as Andre discussed earlier, it is real money.

It can be used for either innovation or A&P investments, it can also be used to buy back stock.

So that's about the extent of the comments I can offer on that right now.

Then maybe, what percentage of that business would you say kind of really acts as let's say an internal hedge on what you use in the other parts of the business, as opposed to being let's say a little bit more on the risky side?

Can you say that?

Let me start with one and (MULTIPLE SPEAKERS) I hope I am answering your question.

When you see the results for what we print externally for this segment, those are proprietary activities.

They may be trading the way you're thinking of and they may be merchandising they way you're thinking of it, there may be service revenues that we have with other providers who need help with procurement and we can play logistics or service role.

When we are doing things that require or that involve hedges for the core operations, the benefit of those activities are reflected in the segment results themselves.

So it's really -- there is not a need to take the results proper from trading and merchandising and then resegment them.

However, before I end this, I want to say that the intellectual capital we have, the expertise to advise on that certainly is sitting in the trade group and they are a very valuable resource.

Eric Serotta, Merrill Lynch.

I wanted to circle back on the comments, Gary, that you made about some strained or temporarily strained trade relationships as a result of some of the hiccups you had earlier in the quarter.

I guess, what gives you the confidence in your being able to get back to where you were before these two recalls and these other customer service issues by the end of this year?

I'm highly confident, one, because I'm very much on a regular basis in contact with our sales team who's on the front side of this with their customers as well as on customer calls myself.

And what it really boils down to is improved service.

We are already on that path.

We've made dramatic improvements here in the last month or two.

That is what really counts -- can we deliver what we have promised?

And we have corrected those situations.

So I see that really as a temporary blip.

I think they appreciate the innovation that we're bringing.

I think they appreciate the insights, the gold store initiatives, and now it's getting back to doing business the right way.

So that's really what gives us confidence and I think that's bearing out in the marketplace and we can already see that here in December.

You know I hate to beat a dead horse in terms of the Trading and Merchandising operations, but there does seem to be this disconnect between the continued very strong results that you're having, your statements that you're really not taking on significantly more risk, and yet your expectations for it to return to normalized levels of profitability over time.

You know, they just don't seem to logically add up that if you are taking on more risk you would expect higher returns over time.

I'm just wondering whether there is anything you could give in terms of additional disclosure as to capital employed in that business on a quarter to quarter basis, some measure of risk like value at risk.

I know it certainly has its problems associated with a simple VAR calculation, but is there any additional disclosure that you could give us that would help us measure the additional risk or the level of risk that you're taking versus the returns you're generating and the returns implied in your future guidance?

Eric, I do understand that this is a bit of a different kind of business.

However, I would tell you unequivocally, we're taking on no more risk.

And I know that's hard to conceptualize, but really it's much more about the upside with a very controlled downside.

We're not changing our VAR limits.

Those are looked at on a very, very granular basis every single day, every single hour basically.

And really, we start it at zero each quarter and it all depends on the inflation and the volatility.

And if we expect that to level off over time, then we expect the trading profits to potentially level off over time.

But I think the most important thing is, as hard as it is to explain, is that we plan conservatively because we don't have a crystal ball.

So we're just being conservative in that, and when the upside comes we'll take yet, but we are really very, very comfortable with the level of controls that we have in that business to limit the downside.

Andrew Lazar, Lehman Brothers.

Just a quick clarification, I want to make sure I understand the commentary of earlier on I think from Andre between the fixed and variable cost opportunity.

Was the point there that you have seen the topline opportunities better than you had initially anticipated, which impacts perhaps the number or type of facilities that you maybe had originally thought you would close, but there were different opportunities therefore on the variable side?

I think, clearly, one of the things that was said in that was also towards the end of my prepared statements.

I mentioned that we have to evaluate versus what we talked about at CAGNY how the top line because of our strong innovation and some of the pricing and the cost savings will play out.

But the items around fixed and variable had a lot to do with some of the work that actually Greg Smith had done previously in his transportation and logistics role where we're getting a lot of variable savings through freight and things like that, and that is starting to look a little different.

And therefore, we look at our footprint potentially different because of what we have been able to do through the freight side.

So I think that was more in line with where I was going there.

I'm curious on some of the new items and getting back to the Consumer side for a minute, how has the incrementality been for a lot of these new items?

Because we only get a certain look at the data that we get monthly and we could argue how good or not that really is.

But a lot of that has not looked great for sort of the U.S.

portfolio overall, yet I think you've pointed to a whole bunch of areas within this that have performed really well.

So is there an incrementality issue here, or has it really been just specific businesses, like you mentioned earlier, (inaudible) popcorn, that was not where you wanted it to be, that is kind of holding back the overall?

In other words, priority brand volume obviously or sales obviously decelerated from last quarter and I'm trying to get a sense of if everything is going really well with new items, what caused the deceleration?

First of all, we did grow from about 3% volume and we have a number of our key priority brands that are growing, brands like Healthy Choice and Marie Callender's and PAM, Egg Beaters and so on.

So we have a number of brands growing in the right direction.

We do have a significant amount of incrementality.

I would say in Q2, we might estimate somewhere in the neighborhood of $50 million, and that is really suppressed a bit by our allocation on Cafe Steamers.

That business is on fire and, again, well over forecast.

We are building the inventory and about to be able to go off of that allocation.

But I would tell you that we are holding ourselves to that incrementality standard, both margins and volume, and I am confident in that pipeline.

I think the thing to recognize in Q2 that kept the volume, adjusted volume, at only 3% were two big pieces.

One was the popcorn I talked about, and we have the plans in place to gradually build that back.

And the other was a very seasonal business.

Swiss Miss cocoa, we had a very warm fall.

I can tell you, we have made it all back and more already on that business in December.

Andrew, one point I just want to make, and I apologize, but just to be clear, on my comments, let's not lose sight of the fact that this organization, we talked about closure of approximately in wave one of about 12 plants.

We're still going to close and have closed about or have cited about 10 to be closed.

So we're not leaving that, we're not departing from that task as well.

I just want to make sure people understand that.

We have closed about 10 plants.

Thank you for that.

And then last quick thing is, I'm just curious, this is more industrywide I think, and I might just be completely naive in how this all works, but given we don't know where input cost inflation is going to go and the industry as a whole has been kind of playing catch-up with respect to pricing because I don't think anyone thought we would be where we are today.

Is there a way you and the industry can think about, why wouldn't folks price ahead of where they thought things might be in this environment, which is very volatile, if you have to sort of bring some of that back through promotional spending and such, you can do so, but at least the industry would be starting to try and get ahead of it rather than always playing catch-up.

And maybe that's just a naive comment and it just doesn't work that way, but I'm just curious on your thoughts there.

I would not say that is a naive comment.

It's a very logical question.

And I can tell you unequivocally, I'm not happy with our lack of price realization in the first half of this year.

So let's make no bones about that.

I have gotten very directly involved with our consumer units in the past few months and I can tell you clearly that our pricing execution will be much different and clearly evident to you starting in Q3, it will be much more aggressive, it will be much more forward-looking.

Clearly, it has to be based on input costs, otherwise we have a very difficult story to tell with our customers.

But, we're going to do a far better job than we have in the past and next time we talk I think you will see the numbers.

Pablo Zuanic, JP Morgan.

I hope I can be allowed to ask a few questions like everybody else, so please ask the operator not to cut me off.

First of all, why are corporate expenses up so much?

That's number one, [quarter], year-on-year.

Number two, Gary, when we look over pricing and we look at (inaudible) portfolio, just give us an idea in terms of in which type of product types you're having a better time getting pricing through, what lines that you are not being able to increase pricing, or is it really just an issue across the portfolio?

I have those two questions and then a follow-up if I may, please.

Let me start on the pricing.

You mentioned frozen, Pablo?

Well, yes, frozen is like a third of your portfolio, so I'm trying to understand, where is it that you are getting pricing and where is it that's lagging so we can track.

We want to anticipate what is going to happen.

So what should we be looking at, or is it really just an issue across the portfolio?

I can tell you some categories off the top of my head where we're getting pricing, clearly in frozen.

Now, frozen is made up of a lot of different pieces, but it's clearly evident in Healthy Choice, it's clearly evident in Marie Callender's.

We have some issues on Banquet in our poultry business, our bulk poultry business, but Kid Cuisine as well.

So across the frozen portfolio, it's very evident.

In Egg Beaters, it's very clear.

In PAM, it's very clear.

So right off the top of my head, I can tell you for certain, we have seen the pricing there.

You will see it across more of our brands and categories as we get into Q3 and it will be much more evident as we get into Q4.

Let me answer the SG&A question that you had, Pablo.

As I said in my prepared remarks, we made three key areas of investments in this quarter, quality and supply chain, and we strongly believe that those investments will improve our service levels that we've talked about as being critical for us and driving our top line.

The other piece was system investments which are critical to providing the dashboards that our operators need to drive this business, and that's around the SAP investment.

The other one was a timing issue around a foreign exchange derivative charge we took and that will actually turn around in Q3 and Q4.

And the last piece I told you, which was around the Trading and Merchandising incentives, given the kind of quarter, the strong quarter and the strong half of the year that they have had.

So those are the drivers.

And as I said, we will see that turn around, turn itself around, in the back half of this year, our growth in SG&A.

Thanks, and just a last one if I may, Gary.

It's great that you have a person in charge of Trading and Merchandising there and it's great that you can answer questions and give us greater disclosure.

You know, Bunge, ADM, when they report and their (inaudible) moves up, the market isn't ready for that and the stock goes up.

You guys today, you're not getting credit for that, and perhaps with better disclosure, you will get it.

So I guess my question is, just give us a sense in the EBIT this quarter, how much was it really trading, how much was it logistic service and storage?

Just give us a sense there.

And within trading, how much fertilizers, energy grains, whatever you can provide there would be useful.

And just a separate question, Gary, more for you.

When I look at the [scanner] data, and we know that it has its limitations, in general most companies will report sales growth 1 to 3 points above the scanner data.

In the first quarter, you guys were about 7 points above, and this last quarter, you were about 5 points above.

So I'm wondering, is ConAgra doing something better than other people at Wal-Mart, C-stores and other channels, or is it that you're just starting from a very low base?

Clarity on both points would help, and thank you for taking the questions.

Sure, Pablo, I will answer the second one and then I'm going to turn it over to Greg on the trading.

I would tell you that we do have a pretty significant opportunity that we're capitalizing on outside of the measured channels.

So those business channels are doing extremely well and we believe that will continue.

Greg, do you want to take the trading issue?

Sure.

With the widespread inflation that you have seen across agriculture, energy and fertilizer, which kind of links between the two for us, we saw good performance really across our entire portfolio.

If you think about the absolute price change and the price volatility and the acreage increases, we saw volume increase and we saw needs for our customers on the supply and consuming side to manage their risk, and that was good for the portfolio overall.

We saw the biggest increase of course in our physical businesses of grain and fertilizer and our feed ingredients, but we also saw it in the balance of the portfolio as well.

Energy was the only part of the portfolio that was not up year-over-year but it still had very strong results.

So it was a very balanced performance across a very diversified portfolio.

[Jim Lane], [Tri-Asset] Management.

I had a couple of questions.

First, it's clear that management has done a much better job than predecessors at creating stability in the earnings stream.

The portfolio of earnings streams has been much more consistent than if we looked back three or four years.

But I guess when we look at the successes this year and the mix of earnings, it's ironic that earnings estimates are higher than they were at the beginning of the year but the stock price is lower.

And I was wondering if you could speak to maybe that management's and the Board's urgency with regards to making hard decisions.

Does perhaps the company need to be much, much larger in order to create shareholder value, given how much things have admittedly changed in the marketplace?

Or perhaps, is there more value creation potential if Trading and Merchandising were part of another entity or perhaps a separate entity?

Jim I won't comment on that last speculation, but what I will tell you is that there are no big acquisitions planned, and I think that's prudent for us at this time clearly because you need to have a very, very solid foundation.

We don't want to do something until we clearly have our own blocking and tackling and house in order.

We've made lots of progress.

We still have a ways to go to be that really finely-tuned operating company.

That is really where we are at today.

So we're still in the early stages.

And I would also tell you that it's clear to is, we don't want to walk away from it.

We know that we have some work to do that resides in the Consumer Foods business.

Those plans are in place now.

We will start to see improvement in the back half of this year and clearly into next year, but I don't want to disregard the contributions that we are getting from the Trading and Merchandising group.

That's clear.

But maybe even more importantly, the one that we just don't talk about enough is our billion-dollar -- this quarter -- billion dollars worth of Food and Ingredients business which has performed exceedingly well over the last few years on a consistent basis, and in particular our Lamb Weston business is just an absolute rock-solid outstanding performing business.

Top line, bottom-line momentum, return on invested capital, any way you look at it -- innovation, customer service -- that is such a terrific business and that whole Food and Ingredients portfolio has performed extremely well.

That has also helped us to have that consistency of earnings.

So we have two of the three pieces working extremely well.

We have the plans in place.

The execution is going to be rock-solid as we go forward on Consumer.

We have a lot of good things happening that in terms of building our foundation.

Our systems are getting better with SAP, our store shelves are looking better.

We are continuing to make progress on all those fronts.

So I think that's really what the story is.

Thank you.

My question is in the context of the positives and the negatives of the year, and more in light of the fact that the capital markets have not rewarded the Company or the stock for that increased stability.

Just a follow-on question a couple of what other people have asked.

On the questions regarding pricing and costs, and I was wondering if you could fill us in a little bit more on what has changed internally at ConAgra, such that there is strong credibility to the comments regarding a more accurate pricing initiatives with regards to inflation?

Because while everyone seems to be a bit behind the curve, I do think we're a bit further behind the curve with regards to our product portfolio.

So what granularly is being done at the Company different today than say was done six months ago such that we're not surprised in another six months?

Jim, you're talking specific to pricing?

Correct.

Okay.

Specific to pricing, I can tell you that one thing that is different is, our wiring is far better.

These are muscles that we have had to build.

We learned a bit the hard way as the inflation just roared on us.

We got a bit of a late start, but I can tell you clearly that we're in the mode now where we're going to make up for that here as we get in the back half.

Clearly another piece is my direct involvement.

It is clearly on my radar screen as a top priority, and I mean at a granular level.

And I think those two things -- the awareness of the organization, the wiring between the different pieces, say between procurement, the operating groups and the selling organization -- it's just stamped on everybody's forehead now as a top priority.

And the proof will be in the pudding.

And as I've said, we will see some evidence of that in Q3 and we'll see much more of that in Q4.

David Driscoll, Citi Investment Research.

Two questions for you guys.

The first one, Gary, is on Banquet.

Given the problems that you had on the pot pie business there, do you think that those negative issues with consumers on the recall, did it carry over into other aspects of that brand, just noting that that is the single-largest frozen brand you have?

So I think there should be probably a great deal of sensitivity to how that brand performs under a negative scenario, like a salmonella recall.

Actually no rub-off whatsoever.

Clearly, that pulled our numbers for Banquet down in the quarter, and you can see that in the scanner data, but we have some excellent plans in place on Banquet, and the core business, the core components of the business, are performing extremely well.

We have 100% of our distribution back on pot pies already, which says something about the customers' thoughts about the Banquet portfolio.

And everything basically is back on the shelf or will be in very short order.

That's helpful.

Second question, Andre, is on commodity hedging.

Can you talk to us about how you've hedged the Consumer Foods business?

I want to make a guess here that says that, given how fast this rate of inflation is moving, that you really did not have much in the way of commodity hedges in place for that business.

Is that accurate, and/or what's the percentage you have hedged for the balance of the year?

David, I will say what I said last quarter.

We don't comment publicly on our hedging strategy in our organization.

Nothing, zero comments whatsoever?

Correct.

Okay, thank you.

Ken Goldman, Bear Stearns.

Marketing and R&D -- question is, how do you see that?

Is it up significantly in the back half of the year?

And I guess tied to that, you mentioned that share repurchase is an option right now, and I'm wondering really why.

Given that a lot of investors and even yourselves seem to want to increase R&D and marketing over the long-term, why would you not put that cash back toward those long-term investment drivers, rather than give it back to shareholders right now?

Ken, I can't promise you that you will see increased spending on A&P.

I think we're at the right levels.

What I can tell you is it is much more effective and efficient than it has been in the past.

We've taken a lot of nonworking dollars out.

Clearly, that is a very good thing.

The return on investment mentality that we have against our marketing efforts is a very different approach for us.

And you also have to take a look when I talk about the level of investment.

Last year in Q4, we made huge jumps on how much we spent on A&P, and that was because we had the opportunity to do so, some of that afforded by the trading business.

We are not planning on that.

So the numbers I think are going to be what the numbers are.

But we feel very, very good about the marketing efforts and even better about our innovation.

Again, it's about the effectiveness and I can tell you, clearly I can't open the kimono on all of the innovations that we've got in the pipeline, but it is extremely robust and it will be up to us to introduce them in a measured enough way that we make sure that the execution is perfect and flawless.

And your question on share repurchase, the way I would answer that is, I think we have, to Gary's point, in our algorithm in the back half the year, we have all of the things that he has mentioned on innovation and effective marketing spending already -- our plans are already there.

So we do believe that our shares where they are currently priced today offer us a very attractive return on investment if we were to go out and get some.

So that's where we're at.

And we will always balance against the long-term opportunities we have internally and we're never going to short change when we have strong potential internally.

Christine McCracken, Cleveland Research.

Just a quick follow-up on your fertilizer and ag businesses.

If you look at these fertilizer markets as an example, they are on fire right now.

You mentioned that in your comments.

What's to say that they won't continue to outperform?

Clearly, you have to balance your cost versus demand, but looking ahead at this coming year and where commodity prices are specifically, you should have one of the biggest crops barring any unforeseen weather-related event that we have seen in a long time, particularly probably the demand for fertilizer given this type of commodity environment is going to be massive.

Why wouldn't you forecast ongoing strong performance from that group?

I would just say, we absolutely take into account not only all of the external factors, but as well as the internal factors when we put that forecast together.

I think the way you want to think about it, you look in the portfolio, you have good diversification across ag and energy and fertilizer and we look at what we believe those base earnings can be while not counting on the opportunistic type earnings that that portfolio allows us.

So I think that's really how you have to think about it.

Robert Moskow, Credit Suisse.

Andre, you said that in wave one, you're almost complete closing down plants.

I always thought that wave two would have another round of closures of plants because you guys had said that your manufacturing footprint was over -- it was too big.

Are you saying anything now about wave two?

Has anything changed regarding your thoughts on wave two?

We have not said -- we didn't say then and we're not saying anything now relative to wave two.

I think one of the things we're doing is re-assessing that fixed versus variable element.

And I think as Greg, having been in the role in the transportation side is now stepping into the broader supply chain role, we are really reevaluating what we need to do.

And with innovation coming and different innovation on different platforms, I think it's important for us to sort of relook at our network and determine where we need to be.

So we have not announced anything in wave two and we don't plan to any time shortly.

It's really all about total delivered cost, so we're going to take a look.

Greg's charge is to look across the whole footprint and deliver the savings, but it's across total delivered cost, total landed cost.

Eric Katzman, Deutsche Bank.

Gary, I guess at CAGNY last year, you took the growth rates up on expectations longer-term from 7 to 9 to 8 to 10, and if I'm understanding it correctly, your message today is that the Company given the inflation environment needs to look at dollar profits and dollar sales and dollar margin as opposed to percentages.

If the trading group is let's say at a normalized rate and you get a few percentage points from share repo, given your cash flow and balance sheet strength, does that imply that you need to get kind a 4 to 5% kind of sales growth from everything else food-related and kind of an equal percentage of EBIT growth?

Is that kind of how we should think about it?

Eric, I would tell you that we are still committed to the 8 to 10, so that is most important, and it is likely that we will probably take our top line number up.

I don't want to commit to an exact number on that right now.

We will revisit at CAGNY, but you are on the right track.

Good, I understand it, thank you.

Jeff Cantor, UBS O'Connor.

Kind of a two-part question, and Greg, I would like your thoughts on this.

How does your team think about grain trading and merchandising in light of this energy bill?

Clearly, investors in Bunge and ADM see it as a money machine, that we're in a different world.

And I was wondering if you think about this in kind of the same way, that we're in a different world and it's not a bad world to be in from grain trading and merchandising?

I guess I would agree with you that things have definitely changed with kind of the convergence of food and fuel.

It has changed on kind of the breadth and amount of inflation that is affecting and it has affected the volatility.

So we do think that we will see this commodity cycle for awhile.

We're also seeing global growth, which is also contributing to that.

So it's a little bit of a perfect storm, and I think that is why you do hear all of the consumer products companies as well talking about the depth and breadth of inflation across all of the ag, energy, transportation packaging.

That's why they're talking about inflation, that's why they're talking about pricing, because it truly is a different day.

So taking that, if I could just build on that and ask Gary a question, so how do you look at, Gary, as -- everybody looks at your Consumer Foods results in isolation, right, but your EBIT is -- and your cash flows are what your cash flows are.

And clearly, you have flexibility to take these cash flows from this new world that Greg is living in to reinvest behind Consumer Foods.

So, when you say 8% inflation, that excludes this natural hedge.

So do you feel like you have flexibility that a lot of other packaged foods companies don't have to reinvest behind the business?

How do you think about it, just from a top-down perspective?

I do think about it that way, Jeff.

However, given the volatility, it's hard to pin Greg down on exactly what he's going to deliver next quarter.

So we really have to play it by ear.

And I think a really good example is last year in Q4 as I talked about a little while ago where we saw the opportunity, it was very clear and we were able to act quickly and make some very good investments in our Consumer business.

But we always have to remember that we're going to spend the money on an ROI basis, not just because we have a lot of money.

We've got to have good places to put that money.

But clearly, we do believe that with the occasional upsides provided by trading that we do have some opportunities to reinvest in the other parts of our business.

This concludes our question and answer session.

Mr.

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

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're available for discussions.

We thank you very much for your interest in our company and happy holidays.

Happy holidays, see you next year.

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

Thank you again for attending and have a good day.