康尼格拉食品 (CAG) 2009 Q1 法說會逐字稿

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

Our 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'm here with Andre Hawaux, our CFO; Rob Sharpe, who has also recently added the title of President of our Commercial Segment, to his existing duties as EVP of External Affairs, and Chris Klinefelter, VP of Investor Relations.

Over the next few minutes, Andre and I will provide our views about the strategic, operating and financial aspects of the quarter.

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 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 will 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 http/investor.ConAgra foods.com under the Financial Reports & Filings link and then choosing Non-GAAP Reconciliations.

Now I will turn it back over to Gary.

Thanks, Chris.

As our investors know, it was a difficult quarter for us.

While comparable EPS of $0.27 turned out to be a little better than we indicated in our preannouncement a couple of weeks ago, there are several shortfalls that have our focus.

While we have a lot to talk about today on the quarter and the year, I want to emphasize two things at the outset.

First, the core topline performance of our brands is solid, and second we have a clear view on the full-year outlook.

I also want you to know that no one is more focused than me on eliminating the first-quarter difficulties.

We know what the issues were, and we're addressing them.

Before discussing our business performance and outlook, I will spend just a minute on the preannouncement.

As you know, the Lehman Brothers back to school conference falls right in the middle of our first-quarter accounting close process each year.

Because we only have preliminary closing numbers at that time, it always creates a bit of a challenge for us.

The preliminary closing numbers available to us immediately prior to the conference indicated two things -- one, that product costs were higher than our latest estimates; and two, that when taken in context with some recent market performance in the consumer segment, this could adversely impact our year and also have caused us to finish a bit short of our guidance for the quarter.

Attending the conference without a clear view of the impact on the year would have generated more speculation than we thought prudent.

As a result, we felt we had no choice but to cancel our participation, but at the same time give investors directional insight into what we were seeing.

Andre will elaborate further on this in a minute, as well as address why it is something that will not happen again.

I do want to apologize to Andrew Lazar, [Jane Gelfin] and all the Lehman team who had to change plans because of our actions, and I also apologize to the investors that we were supposed to meet with at the conference.

Now I would like to move onto more substantive discussion about the underlying business trends.

Consumer Foods sales were good at 9% on a comparable basis, and volumes were about flat on that same basis.

At the same time, significant inflation and adverse mix negatively impacted operating profit.

That said, it does not diminish my confidence that we can grow net sales in a way that preserves the vitality of our brands and over time will result in strong operating profit growth.

We took substantial pricing last March, and this was the first time we have seen the full quarterly impact of that pricing.

In addition, we believe our volume this quarter was likely favorably impacted 1 to 2 points by some wholesale customers buying ahead of our August 24 price increases.

I would say for the most part we were pleased with our topline performance, except for frozen where we have seen increasing promotion depth from our two biggest competitors.

Given the dramatic inflation of input costs on our frozen portfolio in the last year, our strategy has been to make sure that on average the inflation is covered by increases in net realized price together with supply chain savings.

But late in the quarter, it became clear that our principal competitors are pursuing share very aggressively through deeper promotion.

This activity hurt our frozen business from a volume and mix standpoint, particularly in the latter part of Q1 and will continue to do so for part of Q2.

Let me assure you that we have an effective game plan to combat the unacceptable share losses in this business.

One of the brightest spots in our consumer topline performance this quarter was Healthy Choice Asian Steamers.

These are restaurant quality Asian flavored dishes like Sweet Sesame Chicken that use the same steaming technology as our core Cafe Steamers.

According to IRI, Cafe Steamers was the biggest new food or beverage product introduction during the first half of calendar 2008.

Quite frankly, they exceed anything else in the freezer case from a quality standpoint.

Asian steamers have an early run-rate that indicates they may outpace the core Cafe Steamers.

I will also mention Healthy Choice Fresh Mixers, which are shipping as we speak.

They are portable, shelf stable meals so you can take them to work and keep them at your desk.

You do not need a refrigerator or a freezer.

They are easy to prepare in the microwave, and best of all they taste great with products like Ziti with Meat Sauce and Sesame Teriyaki Chicken.

The packaging and the in-store displays for Fresh Mixers look fantastic.

They will be in full national distribution soon, and we expect that they will be another big hit.

Moving from sales to profits, Consumer Foods profits were down about 6% versus last year on a comparable basis, which is unacceptable.

Early in the first quarter, we saw a ramp-up of inflation across a significant portion of our inventory.

Overall inflation in Consumer Foods was $190 million or about 15% for the quarter.

When we saw this inflation early in the quarter, we immediately adjusted the price increases that we had already planned for late August.

But given the nature of the customer leadtimes, those increases could not take effect until the very end of the quarter.

We also saw big negative cost variances on Wesson oil as we started our first quarter.

We had priced Wesson aggressively to reflect this fact.

Because Wesson's price gap on the shelf ended up being greater than we expected, it created a larger than expected volume hit, which decreased our absorption and our operating profit this quarter.

We have lowered the price of Wesson to correspond with the rapid decline in vegetable oil costs.

Wesson was our number one issue on Consumer Foods profitability.

Banquet frozen dinners were also a big issue for us as inflation outstripped our ability to raise prices in the value segment.

We're in the process of revamping the Banquet line to reflect the margin realities in this segment but keeping true to Banquet's essence of providing so much for so little.

For the quarter the inflation impact could not be offset by our prior price increases, even though our cost-saving efforts are significantly ahead of schedule with the benefits for the quarter ahead of our expectations.

Let me turn to some comments on volume.

As I said, our estimate is that 1 to 2 points of consumers' first-quarter volume came from wholesalers buying ahead of the August price increases.

So that will likely take some volume from our second quarter.

As I also said, due to competitive pressures, we will continue to see frozen volume losses for part of the quarter.

In addition, we have also eliminated some very unprofitable Wesson volume that we had in last year's second quarter, and in popcorn we're making a fairly significant shift at some customers from Act II to Orville Redenbacher's, which is a great mix result, but will also result in a bit of a volume hit.

Net net we expect to see this show up as manageable volume degradation for the rest of the fiscal year.

We considered that in forming our outlook for the full year.

We are intentionally making some trade-offs on tonnage against better margins in some products.

At the same time, our merchandising and innovation plans for the rest of the fiscal year should drive mix improvement as the year progresses, and I will talk about that full year in a minute.

Now let me turn to our Commercial Foods business, which we used to call food and ingredients.

This segment continues to do very well quarter after quarter, year after year.

Sales were up well into double digits, and profits showed a healthy rise.

The Lamb Weston potato operations continue to find ways to grow with new and existing customers, as well as delivering new efficiencies.

Foot traffic in the quick service restaurants has been fairly solid given the economic climate for consumers, and french fries are as popular as ever.

ConAgra Mills continues to improve sales and profits by being nimble in response to changes in wheat costs and by improving mix while focusing on cost control.

They were impacted this quarter by short-term pressures in key wheat markets, but managed through it well on the back of strong operating effectiveness.

In addition, our Gilroy business showed sales progress against a softer quarter last year.

As you have heard us say before, while we forecast a good year, we do not expect to see the same kind of dramatic profit growth from this segment in 2009 as we saw last year.

This is largely due to the tough comparison we face in the third quarter resulting from last year's opportunistic actions in a volatile wheat market that we do not expect to repeat.

Before I turn it over to Andre, I want to offer my perspective on the balance of the year.

Given the difficult market conditions in the first quarter, we have completed a total reassessment of the outlook for our consumer business.

Rather than simply making top-down adjustments to our existing forecast, Andre and I have built a new outlook from the bottom up.

During this process we looked at individual brands.

We assess current performance, their bill of materials and expected inflation.

We analyzed existing and planned price levels in each brand's committed trade programs.

We considered our current and projected SG&A trends and supply chain savings performance, both of which are quite good.

We then brought this together and made appropriate adjustments to provide a real-time balance and granular outlook for the business.

After this reassessment and adjusting for the reality of our first quarter, we're taking our full-year earnings estimate to something slightly above $1.50 per share, excluding comparability items.

There are several key factors that give me confidence in the quality of this outlook.

First, our pricing is largely in place.

Between the significant increases in March and further increases in adjustments last month, we are now at the right place on list price.

Secondly, we're implementing the right merchandising programs to drive better mix in our business.

In a measured reaction to marketplace conditions, we're deploying high return merchandising programs that will be done at the right depth to deliver more to the bottom line without compromising brand positioning.

You'll also see tangible results of improved marketing effectiveness.

Keep an eye out for this for our comprehensive 360 degree program, marketing program on fresh mixers, and the first broad-based Banquet support in many years as very clear examples.

Third, our key innovation is working with a lot more on the way.

Early reads on our recent introductions, Healthy Choice Asian Steamers and Healthy Choice Fresh Mixers, indicate both will be major wins.

And you will see several more strong introductions in the back half of fiscal '09 with more in development for fiscal 2010 and beyond.

Fourth, our supply chain organization is clearly in a position to overdeliver on its savings target for the year.

Fifth, the rate of input cost inflation is moderating, driven by declines in natural gas, wheat, corn and edible oils.

Notwithstanding likely pressure on some key input items like steel for our canning operations, the aggregate quarter to quarter input cost increases should be at a slower rate.

This is true even after considering the carried-in hedge losses from the first quarter that will be applied to consumer during the rest of the year.

It is important to remember that a decrease in the cost of a commodity helps us on all of our purchases for that commodity, not just the portion of our needs that we had covered with hedges.

Sixth, our commercial operations are continuing to perform very well.

And lastly, the capital allocation process related to the trading group sale is now finalized.

Andre will comment more on that in a moment.

When I look at these key factors, together with the relative stability in most of our portfolio, I see a clear path to the earnings outlook we have provided.

I continue to feel good about our future.

Andre?

Thanks, Gary, and good morning, everyone.

I want to focus my comments in three principal areas.

Q1 challenges and accomplishments I want to discuss capital items for our first quarter, and I want to touch upon our full-year 2009 outlook.

As Gary mentioned, we encountered some challenges in reconciling our input costs in Consumer Foods.

We were neither challenged intellectually nor technically.

It simply came down to time.

As you know for the past year and a half, we have been implementing SAP beginning with the general ledger and working through our entire supply chain.

With each implementation cycle, we add the new systems and processes at discrete plants.

However, we are also adding functionality that has broader implications such as purchasing and treasury.

These implementations have gone very well.

They have been on time, on budget with no significant interruptions to our business, and most importantly, the system changes have been transparent to our external customers and suppliers.

However, these projects require a very key focus on change management and people learning new processes.

As we implement new functionality, we expect that the organization will have some learning curves around the process changes related to these new capabilities.

Q1 fiscal year 2009 was the first time we utilized certain functionality related to some technical inventory costing matters.

While the software worked fine, the analysis and the review of the results require more time because we were using tools and processes.

What we told you on September 2 was our best information at that time.

We would have preferred to fully complete our close before announcing anything, but our scheduled participation in the Lehman Brothers back to school conference made that impossible.

Ultimately, as we completed our close process, we found that some of our early reads on the product costs required adjusting.

So net net what happened?

We were early in our close process.

We were using new systems.

Our preliminary costs were higher than our latest estimates, and we needed time to reconcile, time we simply did not have before going to the conference.

We're disappointed this happened; however, the software worked properly, the close process and controls worked properly, and we identified several cost improvements that will reduce our cycle time as we move forward.

I want to be very clear with our investors -- this will not be an issue going forward.

So our SAP journey continue.

It continues to provide us more granularity into our cost and margin and improves the way we do things.

We're bringing another four plants live later this month, and the remaining releases we have scheduled this year will add another eight plants.

This will bring the total to 17 plants live on SAP by the end of fiscal year 2009, which represents about half of our consumer supply chain network.

Now turning to some accomplishments in the quarter.

We completed the sale of the CTG Group on June 23, 2008.

We received proceeds of approximately $2.8 billion net of transaction costs and subject to post-closing adjustments, which included before tax proceeds of $2.3 billion in cash and $550 million in face value of pick notes.

We immediately deployed the proceeds in the following way -- $900 million share repurchase via an accelerated share repurchase.

Approximately 38.4 million shares were acquired during the quarter.

We've paid down commercial paper balances of $1.1 billion, and we reduced our long-term debt by $40 million.

Other notable accomplishments in the quarter were our supply chain savings were in the neighborhood of $70 million this quarter, which gives us confidence that we were on track to overdeliver on our $225 million target for the year.

On the SG&A front, we continue to make progress and believe we will deliver cost savings in excess of $25 million for fiscal year 2009.

With respect to capital items, our interest expense was $50 million this year versus $55 million a year ago, driven by interest income on our pick notes.

Dividends paid during the quarter totaled $92 million versus $89 million last year due to an increase in our dividend during the second quarter last year.

For the quarter our CapEx was $106 million.

We are on track to deliver our full-year CapEx of $475 million.

We are on track with respect to our working capital targets, which called for us to be at least cash neutral for the year.

We had a slight year-over-year increase driven by inventory due to inflation and receivables due to our topline sales increases.

Despite this higher balance, our cash conversion cycle did improve over the quarter.

We saw positive trends versus our year-end working capital balances, driven by the tax payable related to our trading group divestiture.

As you can see from our balance sheet, our current installment of long-term debt has increased by roughly $300 million year-over-year.

This is not new debt, but rather a reclassification because of the put option on our 2027 bond as an exercise period that falls within the next 12 months.

Our tax rate was 38% for the quarter, slightly higher than expected versus our ongoing rate of 35%, excluding items impacting comparability.

This was exclusively due to higher effective rates on the gain of sale of the Pemmican business, as well as our restructuring costs.

Now with respect to hedging activities, I believe our release today and our prerelease described clearly where we have moved to in this area.

We have also included an example of the new approach in our Q&A document that accompanies the release.

It is question number 17.

There are a few important points I want to make on the topic.

The hedge gains and losses called out as items impacting comparability are only temporarily in corporate expenses.

The hedge amounts are reclassified to the segment's cost of sales at the same time the underlying commodity impacts our costs.

So a hedge loss flows back into our segment earnings, which is offset by lower than planned input costs, and the opposite is true when we have a hedge gain.

It will be offset by higher than planned input costs.

Thus, the net result of our hedged input costs are reflected in our base earnings.

So to be clear, this is really just about timing.

Meaning when it goes into the earnings base, not if it goes into the earnings base.

I also know many of you have questions on what our hedge gains or losses were in the first quarter of fiscal year 2008.

For total ConAgra we had a gain of $4.6 million last fiscal year first quarter.

Consumer had 3.5 of that gain, and the commercial segment had $1.1 million of that gain.

I want to close with comments about our full-year 2009 outlook.

As Gary mentioned, we have undertaken a full bottoms-up review, which gives us a high degree of confidence in our ability to deliver EPS slightly above $1.50.

This confidence is driven by several factors.

One, our CPG proceeds have been deployed according to plan.

Our SG&A savings are on track.

We're confident that our supply chain organization will overdeliver on their savings target.

Our pricing plan is in place, and where appropriate we're putting in place merchandising programs to drive better mix.

We expect the rate of input inflation to moderate as the year continues.

We have a 53rd week, and the icing on top is our innovation agenda, which is working hard with a lot more on the way.

So with that in place, we are confident in our ability to deliver our new guidance.

That concludes our formal remarks.

I want to thank you for your interest in ConAgra Foods.

With that, I will turn it over to the operator to begin the Q&A portion of the session.

Operator?

(OPERATOR INSTRUCTIONS).

David Driscoll, Citi Investment Research.

Certainly I wish I wanted to spend my time talking about the Consumer Foods improvements in revenues, but Gary, I just want to go back to key parts of your initial opening comment.

The appearance from the outside is that ConAgra does not have control over its business as that September 2 press release really was very inaccurate.

Here is the question -- how often does management get financial updates, and why did this cost error only creep up on you at the end of August?

What can you say to address some of these concerns?

Well, let me take most of that -- most of your question, David.

Let's talk about the first part of that, which I believe how often does management get information on the business.

And I would say that depending on the nature of that information, it runs the gamut from daily updates on our volume performance to weekly updates on things such as share, customer performance, etc.

We closed the books every period, and we go through an extensive period review with senior management around all of our components of our business.

We have what we call a balance scorecard that starts with the topline and how we perform brand by brand all the way to what innovation is doing for us, how we are spending our A&P dollars to how we are spending our G&A.

So the processes are very thorough and complete.

Let me be clear on what happened in the quarter and what you saw transpire before all of you what I would probably call sort of live TV in that we had to go to a conference.

We were in the midst of our close as I said, and our close process has preliminary numbers, and then all of our folks go through an exercise where we reconcile our trial balances, we reconcile our subsystems.

We're in the process of doing that, and we were operating with a brand-new system in SAP, and we are operating with four legacy cost systems.

The first quarter is also the most intricate relative to cost accounting because you revalue your standards from the previous year to your new year.

And there is different functionality in our systems both in SAP and the other systems, and it just took us a long-time to kind of reconcile.

Had we not had to go to that conference, we would have not -- nobody would have seen us sort of go through this process, and we would have been fine as we turned out.

So again, our apologies to the folks that we had to disappoint through that process, but there is nothing inherent in how we run our business that lacks control or that seems that we don't know what we're doing.

Can I ask one follow-up?

Certainly.

The question -- this one definitely is for you, Andre, is really all about the commodity costs, and I do -- the next most frequent question I'm getting is really what your confidence level is on your commodity cost forecast?

What is the level of hedging that you have?

Frankly, this is something that I think in the fourth quarter the commodities were above your forecast.

Now again in the first quarter, it has happened again.

What can you say to us about this situation, and how can you get it under maybe a bit better control?

Okay.

Well, let me explain.

David, you have asked this question a lot, and I have historically moved -- evaded your question.

So let me try to answer it as best as I can.

One is I think the challenge has been the actual volatility that we have seen in commodity markets that we are probably not the only ones that have seen that.

So in the first quarter, our inflation in the Consumer Foods space was about 15%.

We see that moderating for the back half of the year, and right now our total inflation called for the year is approximately between 11% and 12%.

So I think we have a pretty good handle on that, but the market has moved up fairly significantly.

Now let me answer your question on hedging, which historically I have not talked about.

I think there is a way to sort of for me to get the readers or the listeners to understand how we think about hedging.

One is you have to understand what our total buy is on the consumer side, which is roughly about $4.8 billion.

Now we cannot hedge every single bit of those commodities.

So right now we would say about 60% to 70% of that buy can actually be hedged.

And our coverage positions different very much by commodity.

And today we're covered on some commodities for fiscal year '09 up to a point of about 80%, and with some commodities, we're covered at about 20%.

And that is kind of the range.

A lot of that depends on our procurement specialist determining where they believe the markets are going and what positions they need to take to protect our plan and our P&L.

So that is kind of the way we think about it without getting into specific coverage positions by commodity that we have.

But I would say we're depending on the commodity.

We're covered anywhere between 80% down to a low of 20%.

Does that help?

Ann Gurkin, Davenport.

A couple of questions.

I wanted to start with respect to spending to support your brands.

Are you changing how you spend to support brands, either the amount you are spending or the target, say, against a healthy trend?

If you could comment on that.

And then secondly, do you think you can get this Consumer Foods business back to midteens operating margins?

Is that still a doable target over the next several years, or can you comment on that as well?

I would tell you that we certainly are making some adjustments in how we spend our dollars.

We are spending more dollars than a year ago, but we are adjusting to the realities of the marketplace.

You will see us spend a bit more on what we call value positioning, and I think the best example of that you will see I believe starting next week, the first and a comprehensive marketing support against one of our very biggest brands, Banquet, and that clearly is going to talk about the tagline so much for so little.

You're going to see more of our dollars go straight to our customer marketing, so in-store marketing at our key accounts.

We're working and we clearly are spending more money on our key brands, particularly in the healthy space, Healthy Choice.

The Healthy Choice Asian Steamers is being supported strongly, as well as our new introduction that is just hitting the shelves, Healthy Choice Fresh Mixers, which goes into the shelf stable aisle, and it's going to be a very big win.

You will start to see the support on that in about a month or so.

So we are making some adjustments.

We're also accelerating in some cases our innovation, particularly in some of our strongest brands like Healthy Choice, Marie Callender, etc.

But I think your second question went to margins.

And we are continuing to say that over time we will continue to close that gap with the peer group.

Andrew Lazar, Lehman Brothers.

Thanks for your comments very earlier on the conference and such.

I am just curious if we think about the $190 million in cost increases that you spoke of in the quarter, looking at the benefits that fully 9% pricing would have given you, it would seem like that would go a long way to covering if not more than covering those cost increases.

I'm trying to get a sense of the significant kind of gross margin degradation and just trying to reconcile those, two.

Andrew, I think the best way to think about it is, many of our brands had very good profit performance.

The issue is really isolated to two businesses, two big businesses -- Wesson oil where we got upside-down on our cost and pricing, and on Banquet, which is a big value segment where the inflation just was too great for us to price big enough and fast enough.

We're making big adjustments in both of those.

But if we were just even to a year ago on those two businesses in terms of operating profit, we would have been at almost 10% for Consumer Foods.

So it really was isolated.

It was not across the board.

Alright.

And then one thing you have talked about kind of overdelivering on productivity for the year, still expecting a kind of manageable trade-off with respect to volume versus I know what you talked about as being also very conservative assumptions last quarter on that front, it would seem like some of that is actually more positive rather than negative.

So I want to make sure I understand the driving force around sort of the full-year earnings revision so that I'm totally clear on that.

Yes, again I will just reiterate that the frozen competitive situation is probably the single biggest issue.

We saw a dramatic acceleration of price discounting at the end of Q1 and continuing into Q2.

We had priced what we believe to be very responsibly and expected a rational market.

That has not happened.

Obviously we need to do some course correcting.

It is not all going to be in the form of price discounting, but we do need to in a measured way get more competitive.

We're also accelerating some investments in our frozen business.

So I would say that is the number one factor, along with the significant increase in inflation that has hit us again in the biggest place in Wesson oil.

Christine McCracken, Cleveland Research.

Just a few points of clarification.

First, on Banquet, I guess I'm a little bit confused on exactly where you thought the cost inflation is.

Is that a function of the mix of the chicken in that box, or was it more cooking and oil related?

There were many elements of inflation on Banquet.

That is a value segment, and we have always had pretty attractive price points.

So that transition was a significant amount of inflation whether it was protein, wheat on our pasta, oil on our chicken products.

That just -- it was much bigger than we had anticipated.

We're making significant adjustments in our product mix in the way we market that product.

And that you will start -- we will start to see benefits of that in Q2, but it really was a significant inflation on a brand that has always been marketed as a value brand.

And it probably was not on the chicken side given the deflation we saw during the quarter?

It was largely -- the number one commodity was probably oil that affected that franchise.

Number two was probably pasta with wheat, and third was, in fact, some of the proteins did also rise.

And then just in terms of frozen, we have seen the retailers really start to focus a lot on prepared foods.

I'm wondering how much of that competitive activity might be a function of the sector really trying to take a more defensive stance relative to that shift?

It seems like consumers are really drawn toward a fresher product similar to the steamer-type products that you guys have come out with.

But it seems like it has really put a big strain on the industry.

I'm wondering is that what is happening that is creating this environment that your competitors are reacting to and, therefore, changing maybe the long-term focus of that sector, and will that precipitate I guess your change in focus?

No, that is absolutely not the case.

Every indicator we have from both customers and consumers is that frozen is an extremely vibrant category, a growth category.

And what has really happened is pricing dynamics in terms of market share one key competitor never moved off of the old merchandising price points, and the other key competitor after losing a good bit of share finally overreacted with some what I would call nuclear pricing.

And we have gotten into the old-fashioned merchandising price war.

It is very unfortunate.

We hope and expect that rationality will return to that segment because that is not a good way to manage that business.

Innovation is what drives that category, and we believe that we're taking a measured response but really the driver is going to be innovation.

It is a very, very vibrant category.

Eric Katzman, Deutsche Bank.

I guess as just kind of a follow-up to the frozen issue because I know that is such an important business for you, in terms of your outlook for the full year, you are obviously expecting a lot in the second half.

How much -- what kind of assumption are you making that those two big players -- I assume you're referring to Nestle and Heinz -- have -- what kind of assumption are you making that they become a bit more rational?

And then was there some kind of, let's say, negative manufacturing situation where you were kind of planning on more Healthy Choice, but in fact, the consumer kind of went towards the more value-oriented product and you actually had to ramp up on Banquet instead?

Well, Eric, clearly Banquet will do well in an environment like this, and we are fixing Banquet as Banquet in terms of its margin structure.

But that is not really the case.

It is not really the same consumer that buys in that premium segment.

Brands like Healthy Choice does not really crossover much to Banquet.

No, I would say we believe that as in many instances in many categories that after everybody steps back and takes a deep breath, rationality will return.

So we believe this is a short-term issue, and that longer-term, medium-term the category will return to being driven by innovation.

Okay.

And then just two quick follow-ups.

One, if you could just kind of mention the situation with Peter Pan and how that business is doing?

And then the equity affiliates line, it is not an area that we normally focus on, but it was much lower than I had expected and just maybe some view on the outlook there.

Is that going to be a tough year for you on that line item?

First, on Peter Pan, we're very pleased with the business.

It is rebounding almost back to where it was from a market share standpoint, and the profitability is returning as well.

I will turn the equity line over to Andre.

Eric, the issue we had there really is all attributable to a joint venture, Lamb Weston/Meijer, which is our specialty potato joint venture.

In Europe they had a very tough first quarter related to both inflation on that side, as well as pricing in the marketplace.

Rob is on the call as well.

I would say that I think probably for the full-year that joint venture year on year, it had record profits last year just to put that in perspective, and the crop years and the crop cycles tend to go every other year kind of in Europe.

So we see ourselves with some inflation issues, and with the crop where it is, I think we're going to have a struggle with pricing.

So we will still have good results there, but I don't know that they will equate to the record year we had last year.

Rob, I don't know if you want to --

No, I think that is right.

Basically in that business the dynamics and the sourcing of potatoes in Europe are just different than they are here.

If you get into a time period where there are lots of cheap potatoes, you have a lot of small competitors who will take advantage of that and force prices down in the marketplace.

There will be some continuing impact of that in this quarter we expect, but for Q3 and Q4 we will be back on track.

Terry Bivens, JPMorgan.

A couple of questions.

One on the volume front.

I guess you guys changed some of the reporting there, but do we have a number for what the domestic Consumer Foods business would have looked like volume-wise ex the international?

We're now reporting that segment as it is, as you see it.

I don't know that we have the international as a separate volume today.

Andre, do you have anything on that?

Terry, I don't have that.

We could follow-up with you, though, after the call.

We could break that out.

I think if my memory serves me right, Canada was relatively flat year on year volumetrically.

And I think Mexico we were up a little bit, but I don't have those numbers at my disposal because of the way we now collapse those.

But we will get that back to you, Terry.

Robert Moskow, Credit Suisse.

Can I just understand the opening comments again?

Are you guys saying that the profit warning for first quarter that you thought was going to result because your input costs were higher than you thought, and then a couple of weeks later you realize that your input costs really were not that high, and therefore, it really was not a profit warning for first quarter.

Is that correct?

Well, I think that is fair.

What we saw in our preliminary cost reads through our cost accounting systems was very different than our estimates.

And then absent the time to be able to go back and reconcile and find the issues through the four legacy systems and the new SAP system, we believe that our costs were out of line versus our estimates.

It turned out had we been able to go through a normal close like we normally do without having to get all the external attention, we would have found out that we were essentially pretty much on track, ex the two things that Gary has called out relative to frozen and Wesson, which did impact our quarter.

But those two issues had nothing to do with our call.

That was truly purely an early pre-reconciliation call that we had to make because we were going to the conference.

Eric Serotta, Merrill Lynch.

First, a quick follow-up question on the Banquet pricing and competitive situation.

And then another follow-up.

First, on Banquet, have you seen competition increase from the midtier or upper tier players and product lines bring sort of merchandise price points down closer to where you get to Banquet, or has it really been the value-oriented price lines where -- or the value-oriented lines where competition got even steeper?

And was it coming from like-for-like or coming from above, I guess is what I'm asking?

And there probably -- it is hard to say exactly, Eric.

There are probably some when some of the price points get so deep like they did late in the first quarter, there's probably some impact from that.

But then you also have the traditional value competitors that have basically kept their price points.

I would tell you that Banquet volume was good.

It is just that we have got to get our margin structure more in line given the intensity of the inflation.

And that is what we're working on, and we will have some significant changes as we move into the back half of the year.

[Ed Reisch], Soleil Securities.

I wanted to take advantage real quickly of having a potato expert on the line or on the call.

If you look at the PPI for Russett potatoes, it is up quite a bit.

You know, I think in May you had a 23% increase year-over-year, June very high number around 90%.

Is it safe to say that that is not impacting ConAgra too nearly that extent?

I think the best way to think about it and the way we look at it is pretty similar to our consumer business is, at the core you have got to either price or drive more volume or find cost saves to get volume inflation.

When we look at the overall inflation for our commercial businesses, and I'm going to put ConAgra Mills aside for a second, we're calling the year in the double-digit range, but it is not going to be as severe as consumer saw in the first quarter.

So at the core, there is potato inflation.

I think all our customers understand it, and we have been pretty successful in pricing accordingly.

I would just amplify that Lamb Weston probably does as good a job in terms of managing their cost and their revenue as any operating unit that I have seen in any company that I have been in.

So they have got a very, very strong operating system and gives us great confidence that we will have another great year at Lamb.

The results have been terrific.

One follow-up if I could.

Any update -- I think a quarter or two ago, Gary, you had mentioned in a couple of categories were private-label as your primary competition, their pricing had been lagging.

Has that improved a little bit in those categories?

Absolutely.

We have to respond to the marketplace, and we have course-corrected.

A couple of examples would be brands like a PAM and an Egg Beaters or Reddi-wip where our primary competition is private-label.

And there we have prudently closed the price gap, and we're starting to see the benefit from that.

Terry Bivens, JPMorgan.

Just back on that volume question before I was so abruptly terminated there, if you look at Nielsen numbers, granted they have limited utility, but they show volume for a period roughly corresponding to the quarter, roughly about down six indicating you are making up a good deal of that in unmeasured channels.

Can you kind of give us an idea what is working there volume-wise in those unmeasured channels?

Yes, Terry, your numbers are pretty accurate.

Clearly we see a shift.

The biggest upside for us is club where we are, I would say, a bit underdeveloped, and we are really starting to accelerate our progress there.

Plus, we have got a good strong partnership with Wal-Mart.

So we are seeing consumers move out of traditional grocery to some degree.

It is still a very important segment for us.

But our club and our mass business like a Target is very, very strong.

Eric Serotta, Merrill Lynch.

Andre, you expressed a lot of confidence that the first-quarter issue in terms of timing of closing the books and the back to school conference was behind you, and this was not going to be an issue going forward.

At the same time, you then went on to say I think four more plants coming live on SAP I think it was this month or this quarter, an 8 by the end of the fiscal year.

You know, needless to say, this is a company that has had its share of execution issues and implementing SAP and bringing plants online.

Could you or Gary comment on your overall degree of confidence that the wiring in Gary's words in the past is in place to make sure that we do not have similar types of shortfalls and disappointments over the coming quarters?

Let me address that straight on, Eric.

I'm very, very confident this was not -- I guess I apologize for not being clear to the listeners.

This was not an SAP issue.

This was a timing issue.

Had we had time anywhere between another day or two days to properly reconcile our systems like we do in every close, nobody would have seen us go through this process.

We went through it fairly publicly because we had to go to this conference.

So I've got all the confidence in the world that SAP is doing what we said it was going to do.

Again, Q1 was slightly trickier because of the re-eval issues that you have in your systems.

But we brought nine plants up-to-date and have not had any issues.

And what also gives me confidence is our service levels as a result of our new systems are very strong, and our cost savings we continue to deliver our cost savings.

So, quite frankly, it was not an issue with our systems.

It was really a timing issue that we had to play out our close in a public venue, which we never ever do.

And Eric, I would just add to that, we also learned it was a very isolated issue that we have learned from, and therefore, it will not be repeated again.

We now know a lot more than we did before.

But I would amplify Andre's issue.

It was purely timing.

We would have -- we did -- we figured it out a few days right after that.

David Driscoll, Citi Investment Research.

Gary, could you make some comments on price elasticity that you expect from the latest price increases?

And second and also related to volumes, the private-label threat, last conference call you did mention that you were monitoring PAM and Reddi-wip, I think, to name two of them.

But again, kind of big picture, this is the question on how well this portfolio will do in the current environment.

So again, price elasticities in private-label.

Yes, David, clearly we have built a significant amount of elasticity into our outlook.

We have also taken a number of measures to mitigate that.

But we have told you we're going to make some intentional trade-offs on tonnage where it just does not make sense for us to repeat on some programs or products that were too low margin, particularly given the inflation we have gotten.

We have course-corrected on some of our products like a PAM, a Reddi-wip, an Egg Beaters and clearly on Wesson we have as well.

But given all that, built into our outlook, we are still making very good profits on a go-forward basis with all of that built in.

Eric Katzman, Deutsche Bank.

Related to Dave's question, Gary, it's a very difficult environment, and lord knows you inherited a tough situation.

Given the consumer really is moving kind of pretty noticeably away from home to in-home, do you think that the organization in terms of overall volume should be doing better, or is it that you need to get out in front on more innovation across a greater percentage of the line to drive the business even with that kind of tailwind at retail?

How do you think about that?

That is a very good question, and I think a lot about that issue.

We all do here.

I would tell you that when you have got this much inflation, there are certain segments of our business that are very difficult to pass all of that increase on without making some significant changes.

And Banquet is a great example of that, and that is where we are being extremely aggressive in terms of our sense of urgency to really revamp and rebuild that business so that we can still live up to our mantra of so much for so little.

But that takes some effort, but that will be in place in the latter half of the year.

You do need to make some course corrections as I talked about on some of the price gaps and understand when you get into a very difficult economic environment like this, some of those value brands, and cooking oil is a great example of it, we got ahead of our skis because the intensity of the inflation, and when that absolute price gap gets too big, it just drives people to private-label.

So we recognize that.

But in the end, it's really about three things.

Focused selling, and I believe we're making great strides in store and I would ask you to take a look as our Fresh Mixers, Healthy Choice Fresh Mixers get in-store over the next month, take a look at that as an example.

It is more effective marketing, more high impact marketing, and there I will go back to watch and listen and look around you.

Next week, an example, Banquet, a brand that we have probably not advertised in decades, you will see that.

And most importantly, innovation.

And we have hit very big on our Asian Steamers as a follow-up to our Cafe Steamers on Healthy Choice.

Our Healthy Choice Fresh Mixers is in very early stages, but off to an excellent start.

And we have a significant amount of big innovation coming throughout the rest of this year as well as beyond.

So those three elements are really what I believe will bend the trend ultimately on volume.

But right now we're doing what is right for the environment.

Todd Duvick, Bank of America Securities.

I wanted to ask a bit on the cash flow side.

Last year seemed to be an unusual year, if my numbers are correct, in terms of working capital build.

There was a pretty significant investment in working capital.

And so I'm wondering if you can provide us some guidance on what you're expecting to see cash flow wise this year?

Is it going to be more like your fiscal year 2007?

And what you intend to use your cash flow for in terms of share repurchases, acquisitions, basically your priorities?

Alright.

Well, let me try to go through that.

I think as you rightly pointed out 2008 was a challenging year relative to cash flow for a couple of reasons.

One is the volatility in the commodity inflation that we saw in a lot of our areas both on the commercial side and the consumer side with even the same kind of levels of inventory, if you will, we saw significantly higher rates, and therefore, we had a lot of working capital that we've put up on our books.

I think we will see that, and what we have said is that on the working capital side, we see that as neutral to slightly positive meaning a source of cash for us.

I talked about our CapEx being about $475 million, which would be slightly -- running slightly ahead of our depreciation numbers.

Relative to what, we're going to use and deploy our excess cash for I think we're still evaluating that.

As you know, our Board approved $900 million in share repurchase.

We have actually exhausted that approval and have that in the marketplace today with our ASR.

We have paid down opportunistically $40 million of our long-term debt, and we did take out all our commercial paper balances after the CTG transaction closed.

So right now it is sort of we are going through and evaluating what we would use our excess cash for.

We have nothing that is at the top of the agenda right now.

We do not have any share authorized approval.

We will be talking to our Board about it going forward, but right now we're still in a phase where we are evaluating where we would go with that.

That is helpful.

Thank you.

Robert Moskow, Credit Suisse.

Just a follow-up to Ann Gurkin's question.

I did not quite here you if you said whether your plan for consumer marketing advertising increases this year.

Has anything changed there, and what is your plan for how much more you intend to spend?

I would imagine that being in front of consumers at a time of tougher macroeconomic conditions is going to be very important, and in order for them to buy you in the grocery store, they have got to know that your brands are out there.

So are you increasing, or has anything changed?

We are increasing our marketing investment.

Clearly it is important to make sure that our brands are strong.

So you will see us on the plus side on our A&P spend.

At double-digit?

I'm not going to comment specifically on that detail.

There are no further questions.

Mr.

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

Thank you.

This concludes our conference call.

And 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, and we thank you for your interest in our Company.

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

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