康尼格拉食品 (CAG) 2009 Q3 法說會逐字稿

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

This program is being recorded.

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

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

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

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

Please go ahead, Mr.

Rodkin.

Thank you.

Good morning.

This is Gary Rodkin and I'm here with John Gehring, our CFO; Andre Hawaux, President of our Consumer Foods segment; Rob Sharpe, President of our Commercial segment and EVP of external affairs; and Chris Klinefelter, the VP of investor relations.

Over the next few minutes John 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'll refer you to the documents we file 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 in either the earnings press release on or on our website under the "Financial Reports and Filings" link and then choosing non-GAAP reconciliations.

Now I'll turn it back over to Gary.

Thanks, Chris, and good morning, everyone.

I'm pleased to reconfirm our earnings outlook for fiscal 2009 of slightly above $1.50 per share on a comparable basis.

The third quarter's overall EPS performance of $0.43, as reported, and $0.40 on a comparable basis came in a little stronger-than-expected, particularly in Consumer Foods, and we believe that our stronger foundation in that segment, along with what we're seeing internally and in the market supports our full-year outlook.

We saw increasing strength in our Consumer Foods business this quarter, as we expected, with sales and comparable operating profits ahead of last year.

We're turning the corner in this business.

The steps we've taken the past few years are starting to pay off, inflation is moderating, and we expect year-over-year operating profit growth to be stronger in Q4.

At the same time, our Commercial businesses are delivering solid performance.

The segment was below year-ago amounts only because of the tough comparison with last year's third quarter, when we posted exceptionally high profits driven by volatile weak markets.

We're also continuing to see good, controllable cost performance across the Company, both in our supply chain and on SG&A efficiencies, and this is benefiting both segments.

Let me go through some of the segment highlights of the quarter.

Consumer Foods had a good quarter.

Our business outside of measured channels continues to be very strong.

Those channels are the fastest growing segments and now are about half of our business.

And while we've grown share in measured channels for some brands, like Chef Boyardee, Hebrew National and Snack Pack Pudding, we expect our share performance in the mainstream grocery channel to improve across a broader range of brands over the next few quarters.

Overall Consumer Food sales were up 5% on a comparable basis, with about 10% positive contribution from price and mix, volume down about 4%, and a 1% negative impact from foreign exchange.

Operating profit was up 12%, as reported, and 6% on a comparable basis.

The majority of our brands showed good net sales increases.

We've had a major focus on fixing our mix in areas like popcorn and food service.

This has eliminated some very low margin volume that, frankly, was not a good use of our resources.

Peter Pan had to lap high volumes from its reintroduction last year and also had to deal with a soft category due to the Peanut Corporation of America recall noise.

Third-quarter volumes are not a major concern because we're making real progress on our fundamental mix and momentum.

I do expect to see sequentially improving volume trends as the impact of these moves dissipates across fiscal 2010.

More importantly, we're pleased with a 5% net sales increase and a 6% comparable profit growth despite absorbing moderating but still significant inflation and increasing our marketing support by more than 10%.

Our mix is improving, we have fundamentally improved our marketing effectiveness, our supply chain savings are strong and our SG&A efficiencies are making a real difference, so let's move on to some Consumer Foods highlights.

Competitive promotion remains fierce in the frozen category but we're making important headway with our promotional adjustments, innovation and transformational work in this segment.

For those of you who attended Cagney you're familiar with our frozen foods transformation.

It includes a number of elements that build on our terrific equities and that are exactly on trend with consumers.

Leading the list are significant improvements to Healthy Choice, including the launch of a fresh new look, a completely new line of all natural entrees and product enhancements across a great deal of the overall product line.

We'll be supporting this relaunch with marketing that hits on all fronts.

Watch for national TV advertising breaking on April 2nd featuring a celebrity spokesperson for Healthy Choice who epitomizes the new target for the brand.

When you see it I am certain you'll agree this campaign is a great example of how we've raised our marketing game.

Next is the extension of our proprietary steaming platform to Marie Callender's in the form of great tasting pasta al dentes, chef-inspired Italian cuisine that provides restaurant quality in the convenience of frozen food.

The last major leg of the frozen transformation is the renovation of our Banquet dinner line to improve quality and assortment while at the same time allowing us to realize reasonable margins at key price points.

It's a combination of renovating some existing SKUs, introducing new items and eliminating some low margin items.

In all situations we expect consumers to see these Banquet changes as product improvements and not quality compromises.

These are key moves designed to deliver an economical dinner, strengthening Banquet's great connection to the value-oriented consumer in today's environment.

This is a win for consumer, customers and us.

I'm very happy with the execution of this multifaceted and dramatic transformation of our frozen business and the early reception by customers has been terrific.

It's evidence that the heavy lifting we've done in the last years is paying off through our improved coordination and execution capabilities.

In the grocery operations Chef Boyardee had very good growth in the quarter, with new advertising and high-quality merchandising events.

We dramatically improved Reddi-wip performance and capitalized on opportunities with Snack Pack Pudding, and we also posted solid growth for key brands, like Hunt's tomatoes, Hebrew National and Manwich.

In addition, Healthy Choice fresh mixers are being supported by break-through advertising and have been well received by consumers.

Feedback on the product is very good.

We increased our marketing investment for our grocery operations this quarter and have high expectations for this important area for our Company going forward.

Next we saw healthy growth in both the top and bottom line.

A big portion of this came from our deliberate mix shift from ACT II to Orville Redenbacher's.

That type of shift will slow unit growth volume performance but help expand margins profitability.

Most of our snack brands showed sales growth.

Some of the most noteworthy performances were from Orville Redenbacher's, David seeds, Crunch 'n Munch, as well as our private label of store brands fruit bars and grain bars.

Slim Jim posted modest sales growth.

We also started shipping an exciting new snack product shortly after quarter end.

I'm talking about Alexia Premium Crunchy Snacks, which are Waffle Fries and Onion Strips made from all-natural potatoes and onions.

These items utilize natural seasonings, contain no preservatives and have 25% less fat than regular potato chips.

They are the real thing.

We started with a limited roll out of the product at the beginning of March and plan to have the product in national distribution in August.

At Cagney we talked about how excited we are about this product line and once you try them I'm sure you'll agree.

Many of our other brands continue to perform well.

Value-conscious consumers are helping drive a number of these brands, like Blue Bonnet, LaChoy and Van Camp's.

We've been working through our inventory of high-priced oil with Wesson in the first three quarters and that issue is behind us in our fourth quarter.

I mentioned earlier that Consumer Foods profits were up 6% versus last year on a comparable basis, consistent with the directional improvement we indicated to you earlier in the year, and that happened as we incurred significant inflation and as we increased marketing investment.

Our A&P spend was up this quarter by more than $10 million, as we invested behind the frozen transformation launch and continued to support a number of our other brands with ad campaigns and shopper marketing.

Given the media markets we're finding ways to get more bang for our buck, so while we're increasing our investment the marketplace impact should be magnified even more a we go forward by the buying efficiencies made possible by the current media environment.

As I said earlier, we have an exciting new campaign for Healthy Choice coming out soon and I expect our overall A&P spend to be up modestly versus last year on a full-year basis.

Good things continue to happen on the supply chain side.

Our cost savings efforts stayed well ahead of schedule at $80 million for the quarter, consistent with our revised expectations and above our original plans.

It now looks like savings in our Consumer Foods supply chain will be close to $300 million this year.

John will say more on this in a minute.

As expected, inflation was heavy this quarter across a significant portion of our inventory, although it was not as severe as earlier in our fiscal year.

Overall inflation in Consumer Foods was $140 million for the quarter, in the range of 10% increase from our comparable cost-of-goods base a year ago.

Although some popular news coverage has talked about significant deflation of underlying costs that simply isn't true for the aggregate of our inputs versus the prior-year costs.

In fact, several important inputs for us like cooking oil, grain and packaging increased at significant double-digit rates.

As we indicated before, we don't see meaningful aggregate deflation in the near future.

I want to make clear, though, that supply chain efficiencies is not the only fuel we have to fight inflation.

Our focus on SG&A has also played an important roll, although the dollars are not as large as in the supply chain.

Before I conclude my remarks on the Consumer Foods segment I want to thank Andre Hawaux and his team for their impact on the results for this business.

As most of you know, Andre was recently appointed as President of the Consumer Foods segment and the resulting increased operating rigor and focus on day-to-day execution is showing.

The transition has been seemless and his leadership making a big difference in the segment and in how our organization is wired for growth.

This is just the start of the right path for this segment and we look forward to discussing continued progress over the next few quarters.

Thanks again, Andre.

The Commercial segment delivered good results despite difficult conditions for food service customers created by the economy.

While this creates headwind for the segment I remain confident in these businesses and their positioning with customers.

I expect them to navigate this storm better than their competition.

As I said at Cagney, our expectation is that these businesses will generate less as a percentage of our growth going forward than they have in recent years, and part of this is due to our high expectations for the upside in our Consumer Foods segment and part of it is the current economic pressure from the food service channel.

Sales were up, but profits were down slightly against last year, which was expected due to the very difficult lap in the milling operations that we mentioned to you last quarter.

That being said, ConAgra Mills continued to have very strong results, just not quite as exceptional as the third quarter last year.

Lamb Weston's growth slowed, reflecting the underlying business environment for restaurants, particularly casual and fine dining, but they did post modest profit growth along with good top-line growth.

We continue to believe that reasonably-solid traffic in QSRs, coupled with the compelling profitability of french fries to operators, remains an opportunity for this business.

Our Gilroy Food and Flavors business also felt the slowdown in orders from the food service and industrial customer base.

I continue to believe that we'll benefit from the work that we've done in building the foundation for the Company, even in this environment.

I believe our Consumer Foods segment is stronger than at any time in the past three years.

Based on our outlook for moderating inflation, which has been a severe headwind for eight quarters now, as well as our expectations for strong supply chain savings, SG&A efficiencies, better marketing, a robust innovation platform, and a great stable of value brands that are a perfect fit with many consumers in today's economy we're in a very good position for growth.

At the same time, I know our Commercial Food businesses are strong and will continue to provide a stable foundation.

Our operating strength in both segments, together with the strength of our balance sheet, puts us in good shape.

In closing I want to reinforce that we're comfortable with our full-year outlook of EPS slightly above $1.50, excluding items impacting comparability, and current dynamics for this quarter support that view.

And to reiterate what we shared with you at Cagney, we have strengthened our foundation, and expect healthy EPS growth in fiscal 2010.

At this point I 'l turn it over to John, who will provide you with some additional details.

John?

Thanks, Gary, and good morning, everyone.

I'm going to focus my comments on four areas this morning, as follows: Third-quarter performance highlights; comparability matters; capital items; and I'll close with some brief comments on our outlook.

First, with respect to our four -- our third-quarter results, I won't repeat all of Gary's points but I would like to highlight a few key items.

First and foremost, we are gaining traction in our Consumer Foods business.

Successful innovation, improved merchandising and promotion, improving inflation trends, strong progress on cost control, and a stable of brands with strong value appeal are driving better results and give us confidence about the future, despite a difficult economic environment.

In addition, the Commercial Foods business continue to perform well.

While the food service environment is challenging, we are confident in the ability of our management teams to sustain strong operating performance.

With respect to our cost control, our efforts both in our supply chain operations and our selling, general and administrative functions.

reflect our zero overhead growth, or (inaudible) culture.

Our people are embracing this culture and we are seeing real benefits.

In addition, our supply chain cost savings continue to come in ahead of target and we are now on track to deliver supply chain savings of approximately $300 million for the full year.

This is up from our previous estimate of approximately $250 million.

This increase in savings is the result of stronger performance on cost savings projects, as well as an accelerated pace of identifying new savings projects across all elements of our supply chain.

Now, I'd like to move on to my second topic, items impacting comparability.

First on hedging, in the third quarter we had approximately $46 million of benefit in corporate expense, reflecting the allocation of hedge losses from corporate to the operating segments, and we had $11 million of additional net hedge losses incurred and reported in corporate expense during the quarter.

These net to a $0.05 benefit in corporate expense, which we treat as a comparability item.

Second, we incurred expense of approximately $25 million, or $0.03 per diluted share, relate to a coverage dispute with one of our insurance carriers.

As we have previously disclosed, we are involved in a number of lawsuits and claims related to our February 2007 peanut butter recall.

We have an insurance policy with Lexington Insurance Company, a subsidiary of AIG, and we believe this policy covers a very large part of the associated losses.

However, during the third quarter a coverage dispute developed with the carrier and we initiated litigation to enforce the policy.

As a result of the dispute and in accordance with the accounting rules covering such disputes, we took a $25 million, or 3% diluted share charge in the quarter.

We are vigorously pursuing a sizable recovery from the carrier in this matter.

And to be clear, the charge was generated by the coverage dispute with the carrier.

There has been no material change in the underlying litigation related to our recall.

Lastly, on comparability items we had a benefit of approximately $0.01 per diluted share related to net favorable tax adjustments in the quarter.

Now on to capital items for the quarter.

First on working capital, our working capital levels at the end of the third quarter are higher than the prior year, due princely to higher input costs.

However, our key cash conversion metrics, such as accounts receivable, days outstanding, inventory days on hand and days payable outstanding are improving and we continue to expect to achieve our full-year working capital targets, which will be essentially cash neutral for the year.

Next on capital expenditures, for the quarter we had capital expenditures of $100 million, which brings our year-to-date total to $322 million.

We now expect capital expenditures for the full year to be in the range of $450 million, which is down $25 million from our previous estimate.

The reduction is due principally to revised timing of certain projects.

Interest expense was $42 million in third quarter versus $67 million a year ago.

This decline is largely due to interest income on the notes receivable associated with the sale of our Trading & Merchandising operations, which closed in the first quarter of this year.

We remain very comfortable with the collectibility of these notes.

Dividends paid for the quarter totaled $85 million versus $93 million last year.

This decrease reflects fewer shares outstanding.

Finally I'd like to close with some brief comments on our outlook.

For fiscal 2009, as Gary mentioned, we are reconfirming our earnings outlook of slightly above $1.50 per diluted share, excluding items impacting comparability.

This quarter's performance reinforces that view.

We finished strong in the third quarter and our expectations for a strong fourth quarter have not changed.

As for fiscal 2010, consistent with what we told you at Cagney, we are planning for healthy EPS growth in 2010 and we will communicate our expectations for 2010 in more detail during the fiscal fourth quarter earnings release.

That concludes our formal remarks.

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

Gary and I, along with Andre Hawaux and Rob Sharpe, will be happy to answer your questions.

I will now turn it over to the operator to begin the Q&A portion of our session.

Operator?

Thank you, Mr.

Gehring.

(Operator Instructions).

It looks like we'll begin the segment with David Driscoll of Citi Investment Research.

Thanks a lot.

Good morning, everyone.

Morning.

Well, it's nice to see the profits are growing once again in Consumer Foods.

Congratulations on that.

I'd like to ask two questions, if I may, Gary.

The first question, you made some comments in your prepared script about input cost inflation.

It would seem, just from the numbers in the first three quarters and your full-year expectation, that the fiscal fourth quarter is going to be very low relative to what we've been seeing.

First off is that right?

This is a very, very modest fourth quarter inflation expectation.

And then I'm curious what the fourth quarter then implies for F '10?

Yes.

David, thanks for your thoughts and I would tell you that you're right on Q4.

It will come dow -- inflation will come down significantly.

Estimate in the low single-digits increase versus what we've seen in double digits for quite some time now and I think that that is reflective of what we see coming in our fiscal '10.

Okay.

And then my second question then goes to gross profits and gross profit margins.

Given the moderation that seems to be happening with the inflation, would that suggest that we can expect on a go-forward basis gross profit margin improvement?

The answer is yes.

If I could sneak maybe one more question in.

Can you quantity what quantify what the year-on-year profit decline was in wheat trading?

I believe that -- my underlying question here is it feels like the rest of that business was very, very strong.

How much was wheat trading actually down so we might be able to get a look at the other components of that business?

I think it was down about 16%.

I'm sorry, about $16 million versus a year ago on milling.

Great.

Thanks a lot, everyone.

I will pass it on.

Okay.

From Barclay's Capital a question from Andrew Lazar.

Morning, everyone.

Morning.

Gary, I know that you -- as you said before, you started to take some pricing over the course of last year, or earlier this year, a little bit later than some of your peers, so I guess it's not surprising to still see a very big pricing impact help you in the quarter, but you also had talked about needing to make some merchandising adjustments in certain categories and certain brands.

Given how strong the pricing contribution was, though, I'm wondering were those made and is there any way to think about how you quantify maybe what kind of a drag that might have been on net pricing, because pricing was still very strong even with that?

You're accurate, Andrew.

We didn't have -- we had very little pricing in our base, and that is a -- one of the reasons that the increase that you see is as big.

And also remember that this is a combination of pricing and mix and we had some pretty good mix management.

But more importantly, we really started taking actions in second quarter on a number of our brands to make those kind of adjustments, whether it was responding to frozen or getting the price gaps down in places where private label was a major competitor in things like cooking oils, cooking spray, Egg Beaters,et cetera, so we made a number of those adjustments pretty proactively.

I'd say most of those are pretty much in our base now, starting in Q2 and certainly all of Q3, so I think we feel very good that we have been proactive.

We've got the pricing architecture right.

That's not to say that we won't continue to have it front and center on our radar screen.

That pricing architecture, that price gap management is exceedingly important, but we've taken most of the actions already.

And last thing is, any way to quantify -- you pointed out two items, or two brands that created maybe a lot of - or the majority of some of the volume weakness that we saw in Consumer Foods, meaning the peanut butter piece and ACT II, some of the proactive moves that you're making, is there any way to think about -- were those the bulk of that 4% volume decline or half of it or some way to think about magnitude?

Yes.

If I added in -- what we did from a mix management standpoint, basically discontinuing a number of unprofitability SKUs, primarily in food service.

as well as in our export business, if I put those together, that's the vast majority of that decline.

To clarify along with the brands.

Along with those two brands, yes.

So those basic three to four factors represent almost all of that decline.

Thank you.

We're joined by Terry Bivens of JPMorgan.

Good morning, everyone.

Morning, Terry.

Morning.

Can you guys hear me?

Yes, yes.

Oh, okay.

Boy, I should add you're certainly not the only ones having a problem with AIG here.

Let me address the pricing, if I might.

I think you guys took pricing last March.

My guess is that you would have done some price protection in last year's fourth quarter.

So Gary, would I be right looking at the fourth quarter as the one in front of us as the one where you will still see some robust pricing ala Q3 and then as we cycle into fiscal '10 see that level off on the comparison?

Yes, Terry, we took our first major piece of pricing on March 24th, so that was in period ten of last year in our fourth quarter.

Yes.

And we took pricing across the first quarter.

I think the last significant pricing we took was in September/October.

Okay.

Actually, probably by about Labor Day.

So we will continue to see the impact of that and then it will, obviously, start to dissipate.

Okay.

And Gary, as you look at the frozen category in particular, some of the market share data would indicate that maybe you've priced a bit over the category.

Do you think that's true overall?

And if you could ust give us a snapshot of where you think that category is now in terms of promotion?

Obviously that's been a concern.

Terry, I missed that.

Are you speaking about frozen.

Yes, yes, specific to frozen.

Yes.

If you recall, we -- I'm going to turn this over to Andre for a bit more color.

But what I would tell you is that we're -- we believe we're in the right place now in terms of our -- how we have responded competitively, but most importantly, we are not looking to compete in that category primarily through price.

What -- that's why you're seeing us really step up -- and it really hasn't hit yet, but really step up our marketing, really step up our innovation, our packaging, everything else.

But in terms of the specific dynamics on trade, let me turn it to Andre.

Yes, Terry, let me try to answer that question by first going a little deeper with respect to -- as you look at frozen, the way we look at it here, and specifically for the third quarter, we really look at it in four broad buckets for us.

One is we have a single-serve offering that you're very familiar with three -- really, four power brands there.

We look at multi-serve, we look at prepared chicken and we look at brown and serve, so those are the four real compliments we have to our frozen portfolio.

In three out of those, in the quarter if you go deep enough you'll see that we actually gained share in single- serve, we actually gained share in prepared chicken and we held our share in sausage.

Where we lost the share was in our multi-serve offering, which is something largely behind Marie Callender Crocks, which we've actually discontinued, so we'll be cycling that through.

So if you break apart the composition of the share we feel pretty good at the end roads we're starting to make in places where we play.

Relative to pricing, though, to Gary's point, we are not -- we have a merchandising strategy that's pretty consistent across our brands and that's the game plan we're going to follow.

But we are going to win in that space with the innovation we're bringing and the stuff we're going be reporting -- we shared with you at Cagney on Healthy Choice is really going to start to turn the tide for us and you'll start to see that happen, really, in Q4 as those products really start to hit the market.

Okay.

Thanks very much.

We go now to Deutsche Bank, Eric Katzman.

Good morning.

Morning.

A few questions.

I guess in the terms of the receivable notes on the sale of the trading group that was done at the peak of the market, what gives you such comfort that the counterparty risk there is okay and that we can, I guess, continue to have confidence in those notes?

Eric, this is John.

I guess what I'd tell you is we do a fair amount of due diligence around the financial information of that business and we look at their operations and their balance sheet strength and their cash position and we feel pretty confident that they're going to be in a position to honor those notes.

Yes, Eric, it's Rob.

I think I'd add that when people normally look at pick notes they think of notes that are very high risk in a capital structure, usually the lender of last resort notes.

In the Gavilon structure there is a huge amount of equity under these notes, much more than you'd typically find in any leverage transaction that had pick notes in it, and, in fact, the only thing they have that's senior to us is some bank debt that's significantly over collateralized.

So, all in all, that is the gist of why we feel really good about it.

Okay.

Then, Gary, maybe turning to the, the Consumer business, I guess is it fair to say that even though you've been attempting in various brands to move up scale that the overall portfolio between the private label that you sell plus some of the other brands is benefiting from the consumer shift to, let's say, more value-oriented offerings?

Yes, Eric.

I would say that our -- I think our portfolio is in a -- is positioned well.

We do have a really good core of what we would classify as value-oriented price value, which is very attractive in these times.

But on the other side we have a very strong innovation pipeline that I would call for value add, as well as some extremely good marketing that's night and day better than where we've been before on a number of our products.

So if you take a look at some of our key brands like Healthy Choice and Marie Callender in frozen.

or a Hunt's in tomatoes, I think those -- clearly we would call those premium brands and expect to see continued very good performance from those, as well.

So I think it's a pretty good balance.

And did you see -- as the quarter progressed a lot of the companies out there -- your competitors -- talked about some trade deloading and maybe pantry deloading and shifts in timing.

Did you really see any of that, or was the shift by the consumer to the more value proposition that you give kind of made you immune to that?

I don't know that anybody's immune to it but I wouldn't say that those factors were were a material impact to us.

I would say clearly that we all know that the consumer is holding on to their dollars pretty tightly and is extremely value conscious, but again, that's where I think we've got a portfolio that plays pretty well to that.

An inquiry from David Palmer of UBS.

Thanks.

Good morning.

A couple of --

Good morning.

A couple of questions.

How much was -- if at all was the volume bolstered this quarter by the shipments of the new products that we're discussing; the al Dente and the all natural new Healthy Choice frozen entrees?

That was at the very end of the quarter, so a little bit but not significant enough to make it a material part of our trend.

And maybe a little bit of a boost next quarter, as well?

Yes, I think we should benefit, particularly as the distribution gets to a critical mass point, which it will in the fairly near term, and we turn the marketing on, which has just happened on the Marie Callender side and will happen on the Healthy Choice at the beginning of April.

So I would say we would expect to see a good quarter from frozen.

And was it a couple of points that SKU -- the ACT II diminishing promotions behind that or the SKU rationalization behind that, combined with the peanut butter volume hit, is that -- are those hits going to stretch into next quarter, as well, and any size of that would be helpful?

Yes, I would tell you that the -- certainly the mix shift on ACT II where we discontinued in some major customers, that will continue.

The discontinue in -- of a number of our SKUs across the food service business, that will continue.

Peter Pan, for the most part that should be behind us.

From the offices of TIAA-CREF, Bill Leach.

Good morning.

Good morning.

Gary, just looking at your margins on Consumer Foods they were over 12% this quarter and were actually slightly lower than your Commercial Foods segment, not too long ago you were doing 15% plus.

With inflation moderating do you think those margins can get back to 15%.

Well, I wouldn't want to put a number on it but I do clearly say that I think we believe that the margins will improve.

Obviously it has a lot to do with the price increase from an absolute standpoint pulls your percentage margin down, so I -- net-net I think our gross margin will improve next year.

Okay.

And what is your specific tax rate forecast for the fourth quarter?

We see it just slightly over 4%.

Okay.

Thank you.

Thank you.

We now go to Chris Growe, Stifel Nicolaus.

Hi, good morning.

Morning.

I just want to ask you first, Gary, a bigger picture question in relation to an earlier question on your value portfolio.

Where do you think we should see that in your results.

Should we see better volume growth out of ConAgra or volume performance out of ConAgra?

Should we see less private label penetration of your categories or advance in our categories?

I'm looking across your IRI data and it should improve and it's been all over the place for a lot of the food companies, but we're still seeing an equal degree of private label penetration in your categories and, therefore, I would argue less benefit from that value portfolio.

Am I looking at it the right way?

Well, it's pretty dynamic and I think it's clear there's no denying that private label is certainly performing well in this environment.

So on the one hand we've got our own private label positions, particularly in snacks, like on private label bars and potatoes, those are doing quite well.

Where we have significant private label competition, over the last quarter-and-a-half or so we've made some pretty, I'd say, targeted and surgical price gap, pricing architecture moves where we believe we will start to see better performance from a number of those products that compete with private label.

So I don't think that we're going to see that private label phenomenon go away over the near term, but I do think we're managing it smartly.

And maybe, Andre, if you want to give a little more color?

Yes, the only thing I would add to that, Chris, is really the place -- we watch them in this -- obviously in this environment very closely and I think Gary articulated that we will -- we are much sharper now on watching our price gap management so we don't get out of gap and, therefore, cause our branded items to get significantly hurt.

But in a couple of the categories, private label's always played a role.

It's our -- it's us -- it's up to us to watch where they go, but if you look at cooking oil - that's probably one of the biggest places they play -- I think Wesson has come back to its share position that we feel very comfortable with right now.

The other category would be tomatoes and with what we're doing on both the marketing and the product improvement around the Hunt's franchise we continue to see strengthening in that business for us.

And the other place is in cooking spray -- and Gary mentioned that -- probably earlier in the fiscal 2009 we got ourselves a little out of whack with our price points.

We've adjusted those and we now see PAM -- which is the market leader, by the way, in that category -- doing much, much better.

That's good color, thank you.

And I had just two quick ones, more from a modeling standpoint.

Am I right that the year-ago grain milling benefit, or surge in profits, was around $40 million.

Let's say it was down $16 million, that's the net of those two numbers would be the benefit, some of that it held on to I guess is the way to say it?

Last year's exceptional profits were in the range of $40 million.

Okay.

And it was a $16 million decline year-over-year; correct?

Yes.

Okay.

And then the last question I had, just in follow up on Bill's question on the tax rate, if it is 34% for the fourth quarter by my math it puts you over 35% for the year.

Am I -- are there some exceptional items in there I need maybe account for differently or --?

We would expect the full year to be in the range of 34%, so there are some exceptional items that have -- we've been calling out as we go.

And 30 -- I'm sorry.

and we've been applying the appropriate marginal rate on those items as we've been doing it?

That's correct.

We have a signal from Robert Moskow, Credit Suisse.

Hi, thank you.

The frozen foods category, really there's not a lot of private label penetration in there and I guess that's a real good thing for the brands competing.

Can you talk a little bit about why you think that is?

Is it a distribution issue where the retailers just wouldn't be making a lot of money if they tried to increase private label?

And then a second question, I couldn't find any cash flow information.

Can you tell us what operating cash flow and free cash flow was in the quarter?

Well, let me -- Robert, let me tackle the first one.

The reason you don't see much private label in frozen is because Banquet is such a big player in the value segment.

We have the advantages of scale, we've got 50 plus years of very heavy, loyal equity, and that really takes the place of that opening price point.

Customers are extremely positive on what we've done to get back to that dollar merchandising price point on Banquet and we believe that really obviates the need for private label in that segment.

On the cash flow information, we don't have that information in front of us.

We'll follow up with you and it will be in our 10-Q, which will be on file next week.

Okay.

One quick follow up.

Can we -- is it fair to say that fiscal '10 will be a very front-half loaded year because of the inflation curve and the price curve and just the way it's benefiting you?

This is Chris.

We're still in the process of putting our plans together.

We do have preliminary indications that -- of good growth across most of it, but let us just take our time and finish our plans and get back with you then.

Okay, thank you.

We now welcome Alexia Howard of Sanford Bernstein

Hello, there.

Can I ask about the pricing in the Commercial segment.

I know that this time last year prices were heading upward, selling rapidly because of the ConAgra Mills area, and I guess it got even higher in the fourth quarter of last year.

Are you planning to hold on to the pricing that you've managed to take in those grain operations going forward, or how do you see that shaping out the next few quarters?

Alexia, this is Rob.

Let me -- as a practical matter, the way that business operates is much more transparent on cost than virtually any business you've ever dealt with, so what that translates into is, as a practical matter you really can't hold on to price as grains drop.

The competition is very intense and you tend to make money not by holding on to price but by executing really well and better than anybody else can in terms of how your mills operate and how you source your flour.

So basically the prices are already heading south and its (inaudible) growth that's really picking that up?

Correct.

Okay, that's great.

Thank you very much.

Thank you.

In follow up, David Driscoll, Citi Investment Research.

Thanks for taking the follow up.

Gary, you really talked a lot over the last couple of years about your efforts to gain traction with new products at ConAgra, and I think that your Cagney presentation, you were starting to show some of the fruits of that effort.

Can you do anything to quantify for us the contribution of new products to sales for maybe year-to-date period?

And then the follow up question I would have is, what sense do you have for how incremental the new products have actually been to the franchise?

So I don't know how you can had help us there, but any quantification I think would be very helpful.

Thank you.

David, what I will tell you is that our Cafe Steamers -- we just got con for conformation of it -- was the number one food product introduced across all of calendar '08, well in excess of $100 million.

So that clearly is important, not just because of the size of that but because it really is the base of -- basis of a platform from which we will deliver much more innovation..

So the Marie Callender's Pasta al Dente that we have just introduced and is just hitting the market is the next generation of that platform.

I would tell you that you know given the last pro -- the last round of products the sales impact really won't be seen until Q4 and we;re very positive that it will be highly incremental for us and that it will continue to provide momentum that gives us confidence as we look into fiscal '10 in our biggest category.

Great, thank you.

Returning to Eric Katzman of Deutsche Bank.

All right, thanks for taking the follow up.

Two quick ones.

That JV income line all of the sudden jumped from a first half much lower rate of contribution, can you just talk a little bit about how we model that going forward?

And then second, Gary, can you talk about what inning you are in on SAP integration across the entire Company?

Thank you.

On the JV line, the principle driver of the decrease there is due to a potato joint venture we have in Europe.

There's a couple of factors there.

One is that is lapping a very strong quarter it had in last year, and then over in those markets the business is challenged right now because of -- really a glut of raw materials, potatoes and some competitive pressures that are driving down price.

Yes, I was thinking more sequentially how much it improved, not that it was down year over year.

Well, you're clearly right, Eric.

sequentially there's been really good improvement throughout this year.

And from a modeling standpoint we think of that JV internally -- on average what tends to happen is they make most of their money in six months, just the way the market works, but you can't predict which six months it's necessarily going to be because it's so dependent on what happens in that year's potato crop.

So it's going to be -- tend to be a little lumpy and I wish I could give you more guidance as to every year look for it to make most of its money in the third and fourth quarter or the first and second, but it -- as a practical matter it just doesn't work that way.

And, Eric, I would -- I'd tell you we're in about the sixth inning and feeling very, very good about the traction that we're gaining with SAP, the -- how much better it's helping us run operation, how much more granularity of data it's allowing us to get at, and I'd say that's about where we are.

Thank you.

From Barclay's Capital and the office of Andrew Lazar.

Thanks very much.

Gary, we hear so much these days about -- from retailers around clarity of assortment, and looking for retailers to focus on working capital saves and holding fewer SKUs, holding fewer brands, only those brands with the really super-dominating relative market share survive.

When thinking about your portfolio -- and I know you get this question a lot -- is that just a huge over simplification on our part relative to what you're really seeing and to the conversations that you have with your retail partners day in and day out?

Andrew, there's clearly that.

That is a theme that is discussed a lot across our customer base.

We feel that we have been very proactive in that.

We have our own very-robust SKU optimization program so we're trying to get out in front of that with things that become a win, both for us, as well as for the customer.

But it clearly is a move that our customers are looking to make and we believe that for the vast majority of our businesses we're going to be in good shape because we have done a lot of that ourselves.

In a number of categories we are the leader where that could potentially benefit us, and in a number of categories we -- where we play we actually have the premium branded item and the store brand item, as well.

So in the categories where you may not have a leadership position, are you able to make a suitable economic case to the retailer as to, hey, this is why it's still relevant and why this brand makes sense here, even though it may not be in this particular category the dominant brand?

Yes, absolutely.

In some cases it might be regional strength.

There's a number of our brands like that, that might appear on a national basis not to have a top position but in particular markets are very strong.

And in other cases we've got very demonstrable data that shows when our brand, which might not be a number one brand, but when it's featured and merchandised by the customer versus the private label brand, the performance is dramatically different.

So there's a number of different dynamics like that.

Thanks, Gary.

You bet.

Returning to UBS and David Palmer.

Just one question regarding the frozen.

Heinz has been vocal about how they will tolerate pricing behavior from competitors only to a point.

You seem to be more comfortable with the current promotional environment, even though you're saying that there is heavy promotions going out on there and that your marketing and innovation that you have coming will hold you in good stead.

Do you view the recent promotional activity as the new normal and this will likely just be the cost of doing business, at least over the next year or so, or is there something that you deem to be truly unhealthy for the category and unsustainable about the behavior of the branded players in that category?

Thanks.

Well, clearly, we believe that more rationality will return to that segment and we have not gone as aggressively as one of our key competitors have.

We don't believe that that's good smart business and we don't believe that that phenomenon is going to continue for the long term.

But very importantly, we do have to stay close to the situation in terms of not getting miles apart from a pricing architecture standpoint but try to shift the battle to the marketing and innovation front to the pull side of the business, and that's why we've gone through such an extensive transformation of our frozen business, which we will start to see the fruits of in Q4.

Robert Moskow rejoins from Credit Suisse.

A useful hour here.

Can I ask a question about trade inventories?

I think it's great that you haven't seen any trade inventory deload or any impact on your numbers from that, but with 50% of your sales in what you're calling nontraditional scan you give us a little sense -- more detail about what that 50% breaks out to be?

Was it Wal-Mart, clubs and then what else?

And then, what kind of visibility do you have into the inventory at that channel since you are calling it nontraditional?

Yes.

I could tell you, one, we have seen a little bit of inventory adjustment down at customer levels, but not real material.

I would tell you that we do not really have a break that I would tell you is real accurate, at least from where I sit today, in terms of how those other channels break, but clearly Wal-Mart is the biggest player, without question, and we've got a very strong partnership there.

Club is probably the second biggest piece, and then you have got a number of other players, like price impact, which is things like Dollar Tree and Dollar General, drug, convenience and military that would make the up the other piece of it.

And back on the inventory side, about half of that is vendor managed so we do not see a significant material impact to our results.

So half of the half is vendor managed or half of your overall portfolio?

Half of everything.

Half of everything is vendor managed.

Okay.

Well, thank you.

You're welcome.

Thank you.

This concludes our question-and-answer session.

Mr.

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

Thank you.

This concludes our conference call.

Just as a reminder, this conference is being recorded and it will be archived on the web, as detailed in the news release, and as always we are available for discussions.

Thank you very much for your interest in ConAgra Foods.

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

Thank you again for attending and have a good day.