康尼格拉食品 (CAG) 2009 Q4 法說會逐字稿

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

This program is being recorded.

My name is Jessica Morgan, and I will be your conference facilitator.

(Operator Instructions).

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

Please go ahead, Mr.

Rodkin.

Good morning.

This is Gary Rodkin, and I am here with John Gehring, our CFO, and Chris Klinefelter, 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 are making those statements in good faith and are confident about our Company's direction, we do not have any guarantee about the results that we will achieve.

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

Also, we will be discussing some non-GAAP financial measures during the call, and the reconciliations of those measures for Regulation G compliance can be found in either the earnings release today or on our website at ConAgra Foods under the Financial Reports and Filings link and then choosing Non-GAAP Reconciliations.

In reference to the Regulation G, I will note that our reported diluted EPS from continuing operations of $0.39 has $0.02 of net expense from items impacting comparability as detailed in the press release, resulting in an EPS of $0.41 on a comparable basis for the quarter.

On that same basis, the $0.17 of diluted EPS from continuing operations reported in the prior year quarter contained $0.01 of net expense from items impacting comparability, resulting in an EPS of $0.18 on a comparable basis.

Lastly, as detailed in the press release, Consumer Foods' operating profit of $271 million was up 53% as reported and up 40% on a comparable basis.

Now I will turn it back over to Gary.

Thanks, Chris, and good morning.

We are very pleased to be able to report strong results today.

As you see in the release, we posted significant gains in profits for both of our segments this quarter.

We told you that we expected a strong finish to the fiscal year, and that is exactly what happened.

EPS from continuing operations more than doubled this quarter on a comparable basis and as reported, reflecting very strong and balanced performance and also some benefit of an extra week.

We have many bright spots in terms of brands, product lines, supply chain cost savings, moderating inflation and SG&A cost focus, all of which put us on a very strong foundation as we enter fiscal 2010.

Let me start with a few words about our Consumer Foods segment.

Volume was up 7%, sales grew at 14%, and operating profit improved 53% as reported.

Profit was up 40%, excluding restructuring charges last year.

The extra week helped us at the top and bottom line, but even after adjusting for that, we posted strong results.

I couldn't be prouder of the turnaround our team has made in this segment.

We posted this growth despite absorbing hedge losses, fighting foreign-exchange headwinds and increasing marketing investments.

The topline progress shows the traction we are getting with this year's innovation, specifically strong results from the frozen transformation we discussed earlier in the year, which included great products from Healthy Choice, Marie Callender's and Banquet.

To call out just a couple of these, our Healthy Choice Naturals line is a big win.

Sales there are ahead of expectations.

We are confident this is the right product for the target audience, and the connection with consumers is very strong.

Another significant win is Marie Callender's Pasta Al Dente.

Restaurant quality pasta offerings with the convenience of microwave cooking.

This line uses our proprietary tray in tray steaming platform for perfect Italian cooking every time, and the consumer and customer feedback has been fantastic.

As an aside, I know there is a fair amount of discussion out there about the competitiveness of the frozen category.

Keep in mind that every day, consumers buy more than 3 million of our frozen products, and that we've gotten much better at monitoring and understanding what is happening in the marketplace.

The promotional environment has remained tough.

We commented earlier in the year on that, and it hasn't significantly improved yet.

And while we promote and merchandise with a disciplined ROI-based approach to balancing the mix between volumes, sales and profits, much more importantly, our main approach to fighting through the challenges in the frozen category has been to bring real news to the category with powerful innovation and great marketing.

That should be apparent from the examples I just described.

Market shares for these new items are right where we'd hoped they would be at this point.

We achieved terrific acceptance on our new products from Healthy Choice Marie Callender's, and we are seeing good velocities on these products as they hit the shelves.

Our marketing behind the Healthy Choice relaunch has generated a lot of very positive feedback.

I believe many of you have seen the commercials on TV and on the web.

These funny and memorable pieces featuring Julia Louis Dreyfus are a great demonstration of how far we have come in improving our marketing.

We also continue to make significant progress with Healthy Choice Cafe Steamers and Asian Steamers, which are now more than $150 million in annualized sales and with shelfstable Healthy Choice Fresh Mixers.

Consumer poll for our products is the lifeblood of our business, and we are really excited about the strength that many of our brands are showing.

We have good takeaways from many other brands throughout the portfolio, including Chef Boyardee, Orville Redenbacher's, Snack Pack Pudding, Hebrew National, Hunt's, Alexia, Peter Pan, Reddi-wip and others that you see listed in our supplemental information.

The key to our success with these brands is improved quality and smart and targeted marketing programs, including an emerging strength in shopper marketing, where we bring shopper insights to retailers for them to use customized in-store programs.

As an aside, our shopper marketing program was just named a "Best of the Best" by a leading marketing publication, jumping from number nine to second place, right behind PNG.

There's another key success factor I would like to point out.

As you have heard us say before, we are also very well aligned with the fastest-growing channels in the industry, many of which are not tracked by syndicated data services.

While we are pleased that recent syndicated market share trends have improved, the story is even better across unmeasured channels.

This broad channel penetration and alignment with key customers is a source of strength and bodes well for our growth going forward.

We increased marketing investment by about $16 million for the quarter.

We had that flexibility in part due to profits from an extra week.

And as you have heard us say before, our marketing investments are always done with a focus on ROI.

We are starting to get some real traction across our portfolio, and improved marketing has played a significant role in getting us to where we are now.

So overall, our topline is showing strength, given the innovation, the value orientation of many brands in our portfolio and the quality and effectiveness of the marketing we have done.

Another significant reason for the margin and profit improvement in Consumer Foods is that commodity inflation has finally moderated to the point where our robust supply chain cost savings are outweighing it, resulting in a net benefit to profits.

Commodity inflation of about $55 million for the quarter was more than offset by about $70 million of manufacturing, logistics and procurement savings.

That is a welcome change from recent trends, and it highlights the importance to our profit potential of the cost savings work we have been focused on for three fiscal years now.

For the full fiscal year, we generated about $300 million in Consumer Foods supply chain cost savings, ahead of our original plans and a significant amount by any standard.

And it is translating into more visible shareholder benefit now that inflation has reached more manageable levels.

The productivity runway remains long.

Our SAP implementation is a key component of getting more efficient.

As you have heard us say before, we have successfully implemented modules touching our order to cash processes, total procurement, trade promotion management and management reporting.

More importantly, we now have 21 manufacturing plants on SAP, which means enhanced visibility and efficiencies across key activities such as recipe management, sales and operations, planning, procurement, quality management and plant maintenance.

The plan implementations have gone extremely well, and I am very pleased with how our various functions have worked well as an integrated teams to handle this complicated and important set of tasks.

Our most recent news here is that in April, we became the first SAP customer in the Americas to achieve advanced level certification.

John will say more about this in a few minutes.

Before I move on, I want to address the accident we experienced in our Garner, North Carolina plant.

As you likely know, this tragedy claimed the lives of three of our employees and injured dozens of others, all of them working in the packaging area of the plant.

Personally, I am devastated by the loss of our colleagues.

My thoughts and prayers are with their families, as well as with our injured employees.

Although authorities haven't yet released complete findings on the cause, they have let us know the accident was caused by a natural gas explosion.

At the time of the explosion, we had a contractor installing new equipment in the plant.

We will share more as we have it, but for now, I want to emphasize three things.

First, I couldn't be prouder of our ability to respond to this situation quickly and compassionately.

We have been moved by all of the emotional support the ConAgra Foods family has received, particularly from the local community.

I deeply appreciate this outpouring of goodwill.

Second, while this accident was extremely emotional on a personal level, we are in a position to rapidly return the Slim Jim business to reasonable service levels.

Through a combination of our own production and third-party manufacturing, we will be making Slim Jims again within just a few weeks.

We do not expect this accident to have a material impact on our financial condition, nor on Consumer Foods' overall potential.

And finally, I am totally confident that this isolated accident does not reflect any inherent weakness in our manufacturing practices or infrastructure.

I am proud of what we have accomplished improving the quality and safety of our work environment and operations over the past three years.

Here are a few facts to help you understand our commitment to the very highest quality and safety standards in our work environment and operations.

We have spent $275 million on food safety, quality and infrastructure over the past two years.

We've also built a team of people who are focused on exceeding, not just meeting industry standards for safety and quality, including an additional 140 food safety and quality personnel.

In the past four years, since I joined ConAgra, our industry standard measure of plant safety, total incident rate has declined by 44%, and is 50% better than the food industry benchmark as measured by OSHA.

I wanted you to have this perspective so that you understand my competence in the overall state of our manufacturing platforms.

Let me close my discussion on Consumer Foods by returning back to the fundamentals of the operations.

We have on trend brands with great innovation, marketing and consumer insights, a strong set of value offerings, and robust cost savings opportunities in our supply chains, as well as SG&A.

Another reason for my optimism is that we have the right people in the right jobs in this important segment.

As many of you know, we made management changes in this segment earlier this year, which has increased the effectiveness of our [matrix structure] and significantly improved execution.

This has also allowed me to spend more time on our marketing and innovation agendas.

We call this getting the wiring right.

And it is an important element in why we are able to deliver our growth commitments in this segment.

So when I consider all the heavy lifting we have done in the past three to four years to strengthen our foundation from the standpoint of operations and talent and the momentum that has clearly developed in the back half of this year, I couldn't be more confident in our future.

Our commercial business continued its winning streak despite a more challenging economic environment due to declining restaurant traffic.

For the quarter, sales were down a little.

That is due to lower flour prices, driven by lower underlying wheat costs, and profits were up 35%.

We saw better flour milling margins versus a year ago, driven by mix and a high-quality wheat crop, which helps mill efficiencies, as well as good sales and profit growth from Lamb Weston, reflecting a healthy combination of mix, efficiencies and pricing that followed raw product price increases.

Our dehydrated vegetable and seasonings operations were slightly less profitable than a year ago given the economy's impact on some portion of the food service related customer base.

The commercial group had a truly outstanding year overall and, indeed, has had a couple of years -- strong years back to back.

We consider those unusually high, and when we look to our forecast for fiscal 2010, we see a year for Commercial Foods that is essentially in line with 2009.

Primarily, this reflects the fact that flour milling profits will likely be lower.

Over the past few years, our milling business has done an exceptional job of managing the historical volatility in the wheat market.

Strong risk management of this volatility, along with very good operational performance in the mills, has helped lead to higher profits.

Mill efficiency is influenced by the quality of the wheat crop and whether it yields at relatively higher or lower rates than an average year.

For our fiscal 2009, the crop quality was very strong, which helped drive an increase in profits.

We don't plan on that every year.

The Commercial Foods outlook also reflects the tough restaurant industry conditions.

While we can't change the macro environment, we can assure you that Lamb Weston will navigate these conditions as well as any company can, and that is due to its strong customer service, innovation and efficiencies.

To close, I am more excited about our overall prospects than I have ever been.

In regard to the near term, we are optimistic about the earnings outlook for 2010.

Our growth should be primarily driven by the Consumer Foods segment of the business, as I've mentioned.

We expect to see good volume and mix performance, plus very solid continued supply-chain improvement and lower inflation, along with a laser-like focus on SG&A.

As we process all the various drivers of next year's performance, our estimate for fiscal 2010 EPS is in the range of $1.63 to $1.66, excluding items impacting comparability.

To the extent that the Slim Jim disruption means lower profits from that specific brand, our business interruption insurance should make us substantially whole.

That is the way we have approached our guidance.

Our 2010 estimate represents healthy growth over fiscal 2009, consistent with our long-term objectives, and it shows our progress as a Company and the momentum that has developed.

As usual, we will provide the customary updates to our outlook as the year progresses.

Now I'm going to turn it over to John Gehring, our CFO, who will provide additional details.

Thank you, Gary, and good morning, everyone.

In my comments this morning, I'm going to address four main topics -- our fourth-quarter results, comparability matters, capital and balance sheet items, and some comments on our outlook.

With respect to our fourth-quarter results, while Gary has provided you with a good summary of our quarter, I would like to highlight and amplify a few key items.

First, we are very pleased with the continued strong performance turned in by our Consumer Foods business.

The business continues to build momentum across virtually every critical dimension, including topline growth, market share, cost control and margin improvement.

Consumer Foods' operating profit on a comparable basis for the fourth quarter increased 40%.

At the same time, we were able to accelerate investment behind our brands, increasing marketing expense by approximately $16 million or 18% for the quarter.

Our strong Consumer Foods performance continues to be driven by successful innovation, better marketing and merchandising, improving inflation trends, strong supply-chain capabilities and a stable of brands with strong value appeal.

In addition, our Commercial Foods businesses continue to compete very effectively, despite a challenging food service environment.

And we remain confident in the ability of our commercial management teams to navigate this difficult environment well.

Our cost control efforts continue to yield very good results, both in our supply-chain operations and in our selling, general and administrative functions.

Consistent with our expectations, our consumer supply-chain cost savings came in ahead of target, with savings in excess of $300 million for the full year.

For the first time in many quarters, our cost savings benefits for the quarter more than offset the negative impacts of commodity inflation.

In addition, we achieved our SG&A targets for the year.

Our people are embracing our zero overhead growth, or ZOG culture, and we continue to see good results.

In addition to our improved earnings performance, we have also achieved substantial improvement in our operating cash flows from continuing operations.

This improvement was driven by stronger earnings and improved working capital efficiencies.

Our cash generated by operating activities from continuing operations for fiscal 2009 exceeded $900 million compared to approximately $370 million in the prior year.

While we are pleased with this improvement, we will continue to have a very strong emphasis on operating cash flows in 2010 and beyond.

Additional details relating to our cash flows will be provided in our Form 10-K, including allocations of amounts between continuing operations and discontinued operations.

Now I will move on to my second topic, items impacting comparability.

First, on hedging, in the fourth quarter, we had approximately $31 million of benefit in corporate reflecting the allocation of hedge losses from corporate to the operating segments, and we had $9 million of additional net hedge gains recognized in corporate expense during the quarter.

These result in a benefit of $0.05 per diluted share in corporate, which we treat as a comparability item.

Second, we incurred expense of approximately $50 million or $0.07 per diluted share related to premiums and transaction fees paid in connection with our fourth-quarter debt refinancing.

We treat these premiums and transaction fees as a comparability item.

I will comment further on our debt refinancing in a moment.

Now let me turn to capital and balance sheet items for the quarter.

First, on working capital, we made good progress on working capital in the fourth quarter and for the full year.

The change in working capital resulted in a modest source of cash flows from continuing operations.

We succeeded our cash neutral target for the full year.

We continue to focus all of our businesses on key cash conversion metrics -- Accounts Receivable, days sales outstanding, inventory days on hand, and days payable outstanding.

And we expect continued working capital improvement in fiscal 2010.

Next, on capital expenditures, for the quarter we had capital expenditures of $121 million, which brings our year-to-date total to $442 million, consistent with our prior guidance.

Also, as we have commented previously, we continue to invest in our reengineering efforts and our systems infrastructure through our SAP efforts, which continued to progress very successfully.

As Gary noted, in April ConAgra Foods became the first SAP customer in all of the Americas to achieve the customer center of expertise advanced certification.

Being awarded the advanced level of certification from SAP is another sign of the progress we have made towards building world-class operating capabilities over the past several years.

As I alluded to a moment ago, we executed a very successful debt refinancing program during the fourth quarter.

Through this program, we issued a total of $1 billion of new five-year and 10-year debt at attractive rates.

We also completed a tender offer for approximately $900 million of outstanding debt and contributed approximately $100 million to our pension plans.

As a result of the program, we were able to improve liquidity, extend our average debt maturities and significantly reduce refinancing risk over the next two years, all in a very cost effective manner.

With respect to our pension plans, our funding levels, like those of most companies, have decreased due to the market downturn.

However, we remain comfortable with our overall funding levels, and we are still very confident that our future funding requirements are very manageable.

Interest expense was $51 million for the fourth quarter versus $70 million in the prior year.

This decline is largely due to interest income on the notes receivable associated with the sale of our trading and 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.

The decrease reflects fewer outstanding shares.

Also, during the fourth quarter, we finalized the accelerated share repurchase program that we initiated last summer, and we received approximately $5.6 million -- I'm sorry, 5.6 million additional shares under the program at no additional cost to us.

Now I would like to comment on our fiscal 2010 Outlook.

As Gary mentioned, we have estimated our fiscal 2010 fully diluted EPS, excluding items impacting comparability, to be in the range of $1.63 to $1.66, consistent with our long-term algorithm of 8% to 10% EPS growth.

We expect to achieve this earnings growth in fiscal 2010 despite one less selling week, unfavorable impacts from foreign exchange, and lapping a record year in our milling operations.

Pension and postretirement costs for fiscal 2010 will be in line with fiscal 2009 amounts.

Also, as previously noted, we expect continued improvement in working capital in fiscal 2010.

Further, we expect capital expenditures to be in the range of $475 million.

By segment, we expect the strong earnings growth in our Consumer Foods segment to continue and to be driven by innovation, marketing, merchandising and promotion, lower inflation trends, continued strong supply chain capabilities and a portfolio with strong value appeal.

We expect our Commercial Foods business performance to be in line with fiscal 2009 results as benefits from lower inflation will be offset by the impacts of the challenging food-service environment and less favorable operating conditions for our flour milling business.

We still expect our commercial businesses to perform very well versus their competitive set.

Let me take just a moment now to add my personal thoughts on Garner.

My thoughts and prayers remain with our injured coworkers and their families and those of the employees who lost their lives in this tragedy.

While I am deeply saddened by the effects of this accident, it is heartening to see the strong sense of community and caring among the employees at this location and across ConAgra Foods.

As to the accident itself, we do not expect it to have a material adverse impact on our Consumer Foods business or total Company results for fiscal 2010 or beyond.

We expect that proceeds from our business interruption insurance will substantially compensate for any profits lost during the next few months as we execute our Slim Jim brand recovery plan.

Any net gain or loss associated with property losses, workers' compensation claims, general liability claims, related insurance proceeds and other incidental uninsured costs will be treated as items impacting comparability.

As we learn more about the losses and insurance covers, including the timing of when such amounts will be recorded in our quarterly results, we will provide you with additional information.

In summary, while we expect that fiscal 2010 will be a challenging year in some respects, we are optimistic about the strength of our businesses and especially pleased with the momentum and progress of our Consumer Foods segment.

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 take your questions.

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

Operator?

(Operator Instructions).

David Palmer, UBS.

A question about fiscal 2010, and what do you think the biggest variable is as you think about how that year will play out?

The three things that I'm thinking about are the competitive behavior in frozen, the repeat levels of your new Healthy Choice line in that segment, and then lastly, the demand in the food service area -- in other words, restaurant demand?

Those are three things that I would think of that would be pretty big variables, but perhaps you could address that and if there is anything else that would be higher on the list, they'll be great to hear about.

Thanks.

First, I would tell you one thing you didn't mention is the overlap that we have with ConAgra Mills that is taken into account in our forecast.

But we certainly don't expect to repeat the performance in that segment.

As pertains to frozen competitiveness, we believe we are in a very good position.

We are not looking there to compete primarily on price.

We believe we have got our merchandising programs where they need to be.

From a customer and consumer standpoint, we haven't gone crazy.

We've stayed fiscally responsible.

We are looking to fight that battle through strong innovation, continued strong innovation and strong marketing.

So we feel good there.

As it pertains to the Healthy Choice repeat levels, at this point everything looks very, very good on our new products.

And we believe that will continue to be the case.

All the feedback is extremely strong.

I do think -- and to your last element on food service, yes, certainly there are some macro issues in the environment to deal with in the restaurant trade.

But we believe we are in a very good position, particularly with Lamb Weston, to fight through that, as well as anybody.

The strength of that business obviously is french fries.

85% of the french fries are sold through QSRs, quick serve restaurants, and that is probably the most stable piece of the food-service environment.

And we obviously took all of that into consideration in building the plant.

However, probably the one really important piece that we did not talk about is the fact that we've gotten very strong productivity programs, cost save programs that will clearly be bigger than inflation this year.

Inflation is moderating.

Our cost savings programs are still strong, and that gap will help us from a margin standpoint.

How much bigger is your productivity savings this year then perhaps last year?

Do you have any dimensions on that?

This is Chris.

We start each year with a benchmark goal of around $225 million and then update you throughout the year whether or not we are running ahead of that.

But it will -- we are expecting inflation to be at a low single-digit rate, so even our beginning point should comfortably outpace that.

Bryan Spillane, Bank of America-Merrill Lynch.

Just actually a follow-up I guess to David's question.

When you look at cost inflation for next year, if you can just give us some degree of how much of your input costs are locked in, how far they are locked in for, and given where protein like hog and cattle prices are, is there a chance that -- or how much variability is there for the potential for input costs to actually come down relative to what you are budgeting right now?

Let me talk generally about how we see inflation, especially in the consumer space.

We are looking at still seeing some inflation next year in the low single digits.

We are not looking at deflation.

The inflation is going to be driven by tomatoes, tin plate related to cans and some of the proteins.

We typically are not going to get into a discussion of our precise coverages, but I will tell you that we are proactive in looking at our cost structure and our procurements plans I think are appropriate given the environment.

David Driscoll, Citi Investment Research.

First off, congratulations on a good quarter, and it is great to see that ConAgra has its brands gaining momentum.

I really just have two questions.

The first one is business related, and the second one would come back to the manufacturing side.

On the first side, by my calculations, your fiscal 2010 guidance implies that the consumer business would grow operating profits of about 8%.

This growth is even higher if we consider the lack of a 53rd week.

This is significantly above what we see with like the rest of the food group.

Gary, can you put this in perspective, how aggressive do you feel that this figure is?

Clearly we are going to get the growth from our Consumer Foods segment next year, and it will be bigger than what you stated.

But I would tell you that we feel very, very confident in the fundamentals of the business, both from an innovation marketing, productivity standpoint.

So we are very confident that we've got really good momentum and, yes, we've got a 53rd week to go up against.

But we have already taken that into account our plan.

Is there any share repurchase benefit factored into the guidance?

No.

We do not have any share repurchase benefit in the guidance at this point.

All right.

Last question, Gary, thanks for the comments on the safety of ConAgra's manufacturing operations.

The absence of this information has made it quite challenging to analyze the Company.

One follow-up here.

Will your plant maintenance budget rise to any significant extent in fiscal 2010?

Simple answer is no.

We feel very good about our quality, safety and infrastructure programming.

We have made significant improvements and upgrades to the infrastructure, capital and manpower the last three years, and we feel we stack up in a good place.

Thanks a lot, and again, congratulations on the quarter.

Jason English, JPMorgan.

A couple quick questions for you.

You mentioned marketing expense is up 16% in the quarter.

Was that just consumer marketing expense, and can you comment at all on how your trade spend line is changing?

Yes, we did increase our marketing spend by about $16 million this quarter year-over-year.

We were confident in our momentum and having that extra week.

So we did make that investment.

And our trade spend has gone up a little bit to take into account the value equation, the price/value needs in the marketplace.

But it is pretty minimal, and we feel very, very good that we've got that under control, particularly with a new program in place for fiscal 2010.

Thanks.

Next question.

There has been a lot of chatter about multiple retailers introducing SKU rationalization and brand or product prioritization initiatives.

I suspect nearly every company is going to have some products that are going to feel a little bit of pain.

Some are going to get a little bit of gain.

As you look at your portfolio, can you identify any areas, specific areas where you see some risk or opportunities from these types of initiatives?

You know, we really do see it a bit of caution, but really an opportunity as well.

And it is always important for us to help our customers optimize their shelf real estate to make it more productive.

You know, our own private label snack bars, cereal and potato business is doing quite well.

It's got reasonable margins, and we expect that is going to continue to grow.

I would tell you on the brand side, it is obviously our responsibility to make sure that we stay relevant with our key brands to the consumers and customers.

And, you know, we do have a good number of number-one brands like Orville Redenbacher's, Banquet in the value frozen space, Chef Boyardee, Hunt's tomatoes, Reddi-wip, Egg Beaters, Pam and others that will benefit actually from a reduced brand assortment.

But I think the real core here, the key part of this issue is making sure that we are proactively eliminating our own SKUs when they may have questionable returns to the retailer, and we have a very robust program that we are in called Active SKU Management that tackles this proactively, very proactively.

So I would say the other piece to this to ensure our momentum is to make sure we've got the right price gaps with private label.

And you know that we are all over that, much better than we were a year ago, where I would say we used more of a blunt instrument.

So that price gapping with private label is important.

So I think we've got ourselves in a very good position.

We do not see any significant material vulnerabilities.

We are being very proactive in this regard.

And when I talk about active SKU management, that's specific SKUs within lines, not total brands.

Great.

Thank you.

Very helpful.

I'll pass it on.

Ed Roesch, Soleil Securities.

My main question here is on your corporate expense.

That was significant savings year-over-year.

Fiscal 2009, I think you gained about $0.11 per share from reductions.

Is it at a sustainable level heading into fiscal 2010, and could you comment on the bonus factor or any kind of incentive compensation factor on that number?

Thank you.

Yes.

So, first of all, related to the sustainability, we have focused on our core SG&A, and we have made -- we continue to be able to drive our zero overhead growth across that core SG&A.

And we expect to be able to sustain that for certainly some period of time.

As you alluded to, a portion of the decrease you are seeing year-over-year is driven by a decrease in incentives from fiscal 2008 to 2009.

But we focus on core SG&A for our initiatives, and that excludes the impact of those incentives.

Robert Moskow, Credit Suisse.

Gary and John, I was wondering if you could comment a little bit on your asset platform, specifically in manufacturing.

I did a little bit of math, and I found that on a sales per manufacturing facility basis, you are a lot lower than your peers, probably around the line of 50% in your consumer business when I compare it to Kraft and other branded companies.

I am just wondering, it seems like you have a lot of plants that may be smaller in scale, and I think you also have a lot of brands that are kind of mid-tier.

And I wanted to know, what do you think the positives and negatives are of having an asset platform like that?

Thanks.

I wouldn't tell you that the math is exactly on target, but you're conceptually correct.

Given the way that we were built through acquisitions, we do have an infrastructure that is like that.

Now, I would also tell you that it is a lot better than it was a few years ago, and I think the biggest point is this is where a lot of our productivity runway exists.

You've seen what we have been able to do in terms of putting hundreds of millions of dollars per year on the board from a productivity standpoint, and we are saying that that runway remains long, and that is a significant piece of it.

So it is clearly in our sights.

We are making big progress in that regard, and I believe that we will continue to see that as a major component of our productivity and margin improvement.

You talked about the $275 million spent on quality over the past couple of years.

Is there another incremental investment coming, or is that investment kind of tapering now?

Yes, I would tell you that we really went back and shifted our focus toward core infrastructure, if you will, and that is changing as we go forward.

And you will see us invest more in growth versus basic infrastructure.

We feel we've gotten to a pretty good place there.

So the capital spend, total capital spend will not change dramatically, but the balance will shift toward growth.

Okay.

Is there any way you can kind of give us like a first-half, second-half comparison on commodity costs?

It seems like the first half will have the easiest comparison on costs and then changing in the back half.

Maybe you can add to that, Gary, a lot of these commodities have gone up in the last months.

Does that make it any easier to go to a retailer and talk about the possibility of even more pricing for next calendar year?

Kroger said that the cost to produce their own private label foods is starting to rise again.

Have you noticed that?

Yes.

What I would tell you is that we clearly are not looking at deflation.

We are looking at inflation, although moderating.

Private label is seeing that as well.

Obviously their percentage of cost of goods with the lower price is greater for that.

So we are seeing a rise in the private-label pricing, which I think gives us confidence that we are really not going to see wholesale rollbacks.

As we take this kind of holistic look and we see where private-label is going, and the actions that we have already taken to get our price value in line, I wouldn't say that there is going to be more than isolated instances on specific things where there may be pricing warranted.

Overall, that is not a big piece of our plan for next year.

And the timing of commodity cost comparisons, is there anything you tell us?

Yes.

Clearly, you will see the year-over-year comparison easier in the first half, but the second half still looks pretty good.

Ann Gurkin, Davenport.

With respect to your Commercial Foods business, has your outlook become more cautious since comments made in February, or is it still relatively the same?

You broke up a little there.

Could you restate that?

With respect to the Commercial Foods outlook for 2010, has your outlook become more cautious since comments made in February, or is it relatively the same?

No, I would say it's probably about the same.

I think we are feeling pretty good that we can fight our way through as well as anybody can.

You know, it is a tougher macro environment.

But again, the space that we played biggest in with Lamb Weston on french fries and QSRs is probably the most stable and also a really strong profit source for those operators.

So yes, still a relatively tough macro environment.

Obviously, the big delta for next year on commercial is Mills with the comparison and what was happening with the volatility in the wheat markets.

But other than that, I think we feel reasonably good that we can still grow our Lamb Weston business.

Great.

And then I just want to ask about Alexia.

How is the rollout of the waffle fries going?

Are you getting shelf space?

Just an update there.

Yes, the sell-in has gone well.

It is very early.

We don't have enough read yet on the takeaway.

But the sell-in part has gone well.

Chris Growe, Stifel Nicolaus.

I just had two questions for you.

The first one I want to ask Gary in relation to your comment before about private-label, how you are all over that.

And you have done a good job with the course correcting.

Have you found that your price gaps -- you are having to move those lower, if you will, in order to be more competitive, whether that's against private-label or competition?

Have you noticed that of late, or any change there?

Well, I think that there is a zone that we believe that we can live with and play within.

I do believe that consumers are more discerning about value more than they have ever been before, and that probably will continue to be the case.

We are taking that into account with our merchandising programs.

So I think we've got a pretty good hold on our pricing architecture now, much better than it has been in the past.

Okay.

And I just had two quick ones beyond that.

Have you said how much, in rough terms, the possibility for Slim Jim is?

Like what is kind of in play, if you will, around the insurance, the insurance proceeds in fiscal 2010?

Yes, we are basically saying that we will be able to replace the basic operating performance of Slim Jim with our insurance.

And therefore, it is not a hole in our F'10 earnings.

Have you said how much that is, though, or maybe what percentage margin that business is in rough terms?

No, that's probably too competitive to talk about.

Okay.

And the last question I had was just in terms of cost inflation for fiscal 2010.

Have you given a dollar amount to sort of estimate what we should expect for the year?

Low single digits, John?

We're looking at low single digits (technical difficulty) on that we've not commented.

Alexia Howard, Sanford Bernstein.

I wanted to follow up on the pace of introduction of new products.

I mean clearly it has stepped up quite nicely over the last year or so.

Consumer takeaway looks good.

Do you have a data point in terms of what percentage of sales are coming from products introduced, say, over the last three years or whatever timeframe you choose?

And do you anticipate that that is going to increase over time, or are you pretty much where you want to be on that metric?

Yes, I think in real rough terms, it is probably about 5% over the last three years or so.

And I think that is probably around the right zone.

Again, we are about fewer, bigger, better, not about the number of SKUs.

So we are looking at a high batting average and having the sustainability and growth over time and also looking at it in terms of platforms.

So I believe that introducing good margin, new products that will grow over time will continue to be our focus.

But you don't see an acceleration from what you have achieved in fiscal 2009?

And you are pretty much where you want to be?

Maybe a small acceleration.

Okay.

That's great.

Thank you.

I will pass it on.

Andrew Lazar, Barclays Capital.

A quick question on some of the thoughts around the value orientations.

We have obviously heard that a lot from a lot of companies and yourselves as well.

And I am trying to get a sense -- the examples are going after value more of just shifting some of the marketing, which makes sense, to things of the trade, whether it be discounts on allowance and things of that nature?

I'm sure there is some of that.

But are there any other things that you or you are seeing others do around delivering value to the consumer that are new and interesting or different ways of leading your merchandising with retailers that you are doing from a sales perspective that is truly different or novel?

Well, Andrew, I think one piece would be working backwards from price point and doing some potential reengineering of products, which is really the story of what we have done on Banquet to enable us to hit that magical $1.00 price point.

So I think that is a little bit different.

Talking to consumers through our customers on dollar price points for total meals, so like meals under $1.00 -- I'm sorry, meals for under $10 and leading with that with a whole host of things in our portfolio, really shifting some of our emphasis in promotion from national consumer promotions into shopper marketing, so doing programs that are more in line with what our retailer partners are looking to do versus running national FSIs, all of those things I think are a bit different.

The last thing I would say in terms of maybe what's a little different about ConAgra Foods is I think we have got the right portfolio to play in this environment.

I mentioned the Banquet example.

Chef Boyardee is clearly an example that brings a lot of foot traffic in and is a great value.

But then there's products like our Snack Pack Pudding, our Hunt's Snack Pack Pudding, which is $0.25 or $0.30 per cup, and mom sees that as tremendous values, and that business is doing very well.

Another one would be our Hunt's pasta sauce, which cuts equally as well as the premium jar products but it is a significantly lower price point.

So we have a number of products where we've got reasonable margins that can really deliver value, and when we bundle those together for customers, we've got a good package.

That's helpful.

I appreciate that perspective.

Is your gut that -- because I have heard this from a number of other number of other food companies -- that even if -- when things start improving a little bit from a macro perspective, that perhaps we will see a consumer that will still be somewhat more value-oriented ongoing than they might have been in years past?

And I know this is just more of your sort of personal gut feeling.

I would absolutely agree with that, that value on orientation that -- let's call it save versus spend mentality I think is going to be with us for a good time, a good long time.

Much more discerning consumer looking to really get value for every dollar they -- every penny they spend.

And I think that has to be in our -- right in our crosshairs.

And it clearly is very much the case here at ConAgra.

David Driscoll, Citi Investment Research.

Thanks for taking the follow-up.

Gary, what is the biggest driver in Consumer Foods in F'10?

Is it volume growth, or is it margin expansion?

I would tell you it is probably more margin expansion, which is fuel for volume growth.

We clearly are looking at volume growth, but the real key trigger is, again, really good productivity and cost controls that will outweigh the moderating inflation.

But I think you said earlier in the call that you did expect volume growth in the segment.

We do.

Eric Serotta, Consumer Edge Research.

I was surprised that you didn't talk too much about the initial performance of the Banquet restaging in the quarter.

Could you give us some commentary as to how that is going?

And how that is -- whether that is meeting your profitability targets at the $1.00 price point?

Yes.

Sorry if I didn't hit that specifically.

Very, very pleased.

We've got double-digit net sales growth on Banquet in Q4, and we've got significant margin improvement in Q4.

So a real huge win for us in hitting exactly what consumers and customers want.

It's kind of a win all the way around.

And then in the broader frozen portfolio, would you say that you guys are gaining shelf space or freezer space versus your competitors?

I want -- maybe you could address the incrementality of some of the new products.

I realize that the Banquet restage, you are replacing some slower moving SKUs with some faster turning ones.

But it seems that some of those are more replacement, whereas it seems that other things like the Marie's Pasta Al Dente and the new -- some of the new steamer lines.

The Asian Steamers are more incremental.

But net net are you gaining freezer space in your view or just holding onto what you have?

Yes, I would say we are gaining a bit.

I wouldn't say that's a huge piece of the equation at this point, a bit of shelf space gain.

But most importantly, we are clearly gaining market share in single serve meals.

All three of the products you mention -- Banquet, and particularly Healthy Choice and Marie Callender's -- are gaining significant market share behind great innovation and great marketing.

So we are very, very pleased with the frozen transformation.

Okay.

And then just a final housekeeping question.

I think it said in the press release that there was like an $11 million impact from foreign exchange in the Consumer Foods segment.

I know that you have some export exposure, small international business there, and some of that's going to Mexico and the like.

But it still struck me that that was a large number relative to at least how you guys are perceived as being a domestic company.

Was there anything in particular at play as to why you reached $11 million, or was that just the market-based impact?

This is John.

Yes, it is essentially the market-based impact, and I don't think there's anything unusual in there.

I think as I commented earlier, we will have some foreign-exchange headwinds in the next year, but again, we don't expect those to keep us from hitting the targets we've set.

Yes, and you know, it is both transaction and translation, so we've got some of that happening.

We've got fairly sizable businesses in Mexico and Canada.

But again, all of that is taken into account for next year -- nothing outside of plan.

Karen Lamark, Federated Investors.

Understanding you still expect to grow Lamb Weston, I just wanted to get a little bit more color on food service.

Sequentially, in general, did sales -- were they stable or did they slow?

And what are your assumptions around that fiscal 2010 versus 2009?

And maybe if you could just separate out what you are seeing in QSR versus casual dining, if that's possible.

Thanks.

It's Rob Sharpe.

I don't think I'm going to go that deep on it, but just from kind of the 10,000 foot level, let me give you some overall trends.

Generally, if you think of the world as QSR and all other food service, there was a pretty decent performance out of QSR.

It is stable to growing, depending on the chain, and we kind of expect that to continue into fiscal 2010.

The other food service channels, and I will call it fine dining, more formal casual dining, they were hit pretty hard in the second half.

We do expect that to come back, but it is a slow build.

And so when we look out over fiscal 2010, we are seeing -- we're expecting most of that comeback to come in the second half because if the chain closes its doors, it doesn't just reopen them next week when things get better.

So I hope that is helpful, but I think that is as deep as we want to go.

That's fine.

Thanks very much.

Robert Moskow, Credit Suisse.

Just lastly, you said that 21 of your plants are on SAP now, but you have 94 around the country.

What percent of your facilities do you intend to introduce SAP into?

This is John.

Our focus on SAP is on our consumer platform principally, and we are through 21 plants.

We have approximately 12 more to go, and we will be complete with that in about the next 15 months.

Great.

Very helpful.

Thanks.

There are no further questions.

Mr.

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

Thank you.

This concludes our conference call.

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

And as always, we are available for discussions.

Thank you very much for your interest in ConAgra Foods.

And this concludes today's ConAgra Foods fourth-quarter earnings conference call.

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