康尼格拉食品 (CAG) 2010 Q2 法說會逐字稿

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

This program is being recorded.

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

All audience lines are currently in a listen mode.

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

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

Please go ahead, Mr.

Rodkin.

Good morning.

Happy holidays.

This is Gary Rodkin, and I'm here with John Gehring, our CFO, and Chris Klinefelter, our 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.

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.

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 will be discussing some non-GAAP financial measures during the call today.

The reconciliations of those measures for Regulation G compliance can be found in either the earnings press release or on our website under the Financial Reports and Filings link and then choosing non-GAAP reconciliations.

In reference to Regulation G, I will note that our reported diluted EPS from continuing operations of $0.55 has $0.03 of net benefit from items impacting comparability as detailed in the press release resulting in EPS of $0.52 on a comparable basis for this quarter.

On that same basis, the $0.38 of diluted EPS from continuing operations reported in the prior-year quarter contained $0.05 of net expense from items impacting comparability resulting in EPS of $0.43 on a comparable basis.

Now I will turn it back over to Gary.

Good morning and thanks for joining us.

Today, I will recap our second-quarter results and will talk about the drivers of our strong performance, particularly our good topline results and market shares in Consumer Foods.

I will also discuss other areas of significant progress that are giving us a great deal of confidence about our ability to keep delivering high-quality growth.

After that, John Gehring, our CFO, will run you through a few more financial details.

We're very pleased with the numbers we turned in for the quarter, but also with how we got there, meaning that market shares, units, dollar sales, and brand investment all moved in the right direction to produce very high quality results in our Consumer Foods segment.

For those of you who've been following us, you know that we needed to put some fundamentals in place and build greater brand strength to get to where we could deliver results that investors will value.

Those fundamentals are centered on more and better marketing, real innovation, great in-store execution, and very strong cost savings efforts in our Consumer Foods supply chain.

I'm happy to say that we are seeing results of our efforts and are benefiting from stronger consumer pull for our products and more tightly run operations, as well as better input cost trends.

We're on a path of consistent execution and sustainable growth, just as we said we would be.

Let's get into some specifics.

Diluted EPS from continuing operations was $0.55 as reported and $0.52 excluding items impacting comparability, up 45% as reported and up 21% on a comparable basis.

We are pleased with EPS for the quarter and feel very positive about where we're headed this fiscal year.

In fact, we're expecting fiscal 2010 diluted EPS to now approach $1.73, ahead of the last guidance we offered.

Operating profit for Consumer Foods increased 31%.

This was the fourth consecutive quarter of profit growth in that segment.

Obviously, that's really important, but I'm even more pleased that we got there showing quality volume and sales growth.

Consumer Foods sales increased 3% and volume increased 2%.

That's after absorbing the lost Slim Jim volume during the brand's recovery period as well as pruning some underperforming SKUs.

We gave you the details of those factors in the release.

Our good underlying growth occurred on the back of some very strong market share and sales results among major brands that play a key role in our growth platforms.

I will talk about that more in a few minutes.

In Commercial Foods, sales were down driven primarily by lower pass-through costs on wheat in our milling operations, but also reflecting a bit of topline softness in the Lamb Weston and Gilroy businesses.

As I'm sure you know, it's a tough environment for restaurant sales, but our team is holding its own.

This segment showed some improvement from last year on the bottom line driven by strong milling performance and by Lamb Weston.

So let's get into a bit more detail on the success we are seeing from the Consumer Foods group.

Overall brand strength continues to improve.

Particularly, our aggregate portfolio had good market share performance, particularly in our most significant priority categories where we invested most of our marketing.

Some of our strongest year performances were in frozen dinners, canned pasta, cooking oil, shelf-stable entrées and shelf-stable desserts.

All of those categories showed better than a full point of sheer improvement.

We're growing our largest customer and non-measured channels, but our fastest rate of growth has been in measured channels this quarter.

As you know, a focus area for us is the convenient meals category, an area where we have strength, where we can grow more and an area that's important to both retailers and consumers.

Our frozen portfolio is our biggest play within convenient meals and it did especially well during the quarter with all three of our big frozen brands, Banquet, Healthy Choice, and Marie Callender's taking share, growing volume, and growing profits in the quarter.

Healthy Choice isn't our only frozen success story.

We're just as happy with the performance of Marie Callender's.

Marie is another premium brand built on taste and quality where we are expanding into another eating occasion, lunchtime, with Pasta Al Dente and Home-Style Creations.

Banquet is another example of a brand is getting stronger based on solid fundamentals driven by our reengineering of the line.

As we've talked before, we changed the makeup of the Banquet single-serve dinners to play even more squarely to our remarkable manufacturing efficiency in this area.

We discontinued less profitable items, added new varieties, and re-created traditional favorites.

It's certainly paid off with these very good results.

Our convenient meals lineup also includes Chef Boyardee, a brand that also grew nicely in the second quarter with sales up double digits and volume up almost that much, along with substantial share gains in the category.

Again, good velocity on the base business for Chef Boyardee was the driver for the brand.

Our Obviously Delicious and Secretly Nutritious marketing campaign, which lets moms know that each serving of Chef Boyardee beef ravioli contains a full serving of vegetables has been very successful.

How do we know?

We measure perception change as well as buying patterns among our existing users and our growth target.

The good news is that 80% of both groups indicated that they learned something new about the brand and both are significantly increasing their purchases of Chef Boyardee.

This connection with consumers on news that is meaningful to them really does have the power to change behavior.

Another brand that posted very good success this quarter is Hunt's.

Canned tomato sales and profits were up double digits and market shares were strong.

We're enjoying success as we leverage our insights about consumer preference for the quality that we deliver using our flash steaming process.

We have enjoyed great success with the recent Hunt's advertising and now we taken it up a level with a new campaign, the Crash Kitchen Tour, which features real consumers and encourages them to swap the brand they are using for Hunt's.

This new campaign, coupled with strong merchandising with our key customers and managing to keep price points is resonating.

In a nutshell, we have seen share and velocity gains on the Hunt's brand that demonstrates its staying power, and we are very pleased with the results.

We saw really nice growth in other important areas this quarter as well like Orville Redenbacher's popcorn, Peter Pan peanut butter and Snack Pack pudding.

Broad-based progress like this reinforces our confidence in the long-term potential of our portfolio, and we hope that you are as excited as we are to see it taking shape.

We also continue to make major progress on the cost savings front, turning in another quarter of substantial savings.

You've heard us say before that we have a long runway of productivity.

This is one area of the business where we have consistently proven our ability to execute.

Productivity savings remain a cornerstone of our plans and I'm confident that will continue to be the case.

With half a year behind us, we can safely say that we will over-deliver on our savings goals.

John will have more on this in a few minutes.

That allows us to increase our marketing investments, which we did this quarter in the range of $24 million, as well as drive meaningful profit growth for the segment.

You can see that our demonstrated competence and opportunity in this area plays a key role in providing the fuel for sustainable profitable growth going forward.

Consumer Foods inflation is much different now than a year ago with this quarter showing slight inflation when we exclude pass-through inputs like cooking oil.

Second-quarter input costs were lower in aggregate for Consumer Foods when we include pass-through costs in our analysis.

John will say more on this in a few minutes.

Looking forward, we expect low single digit inflation for the fiscal year in Consumer Foods, excluding the pass-through items.

So that means a bit of headwind but nothing like we experienced last fiscal year or the year before.

Overall for Consumer, I'm very pleased with the quarter but more importantly, very excited about the momentum and the long-term growth potential we see.

John will talk in a few minutes about a few comparable items that negatively impacted sales and volumes such as SKU rationalization and the impact from our Slim Jim business.

Despite those items, we had good increases in net sales and volume, picked up considerable share in the marketplace, and significantly grew profits.

Those gains put us in a good position for the second half of our fiscal year and beyond.

In our Commercial Foods segment, we continue to post profit growth despite being in a business that's fairly tough right now, given that consumers are eating out less.

To be able to continue to grow profits during the second quarter was a win in this environment and reflected a great performance from ConAgra Mills and good work from our team at Lamb Weston.

Lamb Weston, our frozen potato business, grew profits, but volume and sales decreased due to slower demand from restaurants.

Lower demand, excess industry processing capacity and strong crop yields across the industry combined to put pressure on the industry, which affects our top line and also puts pressure on our mix.

That being said, I have complete faith in this business and its ability to work its way through this difficult period better than any competitor.

Lower flour prices drove the overall Commercial segment sales decline.

Lower wheat costs mean lower selling prices.

That's not a sign of weaker milling business; it's just what happens in a commodity operation when large fluctuations in input costs get passed on to customers in terms of changed prices.

The underlying milling businesses performing remarkably well in all fronts, from sales execution to efficiencies in the mills to very smart sourcing of our wheat.

In the rest of the segment, we also faced some headwinds in dehydrated products, seasonings and blends.

That business has some challenges, but the overall impact on the segment is fairly small.

Given the slower pace of the recovery of the food service sector, we continue to expect some year-over-year profit declines for the segment in the back half of the year.

Flour milling will face some difficult comparisons in the second half.

Also, we expect a decline at Lamb Weston in our fiscal fourth quarter as we encourage the negative impact of some cost process changes we implemented this fiscal year.

To echo what we put in the supporting Q&A document for this release, those changes benefited the first half by about $0.02 per share and they were reversed by that amount in the back half, largely in the fourth quarter, netting to no material impact on a full-year basis.

Taking all of this into consideration, we expect full-year segment results to be about flat with last year.

I'm confident in the future of the Commercial business and am pleased with what we have been able -- that we been able to hold our own in this segment despite the tough economic environment.

Regarding our full-year plans together for the total company, we of course have taken into account the economic conditions that continue to weigh on consumers, the intense customer and competitive environments and the fact that inflation will not always be as tame as it has been recently.

Having said that, given our strong performance to date and our growth prospects for the Consumer Foods segment as well as our excellent management of the Commercial operations in a tough environment, we are confident in our ability to deliver a strong fiscal year that meets our new guidance of EPS approaching $1.73, excluding items impacting our comparability.

I know John will make this point so I won't dwell on it much, but the upwardly revised $1.73 is even stronger than it appears.

Yes, we've essentially flowed through all of the over-delivery so far this year, but that's not all there is to it.

While we expect to receive significant business interruption proceeds in fiscal 2010 relating to the Slim Jim plant accident, we now expect to recognize that recovery in our income in fiscal 2011 instead of 2010.

Fiscal 2011 is when we expect final settlement of the claim.

So the fact that we can take this year's EPS up despite the delay in recording the business interruption insurance really speaks to the strength of our business.

Thanks for joining us today.

Now, I'll turn the call over to John for a more detailed financial perspective.

Thank you, Gary, and good morning everyone.

I'm going to touch on four topics this morning -- first, our second-quarter performance highlights; next I will address comparability matters; then onto cash flow, capital and balance sheet items; and finally some brief comments on our outlook.

With respect to our second-quarter performance, as Gary noted, we posted another strong quarter.

We reported fully diluted earnings-per-share from continuing operations of $0.55 versus $0.38 in the prior year.

Excluding items impacting comparability, fully diluted earnings per share from continuing operations were $0.52, an increase of 21% over the prior year.

Segment operating margins showed continued improvement.

The operating margin improvement was led by a strong performance in the Consumer Foods business, which increased its operating profit margin by 350 basis points over the prior year.

This Consumer Foods performance reflects a more favorable input cost environment and strong productivity savings as well as good sales results.

Let me touch on a few other operating highlights for the quarter.

First, as we noted, the Consumer Foods business turned in a very good quarter.

This represents the fourth consecutive quarter of year-over-year performance improvement.

We are executing well and consistently on the fundamentals that drive sustainable, profitable growth.

These fundamentals include successful innovation, better marketing and merchandising, sales execution through strong customer partnerships, and strong supply-chain capabilities.

The benefit of this execution is showing up in our consistent delivery of good financial results.

Inflation for our Consumer Foods business continues to trend favorably, slightly better than our expectation.

Overall in the second quarter, we had net deflation in the low single digits.

However, the net deflation was driven in large part by favorability related to vegetable oil costs, a large portion of which gets passed through on our product pricing on related pricing products such as Western oil.

Excluding materials related to pass-through categories, our costs were essentially flat.

For the full year, we expect costs to be approximately flat as we still face some challenges with certain inputs such as tomatoes, proteins, and steel.

However, overall, the inflation trends are manageable.

Our Consumer Foods supply chain cost reduction efforts continue to yield good results, delivering approximately $90 million in the quarter.

Our Consumer Food supply chain team continues to execute against the long runway of cost reduction opportunities.

Taking into account the first-half cost savings performance, we currently estimate that cost savings will be in the range of $300 million for the full year.

While a portion of these incremental savings drives earnings improvement, a portion also offsets surgical pricing adjustments and provides fuel for accelerating investments in marketing and innovation.

Based on goods costs savings performance over the past several quarters and a significant pipeline of opportunities, we remain confident in the ability of our supply chain team to continue its consistent delivery of cost savings.

Consumer Foods advertising and promotion expense for the quarter was up $24 million, more than 25%, as we continue our commitment to invest selectively and in an impactful way behind our key brands.

For this quarter, foreign exchange impacts on Consumer Foods net sales and operating profit were immaterial.

Turning now to our Commercial Foods segment, these businesses continue to compete very effectively in a challenging food service environment, turning in a slight increase in operating profit.

The food service industry has been challenged over the past four quarters and we expect the recovery to be slow given the broader economic challenges, including high unemployment.

We are confident in the ability of our Commercial Foods management teams to continue to navigate this environment will.

On selling, general, and administrative expenses, our core SG&A, which excludes items such as advertising and promotion, incentives, commissions and royalties, is tracking very close to our zero overhead growth or ZOG goal.

We continue to focus on cost control and challenge our team to meet our annual goal of zero overhead growth.

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

First, on hedging, in the second quarter, we had approximately $6 million of net hedging benefits in corporate expense, or approximately $0.01 per diluted share, which we treat as a comparability item.

Secondly, our income tax rate for the quarter reflects approximately $0.02 of benefit from our lower-than-normal tax rates.

These benefits arose from adjustments to foreign tax credits and deductions related to prior years.

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

First, on cash flow, in addition to our improved earnings performance, we are also demonstrating improved cash flows driven by earnings and working capital improvement.

In fact, our cash flow from operating activities will be approximately $650 million for the first half of the year, our strongest first-half performance is some time.

We closed the quarter with nearly $500 million of cash and no outstanding commercial paper borrowings.

We continue to make good progress on a comprehensive set of working capital initiatives designed to drive improvement over the next several years.

Based on our progress to date, we now expect that working capital improvements will generate in the range of $200 million of incremental cash flow from continuing operations for the full year.

In addition, we now expect cash flow from operating activities to exceed $1.2 billion for the full year.

Details on cash flows will be provided in our Form 10-Q.

Next, on capital expenditures, for the quarter, we had capital expenditures of $123 million versus $115 million in the prior year.

Consistent with my comments last quarter, we expect CapEx for the fiscal -- for fiscal 2010 to be in the range of $600 million.

This amount includes two significant incremental investments.

The first is capital related to our Slim Jim recovery, which will be substantially funded by insurance proceeds.

These capital requirements are currently estimated at approximately $35 million.

The second incremental investment is approximately $90 million relating to our new sweet potato plant, which will be partially funded by approximately $35 million related to current-year tax incentives.

Net interest expense was $41 million in the second quarter versus $43 million in the prior year.

Interest income from the notes receivable associated with the sale of our trading and merchandising operations was approximately $20 million in the current quarter and $18 million in the year-ago period.

We remain very comfortable with the collectibility of these notes.

Dividends for the quarter total $84 million versus $86 million last year.

The decrease reflects fewer shares outstanding.

Finally, I would like to share a few comments on our fiscal 2010 Outlook.

As Gary mentioned, we have raised our full-year earnings estimate.

We now expect our fiscal 2010 fully diluted earnings per share from continuing operations, excluding items impacting comparability, to approach $1.73.

To clarify an item that may be obscured because of rounding, we started the year assuming fully diluted earnings per share from continuing operations in the range of $1.63 to $1.66 per share.

Based roughly on a $0.09 over-delivery in the first half, we have raised our guidance to earnings-per-share approaching $1.73, thus essentially passing along all of our over-delivery to this year's Outlook.

This new guidance also reflects an updated view as to when we expect to recognize the income from business interruption insurance related to our Slim Jim business.

First, let me emphasize that the insurance claim process is proceeding very well.

To date, we have received in excess of $50 million of proceeds related to our property and business interruption insurance claims.

However, given the complexity of the claim and the duration of the business interruption loss period and based on additional analysis of the claim process, we now expect the final settlement of the insurance claim to be delayed until fiscal 2011.

At that point, we will recognize the business interruption recovery and other gains in income and will treat them as items impacting comparability.

So while our guidance from the first quarter had assumed approximately $0.05 of income from business interruption insurance recoveries in fiscal 2010, our current updated guidance does not include this approximately $0.05 of income from business interruption insurance.

Overall, we think this updated estimate reflects the momentum in our business as well as our plans to continue to invest in and execute on the strategic drivers of long-term success -- innovation, marketing, sales execution and supply-chain efficiency.

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).

Bryan Spillane, Banc of America.

Good morning.

Just Gary, if you could talk about maybe since you closed your quarter, the competitive dynamics within frozen food and maybe also just more broadly within your Consumer Foods businesses.

One of your competitors had talked a bit about price competition and just competition heating up in general in frozen food.

If you could just give us your perspective on what's happened there and what you are seeing in the market today, that would be great.

Sure.

I just want to make really clear right up front what's driving the growth in frozen foods really is about the fundamental changes that we've made to the business.

That's really about the innovation and the marketing.

There really is not a deep discounting renting volume with a rational prices or unsustainable promotions.

It truly is not that at all.

Just to put some facts to it, over the last 4, 12, and 52-week periods, Healthy Choice has had the highest average price per unit at retail of any directly competitive offering, which means consumers keep coming back for the food.

Certainly, our pricing is competitive, but what's really driving our sales volume and market share is the strong consumer pull, both on the base business and on the new items.

Andre?

Yes, Bryan, I would say Gary's pretty consistent with what we are seeing in the marketplace.

We haven't seen, other than what you may have seen, if you looked at the 13 weeks, the last four-week period for us was a little softer.

That really talks to the just timing of promotional events that we had which were, in our quarter, much more front-loaded.

And that will happen.

That's why we really stayed focus on the quarter versus the four-week data, but exactly what Gary talked about.

Great.

Thank you.

David Palmer, UBS.

Thanks.

A question on your comment on the non-measured channel sales growth being lower than measured and you noted that you still had growth in your largest non-measured chain.

But do you expect the underperformance in the non-measured channels to continue in future quarters?

Of course any detail on this would be helpful.

Perhaps there's a category or two that where you are seeing the share loss, maybe that's related to discontinuance of certain things.

And really the focus here is will it continue in future quarters.

Thanks.

David, this is Andre.

Let me take that.

So in the non-measure channels, the areas where we were hurt the most are as follows.

One is the convenience channel and that's really largely driven by Slim Jim and that's all that was in that channel.

Second is we've been proactive in the food service space and have actually discontinued a lot of SKUs as we prune that business to better reflect the simplicity we want to put to our supply chain and those kind of things.

So I would say, in terms of continuing, the last several weeks, we've been up to about a 95% service level in our C-store business with Slim Jim.

So that will actually get better as we go into the calendar year.

So we don't perceive that becoming a problem for us.

In food service, we still have a little bit more work to do, so I would say that's probably the only thing that potentially will continue, but we also see the bulk of that heavy load that we've done there already through the system.

We have some little bit more work to due in food service.

Broadly speaking, are you expecting a very significant slowdown in volume trends over the next couple of quarters in the Consumer Foods area?

Absolutely not.

The way our plants are built, we see ourselves with growth in the back half of the year.

I would caution the listeners though that to remind themselves that we had a 53-week year last year, so in terms of what will happen in Q4, there will be some comparability issue there.

But on like-to-like, we see growth in our Consumer Foods business in both unit and dollars.

I will stop there.

Thank you.

David Driscoll, Citi Investment Research.

Great.

Thanks a lot.

Congratulations on the quarter.

The first thing I wanted to do is just make sure I understand what you are talking about on the guidance.

So effectively, the way to look at this in comparison to last quarter's guidance is really the number is $1.78 and then you had to take $0.05 out because you are not going to recognize the business interruption insurance.

I think I have that right.

Stop me if I don't.

The second part of the same question though would simply be that next year in F'11, the $0.05 will kind of "reappear" because Slim Jim will be operating back at 100%, so those, the first fiscal quarter and the second fiscal quarter of F'11 will see the number come through on the operations side.

Is that correct?

Yes, so, first of all, your first analysis we would concur with.

We -- the $1.73 assumes now we're not going to get that recovery.

Just to be clear, the recovery, one is recorded in the first quarter of fiscal 2011.

We will call that out as a comparability item when we receive -- we are able to book the income.

But you will then also see a base business next year that is back up to more normalized levels and therefore will be lapping essentially the [dip that] we had in earnings this year because of not being in the marketplace.

David, I would say yes, you are essentially on target.

That's great performance.

The second question is just simply on marketing.

So I think you said marketing was up 25% for the quarter.

That's an enormous number.

Can you put this in perspective of what you expect the full-year marketing budget to be up?

I don't know that we want to get into specifics of exactly percentages.

But we will be up year-over-year on a comparable basis with our marketing spend.

For the total year.

For the total your.

Okay thank you very much.

Terry Bivens, JPMorgan.

(multiple speakers) in for Terry.

Congrats on another good quarter.

A quick question for you.

On SKU rationalization, you mentioned that there's probably a little more to come in food service, unless I'm reading into your comment there earlier wrong.

Thinking about the Consumer Foods side and the retail environment, this period of accelerated SKU rationalization, both for you and for the industry at large, what inning do you think we are in that?

And should we expect any more meaningful pruning?

Yes, I would tell you that the impact has really been immaterial for us because we have been extremely proactive, in other words out in front of the customers push.

We've had a program called active SKU management.

That has worked extremely well for us.

That has helped us from a productivity standpoint -- as you can imagine longer production runs, less inventory, fewer out of stocks, simpler choice for the consumer.

Net-net, there's some wins for us in some customers.

There's a bit of SKU rationalization in others, but net-net, basically immaterial, .

This is John.

The other thing I would add on that is our SKU rat that we've called out is principally based upon our food service SKUs that are not profitable, not really driven by the customer programs you are hearing about.

Okay.

Thank you.

One more question and I will pass it on, kind of a broader, industry-wide question.

With the outlook for input costs kind of once again pointing up, what do you think the industry will once again be able to pull the pricing levers and offset, either through wholesale increases or dialing back of trade spend?

I think our pricing architecture and our analytics are so much better now on a real-time basis.

Andre's team is all over it and I am confident that, between our productivity and our knowledge of what we need to do at the shelf from a price-gapping standpoint, that we will be all over it, but we still continue to believe that inflation will be pretty tame as compared to what it was the last several years.

Sure.

Okay, well, thank you, guys.

I'll pass it on.

Vincent Andrews, Morgan Stanley.

This is [Jackie Goldsby] for Vincent.

I guess a question sort of on the frozen competitive environment.

What exactly is kind of baked into your guidance from a promotional spending or from a competitive expectation?

What has to happen in order for that to kind of impact your guidance?

What has to happen is a continuation of what we've seen so far, or certainly what was seen over the last 26 weeks.

That's that we will be rational in terms of what we do in the marketplace.

We will continue to leave with our marketing and our innovation that we brought to bear in the category, so nothing outlandish for us to be able to deliver our algorithm.

We believe we've got the right competitive context built into our planning and into our merchandising plan, so no change to our guidance.

So basically no step-up from here is kind of what is baked in right now?

Yes, we don't believe that will be the direction that we need to go.

Okay great.

Thanks so much.

Eric Katzman, Deutsche Bank.

Happy holidays.

Good morning, everybody.

Two questions -- I guess first one, on consumer, I think you said that your advertising and promotional budget was up 25% or 24%.

So that means that you are running I guess at around a $450 million annual rate and that's I guess what I'm trying to understand.

One, is that advertising end below the line promotion, or is that advertising plus the promo between gross and net sales?

Can you define that a little bit more?

Then was -- did promotion impact your top line this quarter one way or the other in the consumer business?

Good morning, Eric.

This is Chris.

I'm going to start.

The statistics we cited were that we increase it by about $24 million, which was slightly north of 25%.

It is not necessarily smooth across every quarter.

So the number you're citing on a full-year basis, the $450 million, is slightly high.

As far as what we're talking about, we're talking about things that are within the income statement below the gross profit line, so we are not talking about trade spending.

trade spending.

Andre?

Yes, it's not about discounting.

So if you're running let's say, I don't know, 5.5% to 6% of consumer sales annualized?

That's a pretty good level.

Yes.

Yes, we believe were at a good level now that, importantly, the effectiveness, the impact of the dollar is significantly greater than it used to be from a productivity standpoint.

So we're confident that we are able to spend against the priority brands in a way that's meaningful.

And as Gary said in his prepared remarks, you also notice, Eric, that we also launched a very big campaign in our meal enhancer categories around Hunt's in the Crash Kitchen Tour.

We had a nice programming with Rotel and also with Manwich in that platform.

So we had a lot of new campaigns out that we launched which is really resonating with consumers and we feel good in what's leading to our volume growth.

Okay.

That sounds good.

Then can I follow-up?

Just on the commercial side, Gary, just it sounds like things have gotten a bit tougher.

I know the business or that division overall has done very well the last few years.

You've kind of signaled that it's going to be a bit tougher.

But I was kind of surprised that you mentioned I guess that there was some excess capacity in the system and that was creating price-based competition, and then at the same time, you were adding capacity in frozen potatoes.

How to we kind of think about that going forward?

Yes, it's Rob.

Let me try and address that.

First of all, when you are talking about the sweet potato plant in Delhi, you really -- we don't really view that as adding core capacity to the industry.

It really is a different product, and we know that when it gets in-store, it's not a swap-out for a french fry.

It actually drives incremental total fried potato sales for an operator.

So it's really on top of everything else.

Obviously, why we put it in Louisiana is to put it right next to the raw supply, which is part of the hallmark of what makes Lamb Weston so efficient on the conventional potato side.

The industry's capacity tends to flow back and forth between domestic and international markets.

The international markets have strengthened a bit.

The domestic markets are, as you know, top in the restaurant industry.

So I don't think it's -- we aren't talking about a situation where there's dramatic over-capacity at all involved.

So, I don't see it as impacting kind of the hallmark of this industry, which has generally been the capacity of the industry pretty much stays in tune with demand.

Yes.

Eric, I guess one last point on that is you certainly know traffic is down in restaurants.

At quick serves, QSRs are the least impacted and that's where we have the bulk of our business.

Andrew Lazar, Barclays Capital.

Hey, everyone.

Gary, I guess two questions, one a little bit more from an industry perspective.

We've all seen some of the industry data points, particularly around volume, over the course of the last quarter.

(inaudible) obviously your largest (inaudible) has been bucking that trend as we've heard from your results this morning.

I'm trying to get a sense first off what you think is leading to some of this industry sort of overall industry volume weakness, particularly because we're lapping a quarter last year when the whole industry went through some pretty big inventory reductions and such.

As part of that I guess, has ConAgra seen any change in its topline trends, maybe more recently that make you think, hey, bucking that trend is going to be tougher going forward or not?

You know, I'm going to -- I'll give you a minute and then I will turn it to Andre for some more color.

I believe that we are seeing things bottoming out.

We still see inventory being tight at the customers clearly and consumers as well.

So people are buying more when they need it versus stocking up in a bigger way like they maybe used to, but we are not seeing anything in terms of more degradation.

We believe that eating at home will continue to be a trend and that marketing innovation and smart merchandising will continue to drive volume.

So we see a continuation of basically the current environment for a while.

I'm not sure if Gary has left me with anything helpful to say on that.

I think we feel very good about the plans we have for the back half of the year.

Again, like everybody else, we are concerned about overall the consumers' health and what's going on in the broader economy, but we see our business in the back half of the year fairly robust, so we feel good about that.

One last point on that -- value is here to stay.

We believe that and we believe that our portfolio is well set from a value standpoint.

At the same time, we are also proving that strong marketing and good innovation can drive equity.

So we believe that one-two punch will continue.

That gets right into my next question around value or a consumer that even seems more focused today on not just value but really on price point, you know, on opening price point.

Is there an example or two perhaps that you've taken in your portfolio where it makes sense, hit a price point that really sort of has hit with the consumer and has led, I don't know, a brand that maybe wouldn't have as much to go on otherwise but has made it a lot more relevant?

Well, I don't -- the last part of your question probably throw my answer into a little bit of a flux.

I believe, and we've talked about this before, Andrew, that our Banquet product is an opening price point in frozen.

It's a very relevant brand to a lot of our customers and obviously to consumers.

So, we believe that the work we've done there on frozen transformation and specifically the Banquet transformation has really helped that business.

It's become more and more relevant in this economy as value takes hold and it does provide the consumer with a very good meal.

It is that magic dollar price point that we strive to hit with that product, and we've done really well with that.

So -- and I don't think it has anything to be -- it didn't have -- the brand doesn't have anything else to bring forward as well.

So, I think that would be one brand that we would certainly highlight in our portfolio.

Thank you and have a good holiday.

Chris Growe, Stifel Nicolaus.

Good morning and happy holidays.

I just had one question, a bit of a follow-up.

But I wanted to ask about your product mix in the quarter in the Consumer Foods business, and when you talk about brands like Hunt's growing pretty strongly, I'm just curious.

How did the mix reform?

Would that have been a mix degradation both from a sales and profit standpoint for Consumer Foods?

Actually, Chris, it's Andre.

It was actually slightly positive for us.

Our mix helped us in the quarter.

Okay.

And then just two quick follow-ups -- one would be in terms of your FX effect on the business, I know it's very fairly small, but it was a little bigger than I thought last quarter and about in-line this quarter.

Should that be positive going forward?

Anything meaningful to call out there on the FX side?

I don't think there's anything meaningful to call out there.

I think it will be fairly muted.

Just one final one for you on I guess corporate expense, SG&A.

It was up quite a bit this quarter.

Is that all just compensation accrual?

Is that how we look at it or --?

The lion's share of the increase is attributable to incentives.

Okay.

Thank you.

Robert Moskow, Credit Suisse.

I thought it was a great quarter.

I guess I'm just scratching my head on why the stock isn't up more.

Can you remind us about your share repurchase program?

You are generating a lot of cash this year.

I can see a scenario where it's strong again in fiscal '11.

Can you talk a little bit about how big it is in your priorities for your cash?

Let me start with our priorities.

I think, first of all, I think, as we have commented before, we are committed to a healthy dividend.

As we accumulate cash, I think we will continue to evaluate various investment opportunities.

That would include acquisitions that fit and have strong finance returns.

We will also look at internal growth opportunities such as the sweet potato facility.

While we do not currently have a share buyback authorization, we will continue to evaluate share buyback as an element of our cash utilization strategy.

I think, as we previously noted, we are committed to a strong investment grade credit rating.

We will remain focused on strengthening our balance sheet and maintaining that strong liquidity in this environment.

So, we're going to continue to evaluate share buyback as an option.

I think that you're probably going to get this question from some other investors in the months ahead, so maybe you can give us a little bit of an insight on what are the other projects internally that you think are -- that would stand out as high-return projects that you think that you can invest in?

Then if you make acquisitions, what areas of the -- what categories do you think you'd want to go into?

Good morning, Rob.

This is Chris.

As far as identifying individual projects, we really don't go to that level of detail.

You've heard us talk about the sweet potato opportunity.

That's about the extent of what we like to discuss as far as that goes.

But we do have a robust set of options and look at them rigorously.

I'm sorry.

What was the second part of your question?

Let me --

As far as giving categories, that's generally -- we generally don't comment to that level of detail.

John mentioned they have got to have a strategic fit and a strong financial hurdle.

That's about all we're comfortable saying.

I guess the reason I ask it that way is people took a step back and looked the ConAgra.

People don't think of it as a company that has a ton of huge reinvestment opportunities, but it does generate a lot of cash.

If the cash is used for share repurchase, it would be a -- I think it might help you (technical difficulty) investors.

That's more of an op-ed piece there.

Said thank you for the questions.

Yes, I think, Rob, that we've got our strategic platforms.

Convenient meals clearly is one of them near the top, as well as potatoes.

We have invested significantly against innovation.

The robust pipeline that we see clearly offers more opportunities.

As we said again, you know, the growth platform on the incrementality of sweet potatoes.

So we do believe we've got a pretty broad array of opportunities and we are hopefully going to be able to take advantage of those.

Alexia Howard, Sanford Bernstein.

So just a question on the outlook for sales growth in the Commercial Foods segment -- I know you've given us guidance on operating profit in the second half, but there was a lot of volatility in the pricing growth and the volume growth last year.

It really flicks around between the second and third quarter of fiscal '09.

As we look out into the second half of this year, are we likely to see I guess a slowdown in the volume growth over the second half, but maybe a moderation in the price declines?

Is that the right way to think about it?

It's Rob.

I think that's probably right.

I think year-over-year, you're kind of looking at volume in the flattish range, maybe down a bit.

But you're right as, for example, in this quarter, Mills represented more than $100 million of sales decline simply from the impact of wheat prices.

So that impact will lessen a bit in the third quarter and will lessen a bit more in the fourth quarter, but you will still see shortfalls at the top line in both the third and the fourth quarter, just not quite as pronounced as what you saw in the first two quarters.

That's great.

Thanks ever so much.

Happy holidays, everyone, and I'll pass it on.

Eric Serotta, Consumer Edge Research.

Good morning and happy holidays.

Two areas of questions here, first regarding the promo spending in the quarter.

It looks like your price mix in the quarter was up somewhere in the range of about 1% or so.

I know that you are starting -- you are lapping the big price increases from last year.

But in the past, you've also talked about how you, being a little bit late on the price increases, that you may be overcompensated and were, of course, correcting as you went forward.

So I guess my question is was your trade promo materially up this quarter?

What does the base or list pricing look like, in rough terms, before the trade promo?

Eric, it's Andre.

So again, the benefit between the 2% to 3% that you mentioned was largely driven by mix.

We did not have a significant ramp-up in our trade spending this quarter versus last quarter.

I think that's the bulk of your question.

In our list prices still -- were discounting off of higher list prices obviously which we had taken off last year.

So on a percentage basis, that looks a little distorted, but for the most part, w did not see significant trade spending increases in this particular quarter.

Okay.

Shifting gears a bit, you guys are in a relatively unique situation or have some unique perspective having -- relative to some of your peers, having a large or a sizable private label business in addition to your branded business.

I'm wondering whether, Gary or Andre, could you give us some perspective as to what you're seeing in terms of the relative performance of the private label versus the branded and what the retailer response or retailer interest is in the two areas.

Eric, we are growing well on both sides of it.

In our private label business, the places where we are really strategic, where we don't have a branded presence like in our snack bars in particular, is quite strong and continues to be, but the branded side of our business is very strong as well.

I would tell you, overall, as an industry, clearly there's going to continue to be a place for private label, particularly in this environment, but the growth overall in the private label industry has slowed as the price gaps between branded and private label have narrowed a bit.

We continue to believe that the power of brands to drive retailer traffic and consumers wanting choice and innovation will continue to make that the top priority for us.

Okay.

Then in terms of your strategy of, your broader strategy of having this sizable private label business, is it -- could you talk about the rationale behind that?

Is it base-loading the plants?

Is it seeing the faster growth in private label versus branded over the next few years?

How do you balance that against effectively competing against yourself in some categories?

Yes, it's really two-sided.

Offensively, it's places where we don't play from a branded standpoint like the private-label bars -- granola bars, etc., fruit snacks.

That's the priority.

But the other side of it is where we defensively flank our high marketshare positions like a cooking spray or a whipped topping, an egg beater, Chef Boyardee.

That's where we basically use a strategy of power of two to give the branded products and the store brand.

David Driscoll, Citi Investment Research.

Thanks for taking the follow-up.

Andre, I just wanted to ask you a little bit more -- this is a follow-up to one of the earlier questions.

In the branded food business, are you -- do you estimate that you are holding or gaining total distribution?

I'm curious about this because, in the past, we've had so much conversation about your "manage for cash" brands, I wanted to get your sense for the health of the overall business and then maybe you could make a comment on the "manage for cash" as well.

Overall, David, we are seeing, in all of our strategic pillars, we are seeing increases in our points of distribution.

I would say the lion's share of that or the strength has been in our convenient meal platform, both shelf-stable and frozen.

With respect to our specialty businesses, or our specialty pillar, which is where some of the "manage for cash" brands that you allude to sit and reside, we've actually done very well in holding power and.

Given the brands that we have in that portfolio, there has not been a ton of innovation there.

I would also say that those businesses have been very strong.

Some of the markets there are high-share businesses for us and we have done -- we have held our own.

We've not seen ourselves lose points of distribution there, but we probably have gained the fewest in that space.

Last question -- can you give us any sense for new product activity upcoming?

Yes, we've got some really neat things that I'm not going to necessarily share with you right now but I think you will see it on your supermarket shelves soon.

Largely led by our convenient meal platform, we've got some interesting things we are doing with snacks as well.

So they will be in the market place later on in the third quarter.

Great.

Thanks a lot.

This concludes our question-and-answer session.

Mr.

Klinefelter, I will 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 will be archived on the web as detailed in our news release.

As always, we are available for discussions.

Thank you very much and happy holidays from ConAgra Foods.

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

Thank you again for attending and have a good day.