康尼格拉食品 (CAG) 2010 Q3 法說會逐字稿

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

This program is being recorded.

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

All audience lines are currently in a listen only mode.

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

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

Please go ahead, Mr.

Rodkin.

Thank you.

Good morning.

This is Gary Rodkin, and I'm here with John Gehring, our CFO, 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 misstatements 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'll be discussing some non-GAAP financial measures during the call today, and the reconciliations of those measures for Regulation G compliance can be found in either the earnings press release or on our website under the Financial Reports & 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 $0.50 has $0.06 of benefit from items impacting comparability as detailed in the press release, resulting in an earnings per share of $0.44 on a comparable basis for this quarter.

On that same basis, the $0.43 of diluted EPS from continuing operations reported in the prior-year quarter contains $0.03 of net benefit from items impacting comparability, resulting in EPS of $0.40 on a comparable basis.

Now I'll turn it back over to Gary.

Thanks, Chris.

As you saw in our earnings report, this was another good quarter for us.

Our momentum is continuing, and we are driving strong earnings per share growth.

Within Consumer Foods, we delivered very high-quality results on both the top and bottom line.

Our sales volume, margin and profit growth, along with our increased marketing investment, are positive signs of our ongoing progress.

The stronger foundation you've heard us talk about on previous calls and in a fair amount of detail last month in our CAGNY presentation is really starting to show in our results.

Third-quarter diluted EPS from continuing operations of $0.44 was 10% ahead of $0.40 a year ago on a comparable basis.

That's the type of growth we expected for the quarter.

We're on track for diluted EPS from continuing operations to approach $1.73 for the full fiscal year on a comparable basis, which is the guidance you have heard from us before.

Net net, the overall year's EPS is on track.

Consumer Foods drove the quarter's EPS progress.

Sales increased 2%.

Unit volumes increased 3%.

Most importantly, operating profit was up 19% on a comparable basis.

Sales growth was burdened by 2 points due to sliding and couponing investments related to new products, as well as passing through lower cooking oil commodity costs in the form of lower prices for certain products.

If you adjust for these factors, there's no erosion in price mix.

Our Commercial business continues to navigate a tough restaurant environment, but through mix and efficiencies, this segment posted a 6% profit increase.

Now I'll say a bit more about each segment.

We continue to post strong sales, units, margin and profit results in Consumer Foods, as well as good dollar and unit market share performance in aggregate.

Our top-line success continues to reflect the benefits of much improved marketing, innovation, and shopper insights initiatives you've heard us discuss before, and of course, reflect a benefit from strong overall execution.

The highlight frozen, all three of our big brands, Healthy Choice, Marie Callender's, and Banquet have grown market share fiscal year to date, and it goes without saying that they are having a very good year overall.

I've talked before about why we are succeeding in frozen.

Our innovation and marketing continues to set us apart.

At CAGNY, we told you about our new frozen items, like Healthy Choice Mediterranean Steamers and Banquet Dessert Pies, and I also said we would have some new products in the marketplace this summer.

I'll give you a sneak peek today of one we are really excited about.

We've got a very strong equity in Marie Callender's.

This brand is a very strong business for us, and it's continued its momentum, growing net sales, taking substantial share, and picking up significant distribution in the premium frozen segment, all while holding steady on price.

We're reaching new consumers with Marie Callender's every day.

In fact, we brought over 4 million new households to the brand in calendar 2009, and innovation has been a key to that growth.

Specifically, the Pasta Al Dente line.

This year, we're going to build on that success with more innovation.

And today, I want to tell you about our Marie Callender's new Signature Bakes that will start shipping in a couple of months.

Marie Callender's Signature Bakes is a great new way to create a true oven-quality baked meal for two made in your microwave in just 10 minutes.

These are nothing short of fantastic and perfect for the Marie Callender's equity, which is built on very high-quality, home-cooked flavors.

The other great thing about these meals is that they give us a very strong play in the two-person frozen meal segment, where there's growing consumer interest.

And, we're able to put these meals in the freezer case at about $6 for the consumer, which is a very good competitive price point.

I've had these mills, like Vermont White Cheddar Mac & Cheese and Chicken Alfredo with Sun-dried Tomatoes, and they are great.

Signature Bakes are a great example of using our deep expertise in microwave cooking to develop what consumers are looking for -- high-quality taste, something that really tastes like you spent all day making it from scratch, but which can be cooked in less than 10 minutes.

In our testing, consumers gave Marie Callender's Signature Bakes top concept, liking and value ratings, and we're looking forward to Bakes being another successful platform for us in frozen, after they start hitting the freezer case later this spring.

That's just one example in a very exciting new product lineup shipping in the coming months.

We'll have more innovation this summer from Marie Callender's, as well as significant new products from Healthy Choice, Banquet, Chef Boyardee, and Hunt's Snack Pack, to name a few.

As you can tell, our innovation pipeline is very strong and robust, and we will continue to prioritize our innovation activities with a focus on ROI and a strong execution of our fewer, bigger, better approach.

Another category of growing importance to us and to retailers is microwavable shelf-stable meals.

Boosting center-of-store sales is key, and our analysis showed that shoppers would be open to shelf-stable convenient meal purchases as long as their quality and health needs were met.

With the recent addition of Healthy Choice Fresh Mixers and Marie Callender's Home-Style Creations to the category, we've achieved a strong share position in a short time and are helping grow their category at retail.

Indeed, we are neck in neck with the market leader in terms of the top share ranking.

Our shopper marketing teams used deep insights to help drive traffic to this set, which is good for center of the store overall.

To say more about this concept of shopper marketing, we continue to leverage our confidence in consumer insights and in-store behavior to help retailers understand how to maximize category sales opportunities.

Strong insights and execution in shopper marketing are why we recently won the Gold Ogilvy Award, the top award across the industry for Excellence in Shopper Marketing.

Given the competition for these awards, a Gold in Shopper Marketing is quite a recognition, and I want to publicly congratulate our team on their success.

Shopper marketing insights are very important in triggering demand for consumer purchases.

We've talked about this at CAGNY and in other quarterly commentaries because we know this is making a difference.

At the core, these insights help retailers determine how and when items within a category are promoted, their placement on the shelves, and product and category adjacencies that drive greater product visibility and usage.

The proof, of course, is growing category sales.

Some of the greatest benefits, though, are harder to quantify but incredibly important in terms of our relationships with retailers and the opportunities that develop.

Being able to bring our retail partners these kinds of business driving insights means a seat at the table for collaborative planning and deeper sharing of insights and strategies.

Before I leave the topic of the strong Consumer Foods top line, I want to emphasize that we had quite a few other brands turning good performance during the third quarter, with sales gains from strong brands such as Chef Boyardee, Hunt's, and PAM.

Our overall growth is coming from multiple channels so the Consumer Foods business is healthy on several fronts.

We have provided more brand details in the Q&A document associated with today's release.

Key to our momentum is the success we are demonstrating in our supply chain.

Our supply chain savings program continues to deliver, putting us on track for $300 million in Consumer Foods cost savings this fiscal year, as we recently confirmed at CAGNY.

This quarter was another strong one for cost savings in the Consumer Foods supply chain, and we're delivering cost savings considerably in excess of inflation.

So the net savings had that much more of an impact in terms of allowing us to post earnings growth while still increasing our investment in marketing and innovation.

To that point, we increased Consumer Foods advertising and promotion by $12 million this quarter and are on track for mid-single-digit increase for the full fiscal year, indicating our desire and willingness to invest appropriately for future growth.

This dynamic of utilizing productivity savings to drive the top line through marketing and innovation is the core of our model.

Moving on to the Commercial Foods segment, performance there was in line with our expectations with more than 100% of the sales decline coming from lower wheat prices and the resulting pass-through impact on the top line at our flour milling operations.

The underlying performance at ConAgra Mills continues to be very strong, just not quite as good as the remarkable quarter they had last year.

Lamb Weston sales were up modestly.

Growth, of course, was dampened by the continued challenges in the restaurant business.

But due to our focus on cost of mix, but due to a focus on cost of mix, they grew profit.

Commercial Foods segment operating profit was up 6% largely on increased manufacturing efficiencies and some mix.

Flour milling profits remain strong, but as expected, were still down from last year's unusually strong amounts.

As we look to the future, we know the Commercial Foods segment will navigate the environment as well or better than its competitors.

And while this segment is not posting the high profit growth rates as it has done in recent years, its performance this fiscal year has been very good, given the industry conditions.

This is fundamentally a strong set of businesses.

We continue to see the full-year bottom line for the Commercial Foods segment to be about flat year over year.

Although Commercial Foods posted profit growth in the first three quarters, we expect and have planned for a fourth-quarter decline.

The absence of the 53rd week and the negative impact of the cost allocation process change at Lamb Weston, that we've described earlier in the year, are the bulk of this headwind.

In summary, we're in a good position as a company and you've heard me say before this is a great time to be at ConAgra Foods.

We expect our stronger foundation and our ongoing momentum will serve us well for the rest of the fiscal year and beyond.

We are confident in our ability to meet our guidance.

Thanks for joining us today.

And 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.

I will begin with our third-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.

So starting with our third-quarter quarter performance, as Gary noted, we posted another strong quarter.

We reported fully diluted earnings per share from continuing operations of $0.50 versus $0.43 in the year-ago period.

Excluding items impacting comparability, fully diluted earnings per share from continuing operations were $0.44, an increase of 10% over the prior year.

Segment operating margins for both Consumer and Commercial showed continued improvement.

The operating margin improvement was led by another strong performance year-over-year in Consumer Foods.

This Consumer Foods operating margin performance reflects a more favorable input cost environment and strong productivity savings, offset by additional investment behind our brands and our innovation initiatives.

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

First, as we've noted, the Consumer Foods segment turned in a very good quarter.

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

And, as I commented last quarter and at CAGNY, we are executing well and consistently on each of our fundamentals -- successful innovation; better marketing and merchandising; improved sales processes and performance resulting in stronger customer relationships; and top-notch supply-chain capabilities.

As we continue to execute against these fundamentals, the benefit 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 expectations.

Excluding materials related to pass-through categories such as cooking oil, our commodity costs were up slightly in the third quarter.

For the full year, we still expect inflation to be in the low single digits as we still face some challenges with certain inputs such as tomatoes, proteins, and steel.

However, overall inflation trends are manageable.

Our Consumer Foods supply chain cost reduction efforts continue to yield good results.

Our team continues to execute against the long runway of cost reduction opportunities.

And as Gary mentioned, we remain on track to deliver cost savings in the range of $300 million for the full year.

While the strong cost savings performance has contributed to our earnings growth, it has also helped to fund investments in support of our new product introductions, offset surgical pricing adjustments and also supported incremental marketing investment behind our brands.

Based on the cost 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 with consistent delivery of cost savings through the balance of fiscal 2010 and beyond.

On marketing, Consumer Foods advertising and promotion expense for the quarter was up $12 million or 13% as we continue our commitment to invest selectively and in an impactful way behind our key brands.

And for this quarter, foreign exchange impacted Consumer Foods' net sales favorably by 1%, while the impact on operating profit was immaterial.

Turning now to our Commercial Foods segment, these businesses continue to execute well in a challenging food service environment, turning in a 6% increase on operating profit.

The food service industry has been challenged over the past year and a half, and we expect the recovery to be gradual, given the broader economic challenges, including high unemployment.

Nonetheless, we are confident in the ability of our Commercial Foods management teams to continue to navigate this environment well.

On selling, general and administrative expenses, for the total Company, 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 challenge our team to control costs and to achieve higher ROI on incremental G&A investments.

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

The $0.06 per diluted share of benefit to this quarter's EPS came from three items.

First, based on favorable developments and regulatory requirements, the Company, in the third quarter, reduced its estimated liability for environmental cleanup costs at a site acquired many years ago as part of our Beatrice acquisition.

As a result, we recognized a pretax benefit of approximately $15 million or $0.02 per share.

In addition, the Company recorded a pretax gain of approximately $14 million, or $0.02 per share, in connection with the sale of its Luck's brand.

Lastly, our income tax expense for the quarter reflects approximately $0.02 of benefits from our lower than normal tax rate.

These benefits relate to favorable audit settlements and other changes and estimates.

On hedging, for the third quarter, the net hedging impact on corporate expense was immaterial.

For the year-ago period, the net hedging benefit reflected in corporate expense was approximately $35 million.

Overall, items impacting comparability in the prior-year third quarter amounted to $0.03 of net benefit.

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

First on cash flow, as we have commented previously, we are focused on cash flow, and our performance continues to reflect this focus.

In fact, year to date, our cash flow from operating activities is approximately $1.1 billion versus approximately $430 million in the year-ago period, a very significant improvement.

And we closed the quarter with over $780 million of cash on hand 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.

We also remain confident that working capital improvements in the current year will generate in the range of $200 million of cash flow benefits.

In addition, we continue to expect cash flows from operating activities to be in the range of $1.3 billion for the full year.

Next, on capital expenditures, for the quarter, we had capital expenditures of $121 million versus $100 million in the prior year.

We expect CapEx for fiscal 2010 to be in the range of $550 million, a bit lower than our previous estimate.

This amount includes current-year outlays related to our Slim Jim recovery, which we expect to be substantially funded by insurance proceeds, and approximately $85 million relating to our new sweet potato plant, which will be partially funded over time by tax incentives.

Net interest expense was $40 million in the third quarter versus $42 million in the prior year.

Interest income from the notes receivable associated with the sale of our Trading & Merchandising operations was approximately $21 million in the current quarter and $22 million in the year-ago period.

We remain very comfortable with the collectibility of these notes.

Dividends for the quarter increased to $89 million from $85 million in the prior year, principally due to the increase in our quarterly dividend from $0.19 to $0.20 per share, which took effect in the third quarter of this year.

As we noted at CAGNY and in the release, our Board authorized a $500 million share repurchase program this quarter.

We expect the program to span multiple years.

To date, we have not acquired any shares under the program.

And finally, a few comments on our fiscal 2010 outlook.

We continue to expect our fiscal 2010 full-year diluted earnings per share from continuing operations, excluding items impacting comparability, to approach $1.73.

As we noted in the release, we have earned $1.34 on a comparable basis year to date.

And based on our assessment of the fourth quarter, including marketing and other investments, as well as product costs and the outlook for the food service sector, we remain comfortable with our full-year guidance.

As a reminder, the prior-year fourth-quarter included an extra week, which will impact certain comparisons.

Overall, I think our outlook reflects the momentum in our business, as well as our plans to continue to invest in and execute on the strategic drivers of our 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, Bank of America.

Hi, good morning.

Just a couple of questions.

One, first, Gary, I guess just looking at the level of couponing that you did in the quarter, and just looking at that negative spread between revenue growth and volume, first of all, do you expect that to continue into the fourth quarter?

And then second, if you could talk more specifically about how much of that was in the frozen category?

It seems just based on your comments, it appears that maybe you had lost some market share in Healthy Choice, and are you having to coupon or discount more in order to support that brand?

Bryan, this is Andre.

Let me take that.

So, as Gary articulated, we have a very robust pipeline of innovation that we are going to be launching, including some of the items that he described.

So our investment behind those in the fourth quarter and into next year -- we'll continue to invest behind launching those products.

That said, in terms of what happened in this particular quarter, we invested significantly of our slotting and couponing investment that we made, about 65% to 70% of it was behind our frozen business, and that was to launch new items, specifically.

That was not to prop up -- your other part of your question was to say that we had lost some share and we were couponing or discounting Healthy Choice.

That was not the case.

We were putting coupons behind the new products around the new Mediterranean Steamers we launched and the new natural line extension that we lost specifically.

The rest of the slotting, really, and the couponing, fell behind our snacks portfolio.

And as you recall when we were at CAGNY, we talked about the new one-step cheese items that we were launching and that was two SKUs.

Yes, Bryan, the other piece of that gap between volume and sales is just our pass-through pricing on Wesson Oil and spreads.

Oil has come down dramatically versus a year ago.

It's not a margin issue.

It's not a trade issue.

It's purely just a pass-through.

So those two things, what Andre talked about in terms of new product investment, slotting allowance and coupon to launch new products, and this pass-through pricing, that accounts for all of it.

Everything else is basically just fine.

Okay.

And then just -- Andre, on the slotting, for the products that you put in, the new products you put in, is that incremental?

Is that extra or new shelf space?

Or is it replacing -- is your shelf set still the same?

The lion's share of it is new, so incremental.

There were a couple of SKUs that were replacements for some poor performers, but I would say 90+% of it was incremental.

And we are getting a very positive receptivity from our retailers.

Doug Knudsen and his team have been out lately talking to customers about the new items, and we are getting very, very strong reception.

So we're largely going to see most of that become incremental for us.

Okay, great.

Thank you.

David Palmer, UBS.

The question comes to this quarter that we are looking back at.

The January and February reporters for the packaged foods sector have been showing some, too many eyes, fairly unsatisfying volume performance, particularly given the easy comparisons that this sector had over that same time period.

What was it, do you think, from an industry perspective, that seemed to dampen December and even to a greater degree, January numbers?

Have you seen an improvement in February and into March that makes you feel like the two-year trend on volume can improve because it seems that is a key issue for folks right now is getting the sense that volume can improve on a two-year basis such that that can carry the top line from here with little pricing.

That's my first question.

Yes, David, I can tell you that we've seen good momentum in our volume continue, and we expect to see that kind of momentum continue.

And it's really based on the fact that we've got good productivity to use as fuel.

Our marketing fundamentals continue to get better and better.

Our relationships with our customers, our retailers, is very strong.

And maybe most importantly, we've got a very robust innovation pipeline.

So we are seeing our momentum on the volume continue.

And we can expect to see that go into next year as well.

And, let's also remember we've got non-measured channels too.

Is there -- one of the things that is troubling folks with regard to the frozen entree category in particular is the lack of momentum in the category, period.

So share gains get you something, perhaps something that doesn't last forever.

When is that category going to get going and kind of relieve that pressure and feeling that this would be kind of a one and done situation for you where you claw back some share, and then the category goes through perhaps another -- a painful process where retailers start to deemphasize that category, perhaps at the expense of margins for manufacturers.

Could you just address the health of the category?

Yes, I can see in measured channels, there is a bit of softness in that category.

Probably at some point in the not-too-distant future, start to flatten out as the economy starts to flatten out.

But in our case, we are seeing very strong repeat rates on our innovation.

So we are seeing our combination of value orientation on Banquet and innovation in health and wellness on Healthy Choice, innovation on Marie Callender, those fundamentals are working for us and keeping consumers coming back again and again.

So the fundamentals, the organic growth, is good for us on frozen.

Yes, and David, I'd just like to emphasize one thing.

I think in this quarter, in measured channels, every one of our brands in the single serve meals, that would be Banquet, that would be Marie Callender's and Healthy Choice, gain share.

And what we are hearing from retailers is what they like from ConAgra and what we are bringing is we are bringing innovation and something that the category has lacked for a while.

So I would say that the response that we've gotten from customers has been very, very positive.

We have not heard them talking about deemphasizing this category at all.

Quite the contrary, they've been very happy with the innovation that we've brought and they're also looking at this Bake idea that we are bringing with Marie Callender in the multi-serve as being innovation we're bringing there as well.

Thanks very much.

David Driscoll, Citi Investment Research.

A couple of questions here.

A number of detailed questions, actually.

So, John, I wanted to go back to your comments on the zero overhead growth.

Can you explain one more time the corporate expense line?

I think it was up something like 28% year over year.

And I know I'm getting lost here on the zero overhead growth concept in that 28% increase.

How do you reconcile these?

And how should we think about the corporate expense line going forward?

And then a follow-up, if you will.

Okay, first of all, David, we've probably got some apples in with the oranges here, but let me start with -- we talk about core SG&A, we're looking at SG&A across all of the Company.

So, when you're looking at the corporate expense, that's just one slice of the SG&A.

So, you need to look at the whole Company P&L for the core SG&A.

And that's again where we continue to focus and drive discipline into the Company across all SG&A.

On the corporate expense, again, I think as you understand, corporate expense can be impacted by a number of factors, including how you allocate costs out to the businesses year over year.

But I think the way we look at corporate expense is, in a normal year, I think we're probably looking at something in the $350 million to $375 million.

One of the reasons it's up this year is we've got certain costs that reside in corporate that are up.

A portion of that, as we've addressed in the release, is incentives are up somewhat this year over last year just given the performance year over year.

So a lot of that delta gets trapped in that corporate expense number.

So, that's probably the key points I'd raise at this point.

Yes, David, I would just add, we've got significant up-and-down leverage in that bonus.

And last year was a pretty tough year for us.

This year is a pretty good year.

So that clearly is a major factor.

So would it be more fair to look at that corporate expense line over a multi-year period?

Yes, I think that's one way to look at it.

Again, this year, I think we're going to end up in that 375 to 400 range for the year.

And again, because of some of the things that get tracked in corporate, there's probably a little more volatility to that.

But again, that's just one component of the total SG&A.

Okay.

Three other quick ones on the P&L.

So the tax rate -- is the fourth quarter really going to be a 41% tax rate to get the full year to 35%?

And then the joint venture number, the earnings there were down a good bit versus what we were looking for, and I believe on the year over year.

And then the last question, Gary, is what's the $12 million in marketing as a percent?

Like $12 million, sometimes it's hard for folks on the outside to understand it on the absolute dollar basis; easier to know when you talk about it on a percentage basis.

Just to take the last one, that's about 13% increase.

So last year was around $100 million.

So another 12%-- 12%, 13%.

Thank you.

David, it's Rob.

Let me try and address the joint venture one.

As we've said in the past, on that venture line, the biggest piece of it is Lamb Weston Meyer venture in Europe.

And that business tends to make most of its money in six months out of the year, but picking which six months that's going to be is always a challenge.

Right now, you're continuing to see plentiful low-price potatoes in Europe.

And what you've got is a very fragmented market there with a lot of small competitors that will sometimes just run for variable profit.

Net net, there's no core issue with that business, but you will see that line bounce around from quarter to quarter.

last year's quarter happened to be one of their better quarters of the year, and this year that wasn't the case.

And the comment on the tax rate?

Yes, David, I think we look at our tax rate on a normalized basis to be in the range of 35% this year.

We would expect that to be the case also in the fourth quarter.

I think what's happening in the math perhaps is that when you look at the year to date, net net, we've had a number of favorable one-time items that we have called out that are reflected in our year-to-date tax rate, which probably puts it somewhat below 35%.

But our normalized rate for the fourth quarter we expect to be right there at that 35% range.

Okay.

Thanks a lot, everyone.

Vincent Andrews, Morgan Stanley.

This is Jackie Inglesby standing in for Vincent.

I was just hoping you could talk a little bit about your outlook on the overall promotional environment, given that one pretty large retailer has been pretty vocal about stepping up promotional activity, so kind of how you view that?

And then if you think that this is implications kind of across the broader retailer landscape?

Okay, Jackie, this is Andre.

In terms of -- what we've seen, we've seen the environment has been actually fairly steady in most of our categories with the possible exception of those that we have had to pass through significant raw material declines around oil and spreads.

So I think I understand your comment about some of the retailer comments, but we've not seen that.

So we continue to see fairly consistent levels of promotional activity at price points that right now we're reasonably comfortable with in terms of what we've had in our business for the last three quarters.

So we haven't seen an abrupt change in that landscape.

Okay, great.

Thank you.

Eric Katzman, Deutsche Bank.

Good morning, everybody.

I guess I want to follow up a little bit, I think it was on Dave Driscoll's question, regarding the marketing spending.

I realize that you are spending, I think the number is about 5% of your consumer sales, which is pretty competitive.

But it just seems in terms of change, I'm sure you've noticed this, Gary, that other companies are kind of boosting that number 20%, 30% kind of levels.

So, do you think that your level is competitive, or is it just kind of the nature of the industry now?

Maybe it isn't going into promotion and it's going more into advertising, but kind of how do you think about that?

Eric, I think that we're basing our spend on where we think we can strike that right balance of effectiveness and efficiency.

So I think the impact at the current level is a very good one.

So, we will continue to evaluate on a, kind of an ROI mindset.

It's a bit more art than science -- but the mindset of ROI on our marketing spend.

And I would say we are in the right ballpark, and we will continue to stay there.

And we probably will continue to see increase in our marketing spending.

But I don't see that jumping to a huge degree.

I think we're in the right zone.

The one thing I would add is that I think if you look at our numbers, and your 5% number is correct, in the aggregate, I think it's a little bit misleading.

Because I think the way to look at it -- the way I look at it internally along with Gary is that ROI mindset.

But more importantly I think you have to look and strip apart where we are spending the money in our pillars because then it starts to look significantly more.

So for instance, in our specialty business as an example, our Wesson Oil business and our spreads and some of our lower tier brands, we don't spend any dollars, yet we generate a lot of sales, if you will.

So I think you have to take a look at it against the brands that we are spending.

And then you start to get into numbers that are meaningfully more than 5%, and I think that's probably the right way to start looking at it.

Looking at ConAgra in aggregate, again, is not the way to look at it because if you look at some of Rob's business, he doesn't spend any A&P either.

So I think for us in the Consumer space, we get down to the brand level and the pillar level, and I think that's the right way to look at it.

That's a fair comment.

And if I could just follow up on the Commercial side, McCormick earlier this morning talked about starting to see somewhat better growth out of food service distributors, signs of life there.

I think General Mills yesterday also commented the same.

So, given your exposure to that area, you kind of said -- you seem to me that you were still a bit cautious.

How do I think about that?

Is it because the QSR exposure that you have?

Or why shouldn't we look at the demand there getting better with the other companies kind of commenting that things are starting to show signs of life?

Eric, I will echo what they have said in that we are seeing signs of life that would kind of lead me to conclude we are off the bottom.

And we are being a little conservative and cautious here.

Because if you look at the core food service industry, and I will exclude quick-service restaurants from this, there are a lot of restaurants that are still barely hanging on.

So, I see signs of life.

We see signs of life.

It certainly makes us more optimistic than we were a quarter ago, but I just don't think we are quite ready to call a trend yet and kind of build that into a near-in forecast.

Okay.

And can I just ask one last quick one just on the tax rate and the outlook?

Is the change in the environmental liability, is that -- does that have any impact on 2011?

Is that an ongoing thing?

And is that -- does that mean 35% is a good rate to kind of hold in for next year also?

Yes, I think there's two pieces there.

So first of all, on the environmental issue, we inherited a basket of environmental liabilities 18 years ago.

We just had a development on one of those properties, and so we view that clearly as a one-time item.

And then on the tax rate, again, I would reiterate what I said before.

I think 35% is a reasonably good estimate for our normalized tax rate.

And John, just to echo John's point, the 35% we are talking about would exclude unusual items like environmental liability.

So they're different issues.

Got it.

Okay, thank you.

Andrew Lazar, Barclays Capital.

Good morning, everyone.

Gary, I know that for a while there, you were sort of breaking out Consumer Foods sales kind of from an enabler versus priority brands standpoint.

And I'm just curious, now I guess it's on a more consolidated basis.

Is your business sort of in a different place where it really doesn't make sense anymore to look at it on that basis?

I'm trying to get a sense of the shift and what that says about where you are at from your business fundamentals standpoint?

Yes, Andrew, we, in our strategic planning a year ago, went to strategic pillars and rather than kind of bifurcating into priority and enabler brands, we now have them broken into pillars like convenient meals, potatoes, et cetera, snacks.

So that's the way that we look at the business now, and that has helped us in terms of the way we focus our resources.

So it isn't anything more than that.

Okay.

And then you've been benefiting quite a bit, as you've talked about, from a more value conscious consumer and some of the brands that really work and resonate with that kind of a consumer and that sort of a retailer.

What type of data do you have that helps you get a sense of what the performance of some of those brands do, when the economy starts to sort of turn around?

Does the increased trial and value orientation of those brands tend to stick pretty well?

Or can you move people -- typically do you move people up within your sort of brand franchise, just the ones that are somewhat more premium?

Just trying to get a sense because obviously that's been an incredible help to your business of late.

Yes, I think we believe very strongly that value is here to stay; that there's a large portion of the population that is going to continue to look very hard at value, even as the economy starts to flatten and turn a little bit.

So we believe the value proposition has fundamentally changed.

On the other side of the coin, we're going to have to work hard as an industry to get growth from the more premium products in the way that we actually do our innovation.

We've got, certainly, the potential to capture folks as they look to move up, given the innovation in our more value-added brands.

But I think we really choose to look at it on both sides, and we are well-positioned in both places.

Thanks, everyone.

Chris Growe, Stifel Nicolaus.

I had one follow-up for you and then one other question.

And that is if you look at Healthy Choice in the quarter, excluding -- and maybe a better question would be for frozen overall, excluding some of the couponing and the slotting, did you see growth in frozen sales?

And I guess I saw that Healthy Choice sales were down as one that you called out.

Would that have been up without some of the spending in the quarter?

Yes, the reason that you saw Healthy Choice down -- this is Andre, Chris.

The reason you saw Healthy Choice down in the quarter was the lion's share of the slotting and couponing were for new items on the Healthy Choice line.

So that Mediterranean Steamer line is a Healthy Choice product, as are the introduction of the added SKUs into the natural lineup.

But without that, you would have seen positive growth as we saw with Marie and for Banquet, for instance.

Okay.

And then I had another one, just related to Q4, it sounds like you've got a pretty heavy new product schedule coming through.

So should we expect -- it sounds -- should we expect any kind of improvement in shipments in the fourth quarter around some of these new products?

Is that going to be like a one-time benefit coming through as you start to ship these products?

Yes; I think the noise you're going to see though in the fourth quarter is we've got these items shipping.

But as John articulated, we're going to be dealing with a 53rd week in the last fourth quarter.

So there will be some puts and takes.

And again, as John said, it will be kind of hard to judge all of those things, but, yes.

Sure.

Okay.

And the last question I had for you was just relative to the Consumer Foods operating margin, you made some very good progress there this year.

You have a lot of cost savings coming up.

Have you gone out and said kind of where you foresee that margin going?

I think you've made some general comments about that, but we're getting a much better sense of the strength of the cost savings, which would seem to help that margin continue to move higher as long as you don't have any material incremental marketing spending, for example, which I think you said you do not.

Why don't I start?

This is Chris.

We have not offered a firm number on the target for Consumer Foods operating margins.

We certainly have a lot of upside and continually will narrow the gap at our peer set.

We're at the midteens now.

There's no reason that can't keep going north.

Okay.

Thank you.

Robert Moskow, Credit Suisse.

Hi, just kind of a different kind of question.

I understand that there's some legislation hanging out there out of California, or the congressman out of California, that would require a lot of incremental spending on food safety.

I wanted to know if you had looked at it.

It probably won't pass in its current form, but as you look at your CapEx budget, which is unusually high this year, the way I figure it maybe we have one more year that's high and then we can kind of normalize at a lower level, which I think would be great for your cash flow.

But, do you see any incremental spending that will have to be done to ramp up food safety issues?

Or do you feel like you are doing what you need to be doing right now?

Yes, Robert, over the last few years, we have spent a significant amount of money.

I think we've even talked about it being about $400 million on infrastructure, really focused against product quality and food safety.

So we are in very, very good shape.

From that perspective, I'd say looking more as a leader rather than a laggard as we might have a few years ago.

So we're in pretty good shape overall from an infrastructure standpoint.

Okay.

And --

That means that the capital that you see us deploy on a go-forward basis is going to shift more into growth and cost savings versus just having to spend the bulk of it on infrastructure.

Right.

And just in terms of fourth quarter, I guess I got a little ahead of myself here on numbers.

But I'm trying to figure out why operating income would be down in fourth quarter, which seems to be what's implied by the guidance.

You mentioned Lamb Weston.

You mentioned the 53rd week.

But, really, your margins are structurally higher.

You have a better foundation and the inflation is not hurting you.

So, is there something out -- another investment that's going on in fourth quarter?

Is it higher incentive accrual?

Is that going to hit fourth quarter too?

Robert, clearly that will be a factor in Q4.

I think the biggest pieces are the fact that we do have the 53rd week.

But maybe most importantly, we are going against a really tough commercial overlap, so that's going to be a tough one.

But importantly, we still expect to see consumer up.

So the fundamentals of the business still look very good.

We still feel very good about the full year and the momentum continuing.

It's just a bit of optics.

Okay.

Thank you very much.

Alexia Howard, Sanford Bernstein.

Good morning, everyone.

Could I ask about the commodity situation and how you are feeling about that right now, particularly in Consumer?

It seems to me that meat prices are beginning to trend up again.

We've been seeing that for a while, but other things are coming in, sugar and so on.

How do you see the outlook over the next few quarters?

Is it benign?

Is it looking a little bit more challenging?

And will you be able to take pricing if the commodity situation is getting a little bit more tricky?

I would say we would probably see it as something a little bit more than benign, so some of the things you mentioned certainly are going to put some pressure on us.

But we, also, given our portfolio, there's also some places where we see the trends going the other way.

So on some of the crop-based businesses we have, where some of those crops were up this year, we expect those to come down.

So across the whole portfolio, I think we're looking at still kind of fairly modest inflation, probably in the 3% range.

So we think, given our cost savings opportunities, we think we still have a really good place in terms of managing our COGS and continuing the momentum in the business.

So I think that's -- I think feeling good about it.

Great, thanks.

So you wouldn't anticipate needing to take any pricing; the productivity improvement will cover the commodity situation?

We are not planning on taking pricing.

Obviously, if things go significantly differently than what we plan, we are very much on top of it.

But, it's not in our plan.

That's great.

Thanks very much.

I'll pass it on.

Eric Serotta, Consumer Edge Research.

Last quarter, you guys referred to, or referenced, that your growth in non-measured channels was actually slower than your growth in the measured or tracked channels.

And you attributed it largely to the Slim Jim situation.

And secondarily, you did highlight so that the timing of some promotional activity with some large EDLP customers -- I'm sorry, with some large customers.

Could you explain what happened this quarter in terms of your growth in tracked versus non-tracked channels?

Doesn't seem like Slim Jim was a major impact.

Yes, Eric, this is Andre.

I would say we got better balance.

The things that you alluded to for the last quarter were, in fact, in play.

I think this quarter we happen to get much more balance across our non-measured and our measured channels.

Again, a lot of that's going to -- every quarter is going to be different.

There's going to be timing issues that relate to one versus the other.

So I think we felt very good about where our Q3 performance came in.

It was actually very balanced.

David Driscoll.

Thanks for taking the follow-up.

Two points, Gary.

The first one is just on the overall price environment.

You made a number of comments about what happened to you in the quarter.

But maybe, could you just give -- ConAgra's in a lot of different aisles of the grocery store.

I think you probably have one of the best perspectives as what is happening.

Do you see the retailers really putting the pressure on the manufacturers to reduce price?

We get this question tremendously.

And then the second question would just be on private-label.

What's the update on the trends in private-label versus your products?

Well, I can tell you, David, that pricing is all about both manufacturer and retailer, about getting the right price value.

I think we've been very good in terms of our insights on our products and our discussions with our customers, our retail partners, on what some of those price thresholds are.

That's a very important term.

So, it's not always about taking the price down lower, lower, lower.

Sometimes the analytics would tell you that at actually a higher price you will sell more volume.

And we have some pretty good examples of that.

So, certainly there's plenty of pressure for value.

There's no question about that.

But it's really about getting the right price points.

We feel pretty good that we are in pretty good shape from that perspective.

And then, on the -- what was the second question there?

The second question is just on private-label.

I feel like a year ago, every conference call was the question about how is private-label negatively affecting different companies' businesses.

I don't hear the question very much anymore, but you guys actually sell some private-label as part of your portfolio.

And of course, private-label competes against you in a number of key areas like PAM and Reddi-wip.

Can you just give us an update as to how the trends are?

Yes, I would tell you your observation is correct.

It's pretty flat right now.

I think that gap has closed as a lot of manufacturers have figured out that pricing architecture that I referred to before.

So, right now, we're seeing across the board, pretty flat performance from private-label.

There are some places.

We certainly have a business where the private-label business continues to be very good.

But, net net as an overall industry, it's pretty stable.

Great.

Thanks for the comments.

Eric Katzman.

Thanks for taking the follow-up.

And, for somebody who's followed the Company for a long time, I just, I want to compliment you on taking all the questions on the conference call.

It's so different from the way the Company used to be.

It really is appreciated.

Okay.

Just John, maybe you could just -- just so I'm clear because you know there's items in and out, and I know the corporate expense line is pretty volatile.

But what do you have for like the fourth-quarter year-ago corporate line?

Just so I know if you are -- because if you're talking about $400 million or less for this year, it just, based on what I have, it seems like that might actually be flat to down versus a year ago based on what you booked the first three quarters.

I do not have that in front of me.

I think the other thing that we'd have to look at is there tend to be gains from sales of assets and businesses that can flow into that also.

So, I just don't have the number.

Chris (multiple speakers)

Chris, you can get back to me after the call.

That's okay.

(multiple speakers).

We'd be happy to follow-up.

I apologize.

Thank you.

There are no further questions.

Mr.

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

This concludes our conference call.

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

And as always, we are available for discussions.

Thank you very much for your interest in ConAgra Foods.

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

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