康尼格拉食品 (CAG) 2011 Q1 法說會逐字稿

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

This program is being recorded.

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

(Operator Instructions).

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

Please go ahead, Mr.

Rodkin.

Good morning.

Welcome to the call and thanks for joining us.

This is Gary Rodkin, and I am here with Andre Hawaux, President of Consumer Foods; John Gehring, our CFO; and Chris Klinefelter, VP of Investor Relations.

Over the next few minutes, Andre, John and I will provide our views about the strategic, operating and financial aspects of the quarter, but before we get started, Chris will say a few words about housekeeping matters.

Good morning.

During today's remarks we will make some forward-looking statements, and while we are making those statements in good faith and are confident about our Company's direction, we do not have any guarantee about the results that we will achieve.

So if you would like to learn more about the risks and factors that could influence and affect our business, I'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, and the reconciliations of those measures to the most directly comparable measures for Regulation G compliance can be found in either the earnings press release, our Q&A, or on our website under the Financial Reports and Filings link, and then choosing Non-GAAP Reconciliations.

Now I will turn it back over to Gary.

As you can see from the release, comparable EPS was $0.34.

We revised yearly EPS growth expectations to 5% to 7%, and we raised our dividend 15%.

Consumer Foods sales were down 2% and operating profit was down 14% as reported.

In Commercial Foods, segment profits were also down.

A tough quarter, but not reflective of our current expectations for the full fiscal year or beyond.

It goes without saying that we are not pleased with the quarter's EPS.

We have already implemented course correcting actions to improve the overall year, and you'll hear about those actions over the next few minutes.

I want to use our time this morning to give you a deeper insight into our first quarter and more clarity on our outlook for the rest of the year.

I will get into some specifics, as will John, and I have asked Andre to share some of his perspective on the Consumer business as well.

As I indicated, Q1 was definitely tougher than we planned for.

The degree and depth of promotional activity was greater than expected and inflation outpaced cost savings.

While we knew we would have some carryover profitability issues in Lamb Weston, due to last year's poor potato crop and a soft restaurant industry, those costs were more than expected.

Given that, we have been implementing changes to course correct and deliver good EPS growth this year.

The actions we have taken, and will continue to take, give us confidence in our ability to improve results in the second half of the year and beyond.

This is a stronger ConAgra Foods, and because of that fact we are very confident we have the foundation, including robust innovation, marketing that resonates, productivity, and the brands to generate solid earnings growth this year.

Let's talk more about this quarter, starting with the macro environment for Consumer Foods.

Our Q1 represented a very challenging marketplace.

The strong deal-seeking mindset consumers developed earlier in the recession has become the new normal.

As consumers continue to tighten their purse strings and whittle down their pantries, retailers and manufacturers have discounted more heavily to re-energize sales.

We saw softness in some of our key categories, despite higher trade costs which impacted our margins and profits.

This downward turn in the market environment exacerbated a Q1 that we had planned to be our softest comparison for F11.

We planned for a softer Q1 because of the following factors.

One, the potato crop issue I already mentioned.

Two, our net cost savings, meaning productivity above and beyond inflation would be skewed to the back half of F11 versus the first half of F10.

And three, our Consumer Foods new product introductions coming late in the quarter compared to last year when they were launched just prior to the beginning of Q1.

This meant we absorbed the expense this quarter but not the volume benefit.

Because the negative impact of these three factors are specific to Q1, and because our SG&A costs in the back half will be lower, we have a high degree of confidence that our results will improve significantly, particularly in the second half.

So how will we navigate in an environment like this one?

In a nutshell our focus is on bringing value-based innovation, the right marketing and promotion strategies, and accelerating productivity.

We understand the changed marketplace and our portfolio is capable of succeeding in it.

I believe as we go forward that winning food manufacturers will be those who can deliver highly relevant messaging and innovation, wrapped in a very strong price value equation.

We are pretty certain that the more intense value mindset of consumers is here to stay.

The food industry, both manufacturers and retailers, will not win by continuously dropping prices.

Value does not just mean a cheaper price, it is much more holistic.

We're responding to this environment by accelerating our efforts to better leverage the inherent value of our portfolio.

What do I mean by the inherent value of our portfolio?

I mean the already built-in bundle of benefits, the great deal for the brand user at the normal price points, like Banquet meals for $1 or Snack Pack pudding for $0.25 per cup.

I could give you many examples, but the point is we are working with our retail partners on pricing architecture and pricing thresholds for better overall top and bottom line results.

Sometimes the inherent value is locked up in specific nutritional benefits that we need to market more directly, like a Healthy Choice or Egg Beaters.

Or it might be superior quality, like Hunt's tomatoes or Hebrew National hot dogs.

Net-net we are working toward leveraging a portfolio that we know delivers great price value in a more meaningful way.

That is how we will succeed as we go forward.

And that is how we are working our innovation strategy, starting with a price point we know works for consumers and working backward to meaningful new products that are compelling.

Banquet fruit pies are one example, where we are leveraging existing infrastructure and making a play in an adjacent category and seeing strong early results.

Healthy Choice Lunch Steamers launched in August move us more into the frozen entree lunch occasion and deliver a great price value, particularly compared to lunch alternatives.

Our Marie Callender's bakes are another new item off to a good early start.

These meals are an incredible value for the consumer and are built on our robust abilities in frozen, insights, innovation, manufacturing and marketing to give us a stronger position in multi-serve meals.

Andre will talk a bit more about our Consumer business, including the frozen category, but let me just emphasize that we believe our innovative new products and our compelling price value equation will be positive differentiators for us.

As we have said before, our strategy is to make a significant difference with fewer, bigger and better innovation, and the frozen category is a good example of that.

During our Q1 we were able to grow share in the category, despite the heavy competitive discounting.

We are starting to see some improving trends from the last 4 to 6 weeks of syndicated sales data and our Consumer Foods shipment trends have also broadly and gradually improved over the past 6 to 8 weeks.

While we obviously had our challenges, given the quarter's performance for Commercial Foods, there are also some encouraging signs in this segment.

Lamb Weston delivered topline growth this quarter and signs are that the restaurant industry has started to pick up again.

Our new sweet potato facility in Louisiana will begin ramping up production in October and will help us capitalize on that growing portion of our business.

Along with the dynamics of a more normal crop just coming into production, we are optimistic we will have a much improved second half at Lamb Weston.

Sales for ConAgra Mills declined in the quarter, primarily a reflection of lower pass-through costs on wheat, but profitability was very strong.

We are confident that year-over-year profitability will increase for the Commercial segment with that progress coming in the second half of the year.

While we clearly have a high sense of urgency on our near-term challenges, we continue to keep a long-term perspective.

One of the ways we are demonstrating that in our Commercial Foods segment, I just mentioned, was the investment in our new sweet potato plant.

That is indicative of our firm commitment to ongoing reinvestment in growth across ConAgra Foods.

One of the ways we are demonstrating this long-term commitment in our Consumer Foods segment is in our A&P, our advertising and promotion plans this year.

We plan to keep our A&P spend in line with last year's levels.

While deep cuts may be tempting as a short-term fix for profitability, we are choosing to continue making smart infrastructure, marketing and innovation investments for the sustainable health of the business.

In summary, Q1 was a difficult quarter for a number of reasons, and we have taken action based on our learnings.

We believe the rest of the year will still have its challenges.

The economy will continue to force consumers and customers to be very value conscious, for example, but on the positive side we do expect to see a more rational promotional environment in the next several months, particularly given commodity costs and margin pressures in the industry.

To be clear, we are not expecting an easy competitive environment, but we do think inflation will cause some of the recent promotional intensity to lessen.

As we said in the release, we expect the second quarter to fall a bit below last year, but we are set up for good, strong EPS growth in the second half of F11, and we will turn in a respectable number for full fiscal year '11 because, one, our volume and margins on Lamb Weston will improve as the new crop and sweet potato production come onboard.

Two, we believe our gradually improving volume in Consumer Foods will continue and will benefit from our recent new product launches, as well as some new items coming in the back half.

Three, we will also benefit from contributions from our recent acquisitions, Elan and American Pie.

Four, our cost savings will be stronger later in the year, and for the year will meet or exceed our goals, helping us better offset increasing inflation.

Five, our SG&A will come down due in large part to reduced incentive costs.

Six, our quarterly comparables will become easier, particularly in Q4, and, of course, we will have some leverage from our share repurchases.

Because of the changed dynamics in the marketplace we thought it would be helpful to have Andre share his perspective on the Consumer business, as well as some examples of what we are doing to operate with these consumer dynamics in mind.

Andre.

Thanks, Gary, and good morning everyone.

Let me take a couple of minutes to give you a more granular view of Consumer Foods' results and outlook.

As you heard from Gary, and saw in our release, aside from the timing and acceleration of our cost savings, we expect innovation and more effective promotional strategies to drive improvements in our back half.

Let me use examples in our frozen and in our snacks platform to give you a better sense of what we expect.

Our goals in frozen are straightforward.

First, we want to win in single serve, where today we have a plus 30% share.

Two, we want to establish a position in the fast-growing multi-serve segment.

And, three, we want to capture strategic adjacencies such as appetizers and desserts.

While we weren't satisfied with our frozen performance in Q1, we made good progress towards our long-term goals.

We gained share in single-serve meals led by Banquet, a brand clearly built for these times.

Banquet grew share, grew volume, gross margin and profit in Q1.

In single serve the healthy segment was the most challenging by far for the following reasons -- aggressive competitive discounting, flat merchandising activity versus a year ago, and we invested significantly in slotting to support our new Lunch Steamer platform, which shipped at the end of the quarter.

We believe the balance of the year will show solid single-serve results, driven by the strength of the Banquet brand, innovation, both Lunch Steamers and the Marie Callender's steam fresh meals, more effective merchandising programs enabled by the broadening of our portfolio, especially in entrees, where we now have critical scale, new breakthrough marketing campaigns which are just kicking off, and costs that are essentially frontloaded in Q1 and Q2 for slotting and marketing launch expenses.

This quarter we also launched our first significant foray into multi-serve frozen meals with Marie Callender's signature bakes.

It is a wonderful product that leverages technology to produce oven-baked classics with the convenience of microwave cooking.

Trade acceptance has been very good, and we are already at solid levels of ACB distribution.

The marketing campaign, trial vehicles and media are just starting under the theme of Time to Savor.

We feel very good about our prospects in multi-serve frozen.

Finally, with respect to strategic adjacencies, our Banquet fruit pies are off to a strong start.

We also feel very good about our acquisition and integration of American Pie, and the contribution it will make to our frozen business.

Given some of the upfront and M&A related costs, this new platform will be a more significant profit contributor for Q2 and beyond.

So net-net lots of solid progress on our long-term goals.

We made significant investments in slotting for new items, have new marketing campaigns, and have solid merchandising plans in place.

I feel very good about the balance of the year in the frozen segment.

Let me turn now to snacks.

I want to share a few highlights with you on some of our brands in this pillar.

Our Slim Jim recovery has been better than planned, with our SKUs showing better velocities than before the Garner accident.

We have also regained our entire lost share, and continue to build out our distribution and ramp up our supply chain capacity.

In shelf stable pudding, Snack Pack is up over 4% for the past 13 weeks.

Three of the 4 points are coming from base, not promotions, which is a very positive sign.

Our store brand cereal bar business continues to grow double digits, which validates our Elan acquisition even more.

Not only does the Elan acquisition give us -- the acquisition give us additional capacity, it also gives us capabilities beyond cereal and fruit and grain bars.

Now despite this good news, popcorn continues to be a tough category story.

We are putting in place programs to reverse these trends.

We have a three-pronged strategy to address both the short- and long-term issues facing this business.

The first is very tactical, as we get our pricing architecture right and focus our sales teams on feature and display execution.

Secondly, in the midterm we are looking to capture key holidays and locking in promotional partners, such as Redbox, to bring excitement, not just price promotion, to this category.

We have an innovative Pop and Win promotion slated for the holidays.

This is something that was extremely successful for us in Canada, where Orville Redenbacher's enjoyed a strong share and is growing.

The third prong is long-term innovation, which we believe will play a key role.

For competitive reasons, I won't discuss this in great detail, other than to say that you will see something from us in the back half of the year.

In the quarter ended August 29, all-outlet share review, we have seen progress with our popcorn business, and believe this will continue with the programs I have just described.

So to summarize, I feel good about the back half of the year in Consumer Foods for three reasons.

One, we will have the full effect of our innovation in the back half of the year.

We will be adjusting our promotional activities to reflect the new retail and consumer environment that Gary talked about.

We also see acceleration of cost savings helping us more in the back half.

Hopefully, this provides some context for our performance and has given you some insight as to the direction of the Consumer's business for the balance of the year.

I would now like to turn this over to John Gehring, our CFO.

John.

Thank you, Andre, and good morning everyone.

I'm going to touch on five topics this morning.

I will begin with our first-quarter performance.

Next, I will address comparability matters, and then comment on portfolio changes, then onto cash flow, capital and balance sheet items.

And finally, I will share some comments on our updated outlook for fiscal 2011.

Starting with our first-quarter performance, for the quarter we reported net sales of $2.8 billion, down 2%, driven by softness in the Consumer segment and the impact of lower wheat prices in our flour milling operations.

We reported fully diluted earnings per share from continuing operations of $0.32 versus $0.37 in the year-ago period.

Adjusting for items impacting comparability, fully diluted earnings per share from continuing operations were $0.34.

While Gary and Andre have addressed the Consumer segment results in some detail, I would like to touch on a few key metrics.

First, Consumer Foods net sales were $1.8 billion, down 2%.

Inflation for our Consumer Foods business in the quarter was up from prior year, slightly over 5% and a bit more than our expectations.

Our Consumer Foods supply-chain cost reduction efforts continued to yield good results, and we delivered cost savings of approximately $60 million in the quarter.

And we expect our programs to deliver in the range of $275 million for the year, consistent with our previous estimates.

Overall, Consumer Foods gross margin percentage was down about 1 point due to pricing pressure and inflation.

On marketing, Consumer Foods advertising and promotion expense for the quarter was $88 million, down $7 million from the prior year.

The decrease principally reflects timing differences versus the prior year.

For the full year we expect A&P to be in line with prior year, as we continue to prioritize investment behind our key brands and our innovation initiatives.

For this quarter foreign exchange had an immaterial impact on net sales, and contributed approximately $10 million of operating profit to the Consumer Foods segment results.

Also, for this quarter new businesses, net of divested businesses, contributed $29 million of net sales, but had an immaterial impact on operating profit.

Turning now to our Commercial Foods segment, net sales were $993 million or down 3%.

The decrease was driven primarily by the impact of lower wheat costs in our flour milling business.

At our Lamb Weston business, however, net sales were up 2% on stronger volumes.

Overall, segment operating profit was down 17%.

The decline was due principally to the unfavorable product costs in our Lamb Weston business resulting from a high-cost, poor-quality potato crop carried into the year.

Operating profit for the balance of the segment was up slightly, as our mills business performed well with continued strong operating profit.

For the total Company, selling, general and administrative expenses were down $23 million on a comparable basis, driven by lower incentives and our continued focus on cost control.

Corporate expenses for the quarter on a comparable basis were $78 million versus $93 million in the year-ago quarter.

The reduction relates principally to lower incentives.

The tax rate for the quarter was 32%, slightly below our estimated full-year rate of 34%.

Moving to portfolio changes.

We completed several transactions during the past quarter that support our portfolio optimization objectives.

First, we closed on our acquisition of the assets of American Pie, which produces frozen dessert pies under the Marie Callender's and Claim Jumper brands.

We funded the purchase price of approximately $130 million out of cash on hand.

This business provides us a strategic adjacency to our core frozen platform.

We also closed on the sale of the Gilroy Foods & Flavors dehydrated vegetable business to Olam International.

Proceeds from this transaction were approximately $250 million.

As we go forward we'll continue to look for additional growth and portfolio improvement opportunities.

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

Overall we have $0.02 per diluted share of net expense in this quarter related to two items.

First, hedging -- for the quarter net hedging loss included in corporate expense was $6 million, or $0.01 per share.

In addition, we incurred $8 million, or $0.01 per share, of restructuring charges related to the relocation of our meat snacks production from Garner, North Carolina to Troy, Ohio, and the relocation of administrative functions principally related to our snacks business from Edina, Minnesota to an existing office facility in Naperville, Illinois.

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

First, we closed the quarter with over $800 million of cash on hand and no outstanding commercial paper borrowings.

On cash flow, we continue to emphasize cash flow within our business, and we expect to deliver strong operating cash flow in the range of $1.1 billion for the year, down slightly from our previous estimate of $1.2 billion.

This decrease is due mainly to our decision to make approximately $110 million of discretionary pension plan contributions during the first quarter.

On working capital we continue to make progress against our working capital initiatives.

The first quarter reflects a slight use of working -- of cash for working capital due principally to the seasonal nature of our businesses.

However, for the full year we still expect that working capital improvements in our base business will generate in the range of $100 million of cash flow from continuing operations.

Next, on capital expenditures.

For the quarter we had capital expenditures of $129 million versus $117 million in the prior year.

For the full year we expect CapEx to be approximately $525 million.

This amount includes outlays related to the recovery of our meat snacks business, which we expect to be substantially funded by insurance proceeds, as well as expenditures related to our new sweet potato plant.

As we have said before, the mix of our capital expenditures continues to shift away from infrastructure and to more innovation and growth investments.

Net interest expense was $37 million in the first quarter versus $41 million in the prior year.

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

We remain very comfortable with the collectibility of these notes.

Dividends for the quarter increased to $88 million from $85 million in the prior year.

And as I previously noted, during the first quarter we contributed approximately $110 million to our pension plans.

Now let me update you on some capital allocation matters.

First, we remain committed to a top-tier dividend payout.

In that regard, and reflecting the confidence in our ability to generate strong cash flows, our Board has recently approved a $0.03 per share, or 15% increase in our quarterly dividend, from $0.20 to $0.23 per share, effective with the December payment.

In addition, during the first quarter we acquired approximately 4.2 million shares for about $100 million under the $500 million share repurchase program that our Board authorized during the third quarter of fiscal 2010.

We have approximately $300 million remaining under this program.

We also remain focused on growth and profit enhancement investments, including new product introductions and capacity expansions.

And we also continued to pursue acquisitions that meet our established criteria.

Finally, subsequent to quarter end we repaid approximately $250 million of 7.875% notes that matured on September 15, 2010.

Now I would like to share some comments on our updated fiscal 2011 outlook.

As Gary mentioned, we expect fiscal 2011 diluted earnings per share, adjusted for items impacting comparability, to grow at a rate of 5% to 7% from our 2010 base of $1.74 per share.

Beyond fiscal 2011 we remain committed to our long-term financial goals, which include annual EPS growth of 8% to 10%.

Our updated 2011 earnings estimate reflects revenue growth in the range of 2% versus our original expectation of 3%.

And for fiscal 2011 we are on track to deliver approximately $275 million of cost savings in our Consumer business.

The outlook also reflects a continued focus on selling, general and administrative cost control and an effective tax rate for continuing operations in the range of 34% for the full year, although this rate may fluctuate somewhat quarter to quarter.

By segment we expect earnings for the full year in our Consumer Foods segment to be in line with the prior year, with back-half earnings growth offsetting first-half weakness.

And in our Commercial Foods segment we expect earnings growth in the full year to be in the mid-single digits, reflecting both revenue recovery and improved product cost in our Lamb Weston business, as well as continued strong performance in our mills business.

In developing our revised outlook, we have reviewed all of the key factors and variables of our business plans.

As we noted previously, we expect EPS growth to be concentrated in the second half of the fiscal year.

As Gary noted, there are several key factors which contribute to this timing, but which also support our confidence in achieving our revised earnings targets.

Let me touch on these factors.

First, in our Consumer Foods segment we expect cost savings to accelerate over the balance of the year.

We also expect meaningful contributions from our new product introductions.

In addition, our recently acquired businesses, Elan and American Pie, will contribute to earnings growth over the balance of the year.

In our Commercial segment, as you have heard us say, at Lamb Weston the poor-quality crop that we carried into this year was a significant burden to our first-quarter results.

We are substantially through the old crop now, and the early indications are that the new crop is much better.

So while the first-quarter comparison to prior year was negatively impacted, we expect that the current fourth quarter to compare quite favorably to the prior-year fourth quarter, which was significantly burdened by the same poor crop issues.

Also, we are seeing positive trendlines on the topline at Lamb Weston, which should contribute to improved year-over-year performance.

At the corporate level several items will drive favorability over the balance of the year, particularly in the back half of the year, including lower incentive costs, lower interest costs, and leverage from share repurchases.

Overall, while we have no illusions about the difficulty of the current environment, we believe that our balance of the year business plans reflect both the challenges we face and a realistic view of the results that we will be able to achieve.

Finally, on our Garner insurance claim, to date we have received approximately $100 million in connection with our insurance claim, and we currently expect to settle our insurance claim during fiscal 2011.

That concludes my 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; however, I will now turn it back over to Gary for some brief final comments before our Q&A session.

Gary.

Thanks, John.

I just want to close with a couple of key points.

Make no mistake about it, I am disappointed in our performance in Q1, and we have already and will continue to make adjustments.

But I am confident in our outlook based on the strong foundation we have built and our ability to operate in this environment.

To start, the year gets progressively better because we are lapping easier comparables, we have greater SG&A and productivity savings coming, and because we will have a commercial profit issue behind us.

More importantly, though, I am confident in the quarters and years ahead because our brands and fundamentals are sound and our efficiencies and cost savings keep getting better and better.

We have the wherewithal and the ability to adjust to changing marketplace dynamics, and we will always do what we believe is in the best for the long-term health of ConAgra Foods.

Thanks for joining us, and I will turn it back to the operator for Q&A.

(Operator Instructions).

Bryan Spillane, Bank of America.

Just a couple of questions.

First, just so I am clear on, I guess, what was different in the first quarter relative to what your expectations were going in, how much of it was that your cost inflation was higher than you thought, and how much of it is -- if I am hearing it right, that the price points that you had on your merchandising, at least on some products, just weren't low enough relative to where your competitors were?

This is John Gehring.

I would say -- I'm going to comment on the first part and then ask Gary to comment on the second piece.

Clearly in the first quarter I would say two things on the cost side that were probably worse than our expectations.

One would be inflation was probably just north of 5%.

And I think when we came into the year we were looking at that number being more in the range of 4%.

Then, also, I would tell you that the crop issue in Lamb Weston, the quality of that crop deteriorated probably even further and faster than we had anticipated.

We knew we had a problem, but the crop did not hold even as well as we thought as we ran out the rest of it.

I will turn it back to Gary for the comments on the pricing.

Yes, I would say the consumer behavior slid a bit further in the more cherry picking and more -- or I should say, lower inventory or less stock up behavior.

So it really was a more challenging Q1 from a consumer standpoint than we had anticipated.

You know, customers are really driving foot traffic with aggressive discounting, sometimes extremely low prices for major brand names.

This is not how we want to do business.

But sometimes your hand is forced to stay in the game.

A good example is our frozen business, where there were more and deeper deals this summer than we have seen in the last two years.

When deals are layered on top of more deals the ultimate effectiveness is going to be reduced, particularly when the consumers, as I said, are not stocking up as much.

So net-net we spent more than we planned to and didn't get as much for it.

But we do believe this is going to abate in the next few months for two key reasons.

One, that the commodity costs like proteins and grains, which impact margins, will bring more rationality.

And, two, this consumer pantry deloading is going to bottom out as consumers work through their own inventory pipelines.

So, Gary, when you talk about adjusting your merchandising, I guess, for the balance of the year, is it that you're going to promote somehow differently than you did in the first quarter?

I am just trying to get a sense for what is going to change in the balance -- in the back of the year -- what you are doing that is going to be different in the back of the year.

This is Andre.

Let me try to touch on that.

I think there is several things that we are looking at right now, some of which, as Gary mentioned, we have already put into place.

A couple of things.

One is we need to look at what is working and not working relative to this notion of multiples.

You see multiples a lot.

You see -- given multiples are out there, and given that you see consumer behavior being different relative to the stock up and cherry picking, we have to take a look at that.

We believe we see some movement right now to where people are going to single price points as opposed to multiples, and if not, they are certainly reducing their 10 for 10s to maybe 5 for 5s and things like that.

So we have to take a look at that to see what ultimately benefits the lift.

We also have to take a look at some frequency in some of the categories.

And then we need to take a look at certain key price points and what still makes sense in the new environment.

All right.

That is helpful.

Thank you.

David Driscoll, Citi Investment Research.

A couple of questions.

The first one is the quarter, I think, was light by about $0.05.

Your full-year guidance is down by $0.05.

Is it correct to say that the remaining three quarters are unchanged?

And if so why, just conceptually it seems as if the promotional intensity is still quite high, so can you just reconcile the factors?

Your math is about right.

I wouldn't project quarter by quarter.

We have talked about the growth coming in the second half, but the basic math is right, and we do believe there are a number of things that give us a high degree of confidence in the back half.

We talked about the Lamb Weston issue.

That clearly -- we already know that is going to improve as the new crop and the sweet potatoes come onboard.

We are seeing signs in our Consumer Foods that the volume is gradually improving.

And we'll get the benefit of the recent new product launches and a bit more to come in the back half.

We've got our acquisitions -- the recent acquisitions, Elan and American Pie.

Clearly the math is much better on our cost savings, which are stronger later in the year, which will more than offset inflation in the back half.

We have talked about our SG&A coming down in the back half.

And you clearly know that the comparables are easier -- much easier in the back half.

So when we put that all together, it gives us a very high degree of confidence in what our guidance is.

I just have one other question on Consumer Foods.

In the press release, Gary, you said "unit marketshare has improved".

However, Consumer Foods volume was down 3%, so what was the comparable volume figure for your categories, and how do you explain such weak growth overall?

Let me start with that, and I'm going to turn it to Andre.

You know, it is really about this stocking up kind of behavior, where consumers are going to a bit more, I would say, call it just-in-time inventory.

So they are deloading their pantries or their refrigerators and not buying as much each trip.

So clearly there is an adjustment taking place.

Andre, maybe more specifics?

I think two things.

I think, just to make sure we are talking apples-to-apples here, on the one matter you're talking about our share performance.

Some of our categories were significantly down, and we gained share in them because we were down less than the categories, if you will.

The other piece that you referenced also is our volume that we also shared in the release, also includes what we actually shipped.

So they are two different numbers.

One is share, and that is consumption and what consumer offtake is, and the other is our volume shipment.

But the largest piece of the gaining share piece was driven by the fact that a lot of our categories are down, and we were not down as much as some of those categories, and we did pick up share.

Great, thanks a lot.

Andrew Lazar, Barclays Capital.

In thinking about your revised topline growth goal of about 2% for the full year in Consumer, that clearly implies a pretty big recovery to over 3% for the balance of the year going forward.

So I am just trying to get a sense of in your visibility to that how realistic that is in the current environment.

And then when you think about changes in your promotional strategy in given categories, how much of that -- of your merchandising activity at this stage is really all kind of locked in for a good six months or so?

And how realistic is it that you can actually change these things, as you talked about, course correcting kind of intra-quarter?

I would tell you we are already seeing signs of improvement, certainly in our shipments, over the last six or eight weeks, and also in some of our all-outlet consumption.

So we are starting to see signs of bending that trend.

You know that, obviously, lower and lower prices are not good for us, and they are not good for competitors, and they're not good for retailers.

What we really need to do is define this price value as much more than just lower prices.

We believe that we've got a portfolio that can resonate with a broader group of consumers, particularly in this kind of environment.

Brands that can meet the needs of shoppers that may not currently be buying our products or buying as much.

It is up to us to make that connection with more direct functional benefits through our packaging, our advertising, our in-store merchandising, targeted innovation.

And that is what we are really doing is talking about working on, and not just talking about, doing it, bringing the inherent value in our product to life in a more meaningful way.

Obviously, merchandising is a part of that.

Andre, you want to comment on that?

Yes, I will make another comment too, Andrew, just to build on what Gary said.

I think your math is correct.

I don't believe we have to do, from my perspective, anything heroic in the back half of the year relative to volume.

I think a lot of the new items and the innovation that I talked about, which really takes hold now in Q2 and beyond, the acquisitions that we have added on, really help us get there.

So we are -- again, we are not expecting our portfolio in this environment to do anything heroic volumetrically, so I think that is number one.

Number two, on the merchandising question, there are elements, obviously, of our promotional planners and calendars that are locked in with customers.

I would say at the beginning in any quarter I would say about 60% to 65% is locked in.

But I kid you not, there is still a lot of discussion that goes on between ourselves and customers during the quarter as we come up to events.

Everything from price points to feature and display, to what kind of things that you're going to get as a result of the price that you're providing.

So there is still a lot of room and a lot of latitude with respect to a lot of our customers and our plans in any given quarter when we start that quarter.

Obviously, as you get further in, you get further locked in obviously.

Right, great, that's helpful.

I appreciate it.

Then just one last quick one.

Gary, in your comments around the more recent trends around shipments and a little bit around all-out consumption for your key categories, is it going too far to suggest that that is something you're starting to see a little bit more broadly in the overall food group at this stage, or is that more common around your key categories at this stage?

I think we see it a bit overall.

We see it more clearly in ours.

Obviously, we've got more insight into our own numbers.

But we do see a bit of that in the overall data.

I would just say we are seeing stronger volume consumption in our categories, and specifically with our business, and we are also starting to see dollars turn a little bit more favorable than we have seen over the last 13 weeks.

Got it.

Thanks very much, everybody.

Terry Bivens, JPMorgan.

My question is the spending counterpart to what Andrew just asked.

I don't pretend to analyze every category you guys have, but if you look, for example, at your biggest one, frozen, it looks like you have really backed off on promotion at a time when the competitors seem to have really stepped it up.

And when you have gone on deal you have been less aggressive, so the lifts aren't there.

So I guess what I'm trying to understand is the pacing of your promotional and merchandising support in the second half.

Why wouldn't it require a much stronger outlay, I guess, is the real question?

I think Q1, obviously our merchandising was not as great as our competition.

We saw much more than we had in the last several years from one of the biggest players.

We have made some adjustments.

We have chosen not to go incredibly deep, but in a more measured -- a bit more measured way.

But we think between the innovation, the marketing and some adjustment in our merchandising that we will have a good year in frozen.

Okay, and just a quick follow is, if I might, if you look at distribution -- total distribution by companies, you guys are clearly a leader.

Where is that coming from and when can we expect to perhaps see a better Companywide effect from that stronger distribution?

I think a couple of areas there, and I imagine you're looking at total distribution across all channels.

But, you know, again the innovation specifically in frozen, where with respect to our steaming platform, the things you're seeing with both on Healthy, on Marie Callender, and actually we have had good distribution additions into Banquet as well, including things like fruit pies, etc., etc.

So we feel very good about what we are doing.

I think that was the lion's share of your question.

I don't know if I caught all of it.

No, I think that was it.

Thank you very much.

Eric Katzman, Deutsche Bank.

I guess a couple of questions.

Maybe, Gary, a little broader on the dividend increase, I was kind of surprised at such a big increase.

I guess your cash flow is down because of the pension contribution, but maybe you could go into like what investors should expect from a return to shareholders allocation going forward?

Is this a signal that dividends may be more of a priority than repurchase?

I would tell you that, first, our cash position is very strong.

We clearly had a huge jump up last year, but this year will continue to be a very, very good cash position for ConAgra Foods.

We have always committed to having a top-tier dividend, and we believe that what we have done is consistent with that.

We think it expresses the confidence that we've got in our future.

And our payout ratio is competitive.

So we looked hard at this, and believe it is the right thing to do from an overall shareholder return standpoint.

John.

Yes, I think you captured most of it, Gary.

Certainly I would say there is -- this doesn't really represent any change in our basic capital allocation approach.

I think we have talked about having a top-tier dividend.

I think we have talked about also looking at growth investments, but also understanding that share repurchase is a part of the equation.

So I think, generally, there is no real change in the balance there.

I would echo one of the things Gary said is that what we try to focus on in our dividend policy is our payout ratio.

And I think -- bluntly I think our payout ratio was lagging some of the earnings growth we have had over the last couple of years, and we think this increase kind of gets it back in line to where we thought it should be.

Okay, thank you for that.

Then on a completely different issue, with the grain milling, I guess I was surprised, given the run up in wheat, that pricing was down there.

And so maybe you could talk a little bit about that, and then what we should expect from that business' influence on sales, given the wheat cost up, and are you positioned okay given all the volatility in wheat of late?

It is Rob Sharpe.

Let me try and give you a couple of different perspectives on that.

A lot of the volatility you saw in wheat is in the futures prices going way up.

Year-over-year you had a decline in this quarter, and for the balance of the year there won't be that -- a particularly big influence on the topline one way or the other.

As far as the volatility, keep in mind that we are not in this to speculate.

The volatility is good for our business because, in essence, it brings customers to us who are ready to commit to longer-term purchases.

That in essence gives us more time to buy the wheat that we are going to make their flour with, and that is good news for us.

The near-in volatility doesn't really impact our current results, except to the extent that we can buy grain more intelligently for those long-term commitments.

So it is good news for us and we are well-positioned.

Okay, and then, if I could just sneak one last one in.

Gary, is it fair to -- I guess, in looking at the second half, I know you have talked to the consumer and a lot of the things that you're doing, but is it pretty critical that the new products that you're putting into the market win with the consumer to the extent that those, I assume, are going to be not just volume drivers, but also a mix shift positive?

Is that what we should look for in terms of Consumer meeting its recovery in the next couple of quarters?

Yes, I would tell you that a basic principle we've got is that the innovation is both top and bottom line accretive.

So we keep the bar pretty high on that and that is what we've got in our expectations.

Chris Growe, Stifel Nicolaus.

I just had a couple of questions for you.

The first one would be, you reiterated guidance near the end of July, and you have also talked about what seems to be improving trends the last 6 to 8 weeks.

I just wanted to put those two together.

Was it still that topline trends were improving a bit, maybe volumes, but promotion was still heavy, or can you try to put that together for me, Gary?

Yes, I would tell you that what we are not going to do is burn the furniture to make our numbers.

So we are keeping the balance of the short-term challenges in the long-term perspective, and therefore, we really don't believe that we can really make up the divot that we have created in Q1.

Yes, we are seeing the topline start to improve.

There is still a significant challenge ahead of us in terms of the way we balance our trade spend.

But as the second half approaches, we do believe that there will be much -- there will be moderation in that, and we will clearly benefit from both the top and bottom line in the second half.

I have just two more.

The first one would be, within your Consumer Foods division the negative 1% price mix, is there some price increases in there as well?

I don't look at a negative 1% as a terribly bad promotional environment.

But is it just that it is bad in certain categories or is there some pricing or mix offsetting that, some of that aggressive promotion that you're seeing?

This is Andre.

There was a little bit of positive mix and there were some -- there were some categories, obviously, that were down further than the 1% and there was -- we have a broad portfolio that plays across a very wide swath of the consumer landscape.

So I would say on balance we netted out about 1%.

There were some that were deeper and some that were in better shape.

Sure.

That is helpful to get perspective on that.

Then the last question I had for you was on in your Consumer Foods division and the cost savings versus inflation.

In the first quarter that was a negative spread, if you will, with inflation was more.

Was it that -- do you have hedges on the rest of the year to give you a little confidence that the cost inflation will be a little lower, plus you'll have a little bit more in the way of cost savings that are more back-half loaded?

Is that the way to look at the breakdown of the spread between those two factors?

Yes, that's pretty fair.

Certainly as the year goes on we lock in a lot more of our commodity needs.

So we've got more positions on substantial amounts for the back part of the year.

So I think your assessment is pretty clear there.

Okay, thanks a lot for the time.

Vincent Andrews, Morgan Stanley.

I guess a couple questions.

Maybe the first would just be in years past when there was inflation you had to do some work around Banquet to maintain the $1 price point.

Is there anything analogous to that right now going on in your portfolio that you are concentrating on or focused on or feel like you need to get done?

There absolutely is.

There is very significant opportunity for us, and we have started to capture that, but there's a lot more to come.

So you're right on the mark.

But, I guess, so you're looking at more from the reward perspective, and maybe I would ask it the other way.

Is there any risk that there is any pricing you need to take anywhere in the portfolio?

Do you follow what I am saying?

Yes, obviously, if the opportunity arose to take pricing with costs going up, we would certainly be there, but right now we are not planning for that in this environment.

So the answer is that you're comfortable you can redesign any products to take cost out, to make maintain the price point, is that clear?

That is what we are planning to do, and we are confident, yes.

Okay.

Then my last question would just be, it is clear there is a consumer deload going on, not just in your categories, but pretty much across the store.

So maybe twofold.

Do you really think innovation is what will unlock that deload?

I would argue it is probably more macro factors that need to improve from a consumer perspective.

Then secondly, is there any risk from a customer perspective that they're going to make adjustments relative to what the consumer has done from a deload perspective?

You know, I think it is -- it is like anything else -- any kind of organization with inventory, there does come a point where it kind of bottoms out and it kind of self adjusts.

We think we are starting to reach that point.

So consumers -- and we've got pretty good insight into this -- have been draining their pantries, their freezers, their refrigerators, and there will come a point where that kind of bottoms out.

So I am not saying that we are going to go back to huge stock up purchases, but we think that delta will change.

Robert Moskow, Credit Suisse.

I've got a couple of questions.

The first one is gross margin adjusted is down, I think, about 140 basis points year-over-year.

And I think a lot of it has to do with volume leverage, because your volume was down quite a bit.

Since you're assuming that volume is going to improve by the back half of the year, can you give us a sense of how that might help your gross margin in terms of comparisons, or is it still going to be very tough gross margin comparison year-over-year?

Secondly, it is the first I've heard about the cost savings being back-half loaded.

Was that always the plan or is there something new in how you are -- in terms of the pace of the savings as they flow through?

Thanks.

Let me take the second one first.

I don't think we've had any substantial change in the flow of our cost savings from the beginning of the year.

I think the first quarter was planned to be our lightest quarter, and they will -- it certainly picks up, and is more even over the balance -- the three quarters -- the balance of the year, although there is still some weighting towards the back half.

And your gross margin question, I am not sure I followed it all, but -- I'm sorry.

John, I will take that.

Robert, I think it is mostly about the comparables.

So the first half was a lot tougher in terms of the improvement that we made on the margins a year ago.

Things will flatten out.

Margins will improve more in the back half.

We also see -- and part of that obviously is the cost saves versus inflation as well.

So a lot of it is just almost mechanical, the math that we have built into our plan and so that is why we will see improvement in the back half.

Maybe, John, you could think of it this way.

Your gross margin is down year-over-year.

Do you have a sense of how much of that is due to operational leverage from declining volume?

I don't think a lot of it is due to that.

I think it is more the inflation in cost savings spread.

One of the reasons I say that is we are not -- we don't have a big penalty in terms of absorption.

That is maybe ultimately what your question gets at.

We are not seeing a big issue there.

So I really think it is more on the inflation and cost savings related.

Alexia Howard, Sanford Bernstein.

Can I ask a question about the pace of innovation?

Where are you now in terms of percentage of sales of new products?

And do you anticipate that is going to step up during the course of fiscal '11?

And I guess do you anticipate that the -- I mean, you had a lot of new product launches in fiscal '10 that were very platform-based, very broad.

Do you anticipate that the new product launches this year are going to be similar in scale and scope?

This is Andre.

Let me take the first one.

I think your question -- your first question about the percentage of our sales coming from innovation -- we see that -- again, I think we measure it correctly in terms of year-on-year innovation, it is about 5%.

As we take a look at your question -- your second question on platform innovation, I think we have said it multiple times, and we are not going to be the ones that are the most prolific with number of SKUs, we are going to look for sticky innovation and that is all platform-based.

So the things that you have seen, for instance, relative to steaming and frozen are things that we are continuing to do now that we are bringing that offering to Lunch Steamers.

The things you're seeing us do with our tray technology with respect to Marie Callender's bakes, you can see that application that's going to go into other platforms as well, or other things we do in frozen.

So very much platform-based, very broad.

And it is, again, we look for that, as Gary has said, that high batting average for our innovation.

David Driscoll, Citi Investment Research.

Great, thanks a lot, I appreciate the follow-up.

Two questions.

Gary, I believe ConAgra is the first company to report a quarter with inflation higher than cost savings.

So really can you give us any comments about either what you have announced to the trade already regarding price increases or what you are just hearing generally within the categories that you compete in on this topic?

We have not talked to the trade about pricing.

They're not -- I don't think they are in an extremely receptive mood to be looking to raise prices at this point.

Obviously, we will be opportunistic, but we don't think it is prudent for us to plan on that in this environment, and therefore, all the things we're doing from a productivity standpoint are really the way -- both productivity and mix are the way that we are choosing to deal with this, at least in the near term.

There are no further questions, Mr.

Klinefelter, so I will hand the conference back to you for final remarks.

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 for your interest in ConAgra Foods.

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

Thank you again for attending and have a great day.