康尼格拉食品 (CAG) 2013 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.

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

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 Office of ConAgra Foods.

Please go ahead Mr. Rodkin.

Good morning.

Welcome to our first quarter earnings call.

Thanks for joining us today.

I'm Gary Rodkin and I'm here with John Gehring, our CFO, and Chris Klinefelt, VP Investor Relations.

This morning, we'll talk about our strong fiscal 2013 first quarter performance and our upwardly revised outlook for the remainder of the year then we'll open up the call for your questions.

At that point, Andre Hawaux, President of Consumer Foods, and Paul Maass, President of Commercial Foods, will join us.

Before we get started, Chris has a few opening remarks.

Good morning.

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

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 filed 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 to the most directly comparable measures for Regulation G compliance can be found in either the earnings press release, the question-and-answer document, 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.

Thanks, Chris.

I'm very excited about our strong start to the year.

EPS on a comparable basis was $0.44 for the first quarter, strong year over year improvement.

The overall quality of the quarter was high, specifically, I'm talking about the fact that both of our segments grew comparable operating profits while we increased marketing investment at a double-digit rate.

Given the strong start to the year, we have raised our full-year expectations for comparable EPS to the range of $2.03 to $2.06, which is approximately 10% to 12% comparable growth, and that's including a significant increase in brand building investment which we view as good for the long-term health of our business.

It's clear that our operating capabilities, strategic initiatives, and recent acquisitions are generating strong EPS benefit for our shareholders and allowing us to post high-quality performance in the midst of difficult marketplace conditions.

Before I go on to the segment highlights, I will also emphasize that we raised our dividend today to $0.25 per share starting with the upcoming December payments.

The annualized dividend is now $1 per share.

We generate strong cash flows as a Company, and we're confident that we can continue to provide a top-tier attractive dividend to shareholders while pursuing a balanced approach to capital allocation, including organic investments, M&A, share repurchase, and our commitment to a strong balance sheet and investment grade credit rating.

Now I will move to the Consumer Foods segment.

Sales were up 8% driven by acquisitions.

Operating profit increased 20% as reported and 14% on a comparable basis including a double-digit increase in marketing investment.

Overall this segment posted a very good quarter.

A few remarks on the sales performance.

Acquisitions contributed eight points of sales growth.

You know from our comments over the past year or so that we've completed six transactions, strategically adding to our portfolio, and these are helping drive stronger top-line and bottom-line performance.

I'll say more about this in a minute.

Organically, 5% favorable price mix offset a 4% organic volume decline and foreign exchange weight on sales by 1 point.

The favorable price mix was the result of prior pricing actions taken to combat inflation.

The volume decline reflects the elasticity of those actions in the difficult consumer environment, and in some situations, it's the result of deliberate decisions that came with a trade-off.

For example, we anticipated that the pricing actions for Banquet, our largest Consumer Foods brand, would negatively impact volumes, and in this situation, we chose favorable mix and margins over volume, and the actions have resulted in net profit growth for the brand as we intended.

We expect the Consumer Foods volume performance to improve sequentially throughout the fiscal year for reasons I will touch on in a minute.

We again saw very strong results from the Marie Callender's brand.

Single-serve meals, multi-serve meals, and desserts all showed very good growth in dollar, volume, and share for the quarter.

We aim to keep this kind of growth going with strong levels of new advertising that's on the air now, continuing with the time to savor campaign that's worked so well for Marie Callender's over the past couple year.

Slim Jim continued its strong performance this quarter, increasing market share in a growing meat snacks category and also growing nicely in alternative channels.

This brand is a good example of success with our nontraditional integrated marking campaigns.

The Male Spice Loss campaign, you might remember from Cagney, has worked really well in social media channels, and the Slim Jim Facebook fan base continues to grow every day.

The Slim Jim community now has more than 1 million members.

We've also amped up our marketing very recently with a new partnership with EA Video, the worldwide leader in gaming software, backed by a strong supporting media campaign.

I will also comment on a couple of regional brands that are gaining strength nationally.

Rotel Tomatoes and Wolf Chili.

Both have grown over the past year from strong regional players into national brands.

They're impressively growing share, net sales, and volume.

We've supported these brands with impactful marketing and it's working.

They're good examples of smaller brands that we've grown to make meaningful contribution.

Comparable Consumer Foods operating profit grew 14% and that again includes a 20% increase in marketing spend for our base business.

We're very pleased with that profit performance, particularly in this difficult business environment.

This is a situation where our total margin management efforts, meaning pricing architecture, deliberate mix management, and strong productivity initiatives, more than offset inflation, and this drove gross margin expansion in the core business.

Inflation is less severe now than it was a year or so ago, and that, of course, is helpful to margins.

To be clear, we're still experiencing inflation, but at a significantly lower rate than we saw for most of fiscal '12.

As I mentioned earlier, acquisitions also made a substantial contribution to profit growth.

As most of you know, over the past few quarters we've completed six transactions, and these are consistent with our recipe for growth that we've discussed before.

That's our strategic road map designed to continually strengthen our portfolio by finding new growth opportunities.

We've remained focused on three strategic areas.

One, expanding core adjacencies.

Two, growing our private label business.

Three, increasing international presence.

Our disciplined buying strategy is focused on having the right assets, the right operational elements, and the right price.

Our approach is to leverage our strong operating foundation in terms of supply chain, marketing, innovation, product quality, and sales distribution to create truly sustainable value.

We're pleased with our progress on the integrations.

Our most recent transaction completed late in the quarter was the purchase of Bertoli and P.F. Chang's home menu, multi-serve frozen meals from Unilever.

Together, these brands represent about $300 million in annual sales and are very strong equities.

They represent very high quality Italian and Asian food targeted at a higher income segment at higher price points.

These brands bring us new consumers and new eating occasions, and we intend to leverage our innovation and operational capabilities to optimize their performance.

As we've said before, we expect to continue adding to our portfolio with the same strategy and discipline as the right opportunities develop.

As I wrap up my comments on Consumer Foods, I will say that we expect inflation to be less severe than we originally planned, John will say more on this.

And we expect the rest of the year's organic volume to gradually improve, for a handful of reasons.

We will lap pricing actions taken last fiscal year.

We expect to benefit from our innovation pipeline, our latest round of new products including Healthy Choice and Marie Callender's Bakes, Healthy Choice Greek Frozen Yogurt, and the Marie Callender's single-serve cream pies are all ramping up in terms of store presence and points of distribution.

We expect these to make a good contribution to sales and volume for the full fiscal year and we'll support them with marketing and additional new items as the year progresses.

We also expect to benefit from our marketing investments.

And we're gaining traction with Customer Connect, a series of initiatives designed to leverage our insights and make us a strong strategic partner to our customers through joint business planning.

We're excited about customer feedback thus far.

Moving on to commercial foods, sales increased 5% over year-ago amounts.

All the product lines in the segment posted volume growth and the overall sales dollar growth was driven by Lamb Weston, our largest brand, which grew unit volume and posted good price mix with particular success in international marks which grew at a double-digit rate.

We're very excited about the strong growth opportunities internationally, and we're aligned with global customers who have dynamic growth plans in emerging markets and look to us to be a key supplier playing an important role in their global growth initiatives.

Domestically, retail demand for food prepared at home continues to be relatively soft as we just discussed.

But away from home eating occasions have held up better and we've benefited from that.

We've focused -- we're focused around high growth opportunities and operational efficiencies domestically, and we'll say more about both of those aspects in a minute.

Lamb Weston continues to expand into higher margin products and our biggest example of this is sweet potato fries.

We're capitalizing on the investment we made a few years ago when we built a state-of-the-art processing facility.

We're making progress in QSRs and casual dining.

We're in more than 20 significant quick-serve or fast casual restaurants now with sweet potato fries on their regular menu or with limited time offers.

We expect that to accelerate.

Another example of mix improvement at Lamb Weston is our focus on the higher end consumer at retail through our Alexia brand which we've grown to over a $100 million brand in just a few years.

This is a great way for us to strengthen customer relationships, grow our share, and play a leadership role at retail in the frozen potato category.

Additionally, we're driving growth and success in retail with a licensed brand strategy, the most recent example is Arby's curly fries, which are off to a great start.

At retail, we also provide private label potato products for the value conscious consumer.

While the overall frozen potato category has been intensely promotional recently, we're committed to this category for the long term.

As reported, segment profit increased 43%, comparable segment profits increased 37%, tremendous growth driven by Lamb Weston's momentum in terms of good sales performance and favorable product mix as well as operating efficiencies related to a smooth crop transition.

In that regard, our ongoing productivity and cost savings initiatives are on track and you can see the benefit of that in the financial results we just posted.

ConAgra Mills profits were in line with year-ago amounts.

And based on the way things are shaping up, we expect them to have a good second half of the fiscal year.

We're pleased with the start to the fiscal year in both operating segments, and I hope you can tell that we're excited about fiscal 2013.

This is a year where a combination of our core operating and margin management capabilities in both segments, less severe inflation, and the benefit of recent acquisitions are expected to drive very good EPS performance and allow for a strong increase in brand investment.

Our organization is focused on delivering our increased EPS target of $2.03 to $2.06 on a comparable basis which is very good growth especially in the midst of difficult marketplace conditions.

This is a significant milestone for our team.

On a related note, we achieved another milestone very recently.

Last week, we learned that in addition to being named to the Dow Jones Sustainability North American Index for two straight years, we've also been named to the Dow Jones Sustainability World Index for the first time, a significant achievement.

As you may know, these indices are very tough to make, and they are important to us because they're an extremely comprehensive measure of our total citizenship efforts from employee safety to corporate governance and across the supply chain.

This recognition is fitting given our overall progress at ConAgra Foods.

As you know, we've worked very hard these last six to seven years to transform ConAgra Foods into the strong operating company that it is today.

We've invested in capabilities, infrastructure, and talents across the organization.

We have a very clear strategy, our recipe for growth.

And that will help us continue the transformation.

The marketplace conditions are still challenging, but we're pleased with what we've accomplished, and we're confident that we'll continue to deliver on our commitments.

Now, I'll turn it over to John.

Thank you, Gary, and good morning, everyone.

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

I will begin with our first quarter performance highlights.

Next, I will address comparability matters, then on to cash flow, capital, and balance sheet items, and finally I will provide some comments on our outlook for the balance of fiscal 2013.

Let's start with the first quarter performance highlights.

For the quarter, we reported net sales of $3.3 billion, up 7%, driven by pricing and acquisitions in our Consumer Foods segment and in our commercial foods segment we had volume gains in both lamb weston and flour milling.

Net sales also reflect the impact of lower year over year wheat prices in our flour milling operation.

In this quarter we reported fully diluted earnings per share from continuing operations of $0.61 versus $0.

22 in the year-ago period.

Adjusting for items impacting comparability fully diluted earnings per share from continuing operations were $0.44 versus $0.31 in the prior year quarter, a 42% increase.

And while this is very strong performance, I would note that the year-ago first quarter was our softest quarter in fiscal 2012.

While Gary addressed our segment results in some detail, I would like to touch on a few highlights.

Starting with our Consumer Foods segment, where net sales for the quarter were approximately $2 billion, up about 8% from the year-ago period.

This reflects eight points of growth from acquisitions, organic net sales were essentially flat as favorable mix of about 5% was offset by a 4% base volume decline, and foreign exchange add negative 1% impact on net sales this quarter.

Our Consumer Foods segment operating profit adjusted for items impacting comparability was $242 million, or up about 14% from the year-ago period.

While acquisitions contributed to the operating profit growth, more of the growth came from margin management in the base business driven by pricing and cost savings offset by moderating inflation.

The higher operating profit also reflects increased marketing costs and about a negative 2% impact from foreign exchange this quarter.

Our consumer food supply chain cost reduction programs continue to yield good results and delivered cost savings of approximately $75 million in the quarter.

These programs are expected to deliver over $240 million of cost savings for the full fiscal year.

For the fiscal first quarter we experienced inflation of about 3%, a bit better than our expectations.

On marketing, Consumer Foods advertising and promotion expense for the quarter was $95 million, up about 24% from the prior year quarter, principally driven by increased investment against our base business.

In our Commercial Food segment, net sales were approximately $1.3 billion, or up about 5%, reflecting strong international growth in Lamb Weston and improved volume and mix across the segment as well as disciplined pricing in our Lamb Weston business where we increased prices to offset higher input costs.

The pass-through of lower wheat costs in the milling operations had a negative $38 million impact on sales for this fiscal quarter.

The Commercial Foods segment operating profit, adjusted for items impacting comparability, increased 37% from the year-ago period to $140 million.

The strong year over year performance reflects continued good fundamentals at both Lamb Weston and ConAgra Mills, as well as a soft performance in the prior-year quarter.

Within the segment, Lamb Weston posted a very strong double-digit rate of profit growth driven by strong international growth, favorable volumes and price mix, as well as production efficiencies including a smooth crop transition.

ConAgra Mills operating profit was in line with the year-ago period, and overall we are very pleased with the performance of this segment.

Corporate expenses adjusted for items impacting comparability were $75 million for the quarter versus $67 million in the year-ago quarter.

The reported tax rate for the fiscal quarter was approximately 33% and the rate on comparable earnings was slightly lower.

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

Overall, we have approximately $0.17 per diluted share of net income in this quarter's EPS related to several items.

First on hedging.

For the fiscal first quarter, the net hedging gain included in corporate expense was approximately $130 million or $0.20 per share.

This number is larger than what we typically see but it is consistent with the level of volatility in the commodity markets.

I'll say a bit more about our hedging in a moment.

Next, we recorded $4 million or $0.01 per share of restructuring and other one-time charges related to our cost reduction in organizational efficiency initiatives, principally in our Consumer Foods segment.

In addition, we recorded approximately $7 million or $0.01 per share of acquisition related expenses.

Finally, we recorded approximately $8 million or $0.02 per share of expense related to legal matters which relate to prior years.

Next, I'll cover my third topic, cash flow, capital, and balance sheet items.

First, we entered the quarter with $117 million of cash on hand and $272 million of outstanding commercial paper borrowings.

The increased level of commercial paper borrowings is principally related to funding acquisitions.

And subsequent to quarter end, we repaid our outstanding commercial paper borrowings with the proceeds of our recent debt issuance that I will say more about in a few moments.

We continue to emphasize cash flow within our business and for fiscal 2013, we expect to deliver strong operating cash flows in the range of $1.2 billion to $1.3 billion.

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

For the full fiscal year, we expect that working capital improvements in our base business will contribute modestly to cash flow from continuing operations as we continue to improve our cash conversion cycle metrics.

On capital expenditures for the quarter, we had capital expenditures of $99 million versus $96 million in the prior year period, and for the full fiscal year we now expect CapEx to modestly exceed our previous estimate of $450 million due to some additional growth investments we expect to pursue.

Net interest expense was $49 million in the first quarter versus $53 million in the year-ago quarter.

Dividends for the quarter increased from $94 million in the year-ago quarter to $98 million reflecting a higher dividend rate offset by a lower number of shares.

And now let's turn to capital allocation and let's start with growth.

We continue to execute against our growth strategy focused on strategic adjacencies, private label, and international.

During the quarter, we completed the acquisition of Bertoli and P.F. Chang's multi-serve frozen meals.

These brands are great additions to our frozen portfolio and we're excited about the growth opportunities we can pursue with the combination of these brands and our frozen innovation capability.

Going forward, we will continue to pursue acquisition opportunity where there is a strategic fit and a good financial return and we are confident that we can further leverage our capabilities and our strong balance sheet to create value by investing for growth in a disciplined manner.

We also remain focused on organic growth and profit enhancement investments including investments to support innovation, production capacity, and our cost savings initiatives.

The other elements of our balanced capital allocation approach also remain unchanged.

We reiterate our commitment to an investment grade credit rating but also recognize the importance of maintaining our strong dividend and executing share repurchases from time to time.

With respect to our dividend, as Gary noted, our Board of Directors just increased our quarterly dividend to $0.25 per share, or an annualized rate of $1 per share.

This reflects our confidence in our business and our expectations for continued strong cash flow generations.

And on share repurchases, we purchased about $75 million of our shares in the fiscal first quarter, and as of quarter end we had approximately $450 million of available share repurchase authorizations.

And finally, subsequent to quarter-end, we completed a $750 million debt issuance in three tranches of $250 million each of 3-year,5-year, and 10-year notes.

The offering was very well received by the market, and we were able to secure some very attractive interest rates.

We have used a portion of the proceeds to repay outstanding commercial paper borrowings, and the balance will be used for general corporate purposes.

Now, I would like to share some comments on our fiscal 2013 outlook.

As Gary mentioned, we have updated our full-year earnings expectations for fiscal 2013, based upon our strong performance in the first quarter and our outlook for the balance of the fiscal year.

We now expect fully diluted earnings per share, adjusted for items impacting comparability, to be in the range of $2.03 to $2.06, or roughly 10% to 12% growth from our prior year base of $1.84 per share.

This update to our fiscal 2013 earnings estimate reflects net sales growth in the range of 7% to 8% with sales growth for the Consumer Foods segment expected to be in the high single digits, primarily driven by our recent acquisitions.

In our Commercial Foods segment, we expect modest top-line growth in the 3% range as volume, pricing, and mix improvements in the segment are expected to be partially offset by the impact of lower wheat prices in our milling business.

This fiscal 2013 estimate also reflects modest gross margin improvement in our Consumer Foods segment driven by pricing and mix improvements and strong cost savings partially offset by the impact of more moderate inflation.

While the commodity markets, especially grains, have been very volatile of late, we remain confident in our ability to effectively manage input costs and margins over the balance of the fiscal year.

On a related note, we recognized a large hedging gain this quarter that we treat as a comparability item consistent with our normal practice.

The gain offset previously accumulated losses and the remaining net gain will be reclassified to operating segments as the underlying commodities are used in the business.

To that point, we currently expect to reclassify about $35 million of this net gain to segment operating results in the remaining three quarters of fiscal 2013.

And for the full fiscal year, based on our assessment of input requirements and cost trends on these inputs, along with the hedging actions we've taken to manage risk, we now expect that our net inflation for this fiscal year will be slightly lower than our original estimate of mid single digits.

And as I noted previously for fiscal 2013, we continue to expect cost savings in excess of $240 million in our Consumer Foods business.

Also, we have budgeted a strong increase in marketing support this year, and that's in support of our long-term brand building initiatives.

In the Commercial Food segment, both our Lamb Weston and flour milling businesses are positioned to perform well, although with more modest profit growth over the balance of the year.

Additionally, the effective tax rate for fiscal 2013 is expected to be in the range of 34% for the full year, although this rate may fluctuate somewhat quarter to quarter.

And while we are confident in our capabilities and how we are executing against our strategic initiatives, we do expect more modest year over year earnings growth over the balance of the year as the comps will get tougher and we expect to continue to execute against a stronger investment plan in support of our brands to position our business for long-term success.

Overall, we're excited about the start of the fiscal year and we're confident in our ability to deliver very attractive earnings growth for fiscal 2013.

That concludes our formal remarks.

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

Gary and I, along with Andre howl and Paul Maass, will be happy to take your questions.

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

Operator?

(Operator Instructions)

Andrew Lazar with Barclays Capital.

Quick question about the full-year guidance and acquisitions.

I think last quarter you had talked about acquisitions collectively contributing about half of the earnings relative to your previous full-year guidance.

Do you have an update to that now, particularly because you just recently closed on the Bertoli piece as well which should, I would think, add to that?

Yes, Andrew.

First of all we're very pleased with our integrations on all of the six acquisitions we've made in the last 12 months.

I would say that we would expect a little less than half of our Consumer Foods growth to come via acquisitions.

We have a very disciplined process, very clear strategy, and we're leveraging our capabilities to accelerate or improve the performance of the acquired businesses.

For example, as you mentioned, Bertoli and P.F. Chang, will clearly benefit from our frozen infrastructure and scale in the section -- in the frozen section, and our best-in-class innovation capabilities will be directly applicable but let me give it to John for a little more color.

Yes, Gary.

Andrew, just one clarification.

I think as we entered the year, we said for the Company the acquisitions would contribute, we thought maybe a little bit more than half.

I think for the full year, I would say that the acquisitions now for the total Company will contribute slightly more than half.

If we look just at Consumer, it might be a little bit more than half.

Got it.

Okay.

That's helpful.

I appreciate it.

We've had a couple of food companies more recently start to see volume look a little bit less negative or start to gradually recover as the pricing component has started to wane.

I realize at a corporate level, for Consumer, you still had quite a bit of pricing in the quarter and hence the volume elasticity.

Are there any pieces of maybe the Consumer business or particular brands you can point to where the pricing on that brand has started to wane and you've seen volume trends that maybe make you feel somewhat comfortable that again, overall, as your pricing wanes, volume kind of comes back?

Yes, Andrew, you're accurate that we still had quite a bit of pricing to overlap in Q1, and that will change as the year goes on.

But Andre can give us a bit more color.

Yes, Andrew, let me just answer both parts of your question.

First with the pricing which you talked about.

Very succinctly, I would say the way our pricing overlaps occurs over the course of the year, let me give you some percentages.

We lapped about 40% of the price we took last year in Q1 so it was by far our biggest overlap.

In Q2 we lap about 30% of it, so again, not insignificant.

We had taken a lot of pricing as you know last year and we had sequentially done it but we had taken a fair amount in Q2 so that's about 30%.

And in Q3-Q4, it's about 20% in Q3 and about 10% in Q4, so clearly the back half is certainly supports where we'll see a lot more of those volume trends.

As Gary mentioned earlier, we do see sequential improvement starting to happen in Q2 and Q3 and Q4.

With respect to the brands that we've seen and feel very good about as pricing has waned, I'd say that one of the franchises we do feel good about, and we're seeing it in our shares and we're seeing it behind the support that our advertising has given us, is probably on the Hunt's tomato products, specifically our diced portfolio.

We see ourselves coming into what is traditionally tomato season, and we're hoping we get a much -- a less mild winter than we got last year but we see that brand doing very well on a market share standpoint and continuing to win with customers and consumers.

That would be one example I would give you of brands, other than the ones that Gary mentioned, obviously Marie Callender and Slim Jim and Rotel and those brands.

Ken Goldman, JP Morgan.

Good morning, everyone.

Gary, I think you talked about the choice you made to favor mix and margin over volume at least to some extent for Banquet and so far this seems to be the right decision.

I'm just curious how to think about maybe some of the risks that come along with this though because you start with Banquet's, had the attractive price points, had a variety of SKUs, you know it served as a sort of a quasi private label brand in the category so what's the risk here that your actions, though probably smart overall, maybe opening up some parts of frozen to inroads from store brands where there aren't really any right now?

And maybe you're willing to do that, right, and that's fine.

I'm just curious how you think about that risk/reward trade-off.

Yes.

Good question because we certainly do spend a lot of time working though that and we think our analytics and our tools are far better than they've ever been.

I will tell you specifically on frozen, we're really not concerned too much about the store brand side of that because we've got such a strong frozen infrastructure, our scale and our productivity, what we've been able to do in terms of driving costs down in terms of the way we produce product, we believe it would be very difficult to significantly undercut a brand like Banquet so we really don't believe that's a significant issue.

It obviously is still a very tough environment but we really do believe that once we get past this overlap, we'll start to see things moderate.

We're not looking for heroics.

We're talking about sequential improvement.

Andre?

Ken, Gary is spot-on about our frozen capabilities.

I would also say, let's just remind ourselves, as the consumer looks at this, we still provide a high quality protein, a starch and a vegetable, in many cases, for $1 in a meal, and that's unbelievable value.

As you recall a year ago, though, it was being sold for $0.88, and that was unsustainable from a margin perspective.

I think we've -- I know we've made the right trade-offs.

We haven't lost a lot of consumers in that franchise, and they will be back as we lap that pricing, as Gary said.

I feel very good about the decisions we've made on Banquet, and it continues to be a great value, a great traffic driver for our customers, a very good franchise.

And we don't think private label comes in underneath that.

And then one more, if I can.

You've done a bunch of acquisitions lately.

Can you give us some color on which ones have exceeded expectations, which ones maybe need a little more attention, so to speak, and what that tells you maybe about where you're thinking about going for future acquisitions?

You've made some in packaged meats, for example.

Sort of all over the store, if you will.

Just curious, any learnings you have that can help us understand perhaps how you're thinking about further acquisitions going forward.

Yes, you know we -- it's certainly really early in the process, so I would say we don't have any red flags at this point.

We're very pleased with the way the integrations are going.

Things take time to meld into our organization, and we're going to stay very true and disciplined on our strategy.

We've got those three planks that you see us acting on, core adjacencies, private label, and international, and we're going to stick with that.

We've got, again, a very, very disciplined process.

We're looking for both top and bottom-line growth, and we're clearly sticking with that and have very tight filters and a lot of discussion before we move on opportunities.

Rob Dickerson with Consumer Edge Research.

Thank you.

Good morning.

Gary, I just had a question focused on the frozen entree category.

It looks like the last acquisition you did was Unilever with Bertoli and P.F. Chang's.

If you break out, you had the brands of P.F. Chang's, which mainly snacking slash Asian food based.

The growth profile on those brands is just -- it's a lot better than what we've seen in the frozen entree category.

I'm just curious if you could add some color as to why you think there is such growth basically in Asian food, frozen entrees, one, and then two is if there is growth in the sub-category, will you look to obviously expand that and then by growing total dollar sales in the category or would you look to potentially try to reduce your overall mix for some of your slower growing SKUs?

Thanks.

We're very excited about the acquisition, both the P.F. Chang side and Bertoli, because we believe first of all most importantly, those are terrific brand equities.

They take us into new occasions which as you noted, a bit of snacking, snack meals on the P.F. Chang side, but really this multi-serve side of the business is a place that we're very excited about getting bigger in.

But those equities are really great, and I think the most important thing is that we have capabilities that can be leveraged because we've got scale, expertise, infrastructure in frozen that I think are going to be brought to bear once we really get this integrated into the Company so we are very excited about the growth prospects of both of those brands.

They really hit the mark with some new consumers for us.

Jonathan Feeney with Janney Capital Markets.

Thank you.

Good morning, guys.

Excluding acquisitions, I know you made a comment about in this in the script but I just wanted to be clear.

Excluding acquisitions which clearly came with some marketing spending themselves, how much on an apples-to-apples basis was marketing or advertising, however you're disclosing it, spending up roughly in this quarter?

This is John.

On the base consumer business, our advertising and promotion was up about 20% year-over-year on the comparable quarter.

Thank you.

And Gary referred to strong increases for the year as a whole.

What sort of order of magnitude would you expect that marketing to be up against the consumer portfolio for the year, relative to your current plan?

I would say we're into the double digits.

And -- thanks.

And just finally, when you mentioned Hunt's, you're coming into the tomato season as potentially responsive to a little bit more advertising spending, is it your sense that ad spending has become less effective over the last couple of years?

Because you've heard a lot of folks in the industry seem to indicate that maybe cutting ad spending is a little bit more rational given some of the consumer pressures out there.

What's your perspective on that?

Has it become more or less effective?

Any clear trend over the last couple of years?

Thanks.

I think a lot of things have happened, Jonathan, over the course of the last couple of years with respect to how you access consumers from a variety of sources, the major -- the old three network programs that you did before don't work as well.

But I think our teams have done a really nice job getting into the digital space, as Gary mentioned, with Slim Jim and some other things like that.

I think you have to have a balance.

We were historically, at ConAgra, weighted to more portion trade driven and less pull.

I think what we're doing consistent with our strategy has been to better balance that.

But I do believe in this environment you need both.

You need strong pull recognition, going for high ROI programs, and you also have to have merchandising and trade programs that bring consumers in and that support what the retailers are trying to do.

So I think you have to have a balance.

I do believe the programs are still effective.

Otherwise, if they weren't, if they had low ROIs, to Gary's point earlier, we would take them out.

KeyBanc Capital Markets, Akshay Jagdale.

Hi.

Good morning.

Congratulations on a good quarter.

I wanted to just clarify on the fiscal '13 guidance so if I just take what you've said, I'm getting to a base business growth guidance has increased from roughly I'd say $0.06 in EPS growth year-over-year to about $0.09.

First of all, I don't know if you want to be specific, at least can you just say you have increased your base business guidance?

Is that accurate?

Yes, that is accurate.

I'd say we have increased our base business and the M&A piece has probably gone up a little bit although I would caution that very recent acquisitions we don't expect that those are going to be up and running at full run rates for some period of time.

So the contribution of those to the current year is fairly minimal.

And the base business increase for the year, is that just a flow-through from this quarter?

It seems as though it is.

So, in other words, you're not baking into your guidance further increase in base business growth yet.

Is that fair?

I think that's an accurate portrayal.

We've essentially passed through the up side from this quarter, and then we've evaluated the rest of the year and feel like we're in the right spot.

David Driscoll with Citi.

Great.

Thanks a lot.

Good morning, everyone.

First thing I would like to do is just talk a little bit about the margins in Consumer Foods.

You made the comment that the commodity cost, the raw material inflation, came in slightly below the expectations.

I suppose -- what I'm really trying to get is just an understanding.

Three months ago I feel like you guys had a very more cautious outlook.

This is a tremendous report this morning.

The margins are up enormously.

Year-on-year growth are enormous numbers.

Something happened within the three-month window from the last call to this call.

To me, it feels like it was the commodity side of it more than other pieces of it, specifically in Consumer Foods.

But what's your take?

Yes, David, you know, first of all, again, let me reiterate how pleased I am with the quality of this Q1 performance, because both our Consumer and Commercial Foods operations significantly improved their operating profits.

So very, very pleased with that.

Now, certainly we benefited from less than expected inflation.

Remember, we have to put our plans in place several months ahead, so that certainly contributed, but very importantly, our total margin management efforts across the Company have really gotten traction, including our very proactive and effective cost management on top of lower than expected inflation.

Our plants are also running very well across the Company.

Our productivity efforts continue to be robust, and our net pricing architecture tools and our analytics have really improved.

Finally, our Lamb Weston international business was really strong.

So all of the above on top of just the lower inflation added up to an excellent quarter.

Gary, the only follow-on I would make to this one is that the pricing looks like it was a lot of carry-over pricing and in line with our expectations, and on a full-year basis, your productivity savings is roughly where you had thought it was before.

So unless there's a pacing issue within the quarters, again, I'm only trying to understand three months ago versus today, obviously it's a positive question, but it feels like the big delta was on the commodity side.

Am I just too -- am I wrong on this?

Am I just being too strong on the commodity piece?

David this is John.

I think you're being slightly too strong on the commodity piece.

I talked about mid single digits last quarter, and I think I specified kind of 4% to 6%.

When I say slightly better this quarter, we're probably talking about something in the 3% range.

So while it was certainly helpful, there's a lot more to the story than just commodities here.

So I think the things Gary mentioned, I think a lot of our capabilities were working very well.

The other thing I would add is that we expected a quarter to be a fair amount stronger than the prior year ourselves as we entered the year.

So I think there's a lot of credit to pass around here in terms of number of capabilities.

Jason English with Goldman Sachs.

Hi, good morning, folks.

Thanks for the question.

Congratulations on a great start to the fiscal year.

Some questions on the competitive dynamics out there in the industry.

Frozen entrees, the frozen case has been pretty sluggish in terms of growth, and in a couple of your core categories were announcing some price investment by your key competitors.

I think Nestle's price has turned negative in frozen entrees, Heinz has as well.

Then in frozen potatoes, Heinz has been not so quiet about trying to get -- win back market share with price investment and get retailers to concede some price as well in those brands.

Can you talk about the level of aggression, how you see that playing out as we look forward?

Sure.

I think we'll, Jason, we'll tag-team this, myself and Paul.

Paul can speak to the potato piece and I will speak to the category of single-serve meals, which I think you addressed with our competitors there.

We on occasion see that.

For the most part, people have been pretty disciplined, including ourselves, on pricing, but certainly there are promotions out there that we see a little deeper than we'd like.

But I would say on the whole, the key for us is to really bring consumers back and customers back to that category, because that's what we've been -- what's been the most sluggish, has been the off-take there.

Again, a lot of that, we've talked about this in the past, a lot to do with the economy and some things like that.

So I think we see that coming back.

Right now, I don't see competitive prices sort of out of control but on occasion we do see promotions driven at a place where we would rather not play.

And, you know, Jason, clearly we're not going to stick our head in the sand.

We choose to try and drive the business much more with marketing and innovation, but if we need to surgically course correct here and there from a merchandising standpoint, we will certainly do that.

That's not our priority, but certainly we're going to be realistic about it.

And on potatoes, Paul?

Yes.

I'd just reiterate what Gary mentioned in the formal remarks.

There's nothing I'm seeing that would change our strategy and our commitment to the strategy with attracting the high-end consumers with Alexia and our all-natural innovative products with Alexia, as well as the licensed brands.

Those are doing well.

And our long term commitment with private label.

Quarter-to-quarter, things may look a little bit different, but long term, everything that we see tells us to stick with our strategy.

One follow-up, if I can, on private label.

There's been some chatter in the industry of retailers getting more aggressive on trying to put categories back out to bid to try to get some price concessions.

Are you seeing that in that the categories you compete in?

You know, Jason, for the most part, where we have the priority on private label is on more of the value add side so we're not looking to place most of our bets in categories where it's just purely about the lowest price bid.

That certainly will happen now and then, and we have to deal with it.

But our strategy is really to go on the value add side.

Thilo Wrede with Jeffries.

Gary, quick question for you.

Last year obviously you made an attempt to buy a large private label maker and since then you've done several acquisitions which in my view were much more geared towards the branded side of the business.

Is that a shift in focus?

Is that a matter of availability?

Can you just give a little bit of color there?

Yes.

I would tell you that we're really doing all of the above in terms of our three pillars.

You have seen us on the branded side on things like most recently the Bertoli and P.F. Chang.

You've seen us in the private label space, certainly with National Pretzel, and you've seen us on international with Del Monte Canada and with our increased position in our joint venture in India.

So we really do have three pillars.

It's not an either or, and we're going to continue down that path.

Private label, the importance of private label to you hasn't changed at all?

No, it hasn't.

It's still a priority for us.

It's really an important business.

Again, we're interested in the value-added side of private label.

Retailers, clearly you see are interested in developing and improving their own store brands.

We've got a well developed infrastructure on private label and we're leveraging those capabilities that we have across the Company.

On the branded side, like innovation and food safety and category management and just our overall talent so we're going to continue to be a big branded player but we see good growth opportunities in private label.

That's helpful.

Thank you.

The other question I had was just a housekeeping question.

Off your new EPS guidance for fiscal '13, how much of that will be contributed by the non consolidated business, the equity investment business?

This is Chris.

We don't usually single that out as a percentage of EPS.

I think if you look at the current trends and the run rate, you can assume that is something reasonable to prorate over the rest of the year.

Ann Gurkin with Davenport.

Good morning.

Congratulations to a super start for the year.

Thank you.

(multiple speakers)

I wanted to just circle back to the frozen category and on meals.

In terms of the competitive landscape, are you seeing a step up in the pace of innovation and the resulting attempt to drive pricing and margins and value through innovation?

Any change in the strategy for both you and your competitors?

Ann, this is Andre.

Certainly for us, as Gary has mentioned, we believe we, in frozen, we have an innovation machine, and not only with the recent properties we just acquired, we feel very good about the capabilities to innovate off of those two brands unbelievably well in multi-serve but also in other areas.

We've now sort of captured the frozen case, if you will, from, I'd like to say from sunrise to sunset in sense that we have it now at the breakfast occasion all the way through the dessert occasion.

And we're looking at innovation across that entire lineup.

We think we'll bring out some things for breakfast that will get consumers interested and a lot of other things.

We continue to focus, as you know, we showed some of those products at Cagney on dessert.

We know we have opportunities in single-serve and multi-serve meals so we, for one, believe that we'll be driving the categories with our innovation machine that we have.

Ann, I would echo Andre's comment.

The feedback that we get consistently from our customers is that we are by far the best innovator, and we are doing things that are platform oriented, not really one-off so if you think about our steaming, think about our microwave trays that allow the consumer to get the same quality much more quickly out of a microwave versus an oven.

Those kind of things are platforms that we'll continue to leverage.

Okay.

And then if I can also ask about potential expansion or acquisitions you highlighted.

You want to increase your international presence.

Can you help me better understand, would it be in adjacent categories?

Would you enter a new space?

Any geographies you're targeting?

Any other details you can give me?

Ann, I would say what we're not going to do is just plant a lot of flags.

We're going to build out from the infrastructure and places that we already have pretty good scale.

Could be places like India, with our JV, places like Mexico, and we can grow not just in those companies but from that geography, and certainly on the Lamb Weston side where we already have a very significant global footprint we're going to continue to grow as our customers continue with their aggressive plans to expand in emerging markets.

Alexia Howard with Sanford Bernstein.

Good morning, everyone.

As we're just following up, we've moved into Lamb Weston here, you mentioned very strong Lamb Weston growth in international markets, and I think you just alluded to emerging markets.

Can you tell us any more about which countries are particularly strong here, what kinds of outlets are working very well, and will the operating efficiencies that you mentioned this quarter continue to play out through the rest of the year?

Sure.

So I'll -- this is Paul, and I will just kind of give you a broader perspective.

The way we look at it is there is pretty dynamic growth from emerging markets in general.

The highest quality, lowest cost potatoes in the world are in North America and Europe, which is exactly aligned with our footprint, and so we're well positioned to really align with customers and be key strategic partners that enable them to grow and build out their growth plans in these emerging markets.

I would probably generalize, as far as southeast Asia, a real exciting growth market, but in general, we see pretty exciting growth on frozen potato products in not only Asia but also the Middle East and South America as well, and we're positioned well to enable those customers to grow there.

Then on the operational efficiencies, we kind of hit on the quality of the potatoes and the low cost, but our manufacturing footprint can serve those customers very efficiently from where we're at, and we're very focused on that.

It's a big part of what drives our success, and we're committed to that going forward.

Eric Katzman with Deutsche Bank.

Thank you, good morning.

I guess just one specific question and then one broad-based one.

John, I guess you guys restated sales.

Can you just go through that -- the reasoning, what exactly that entailed?

I realize it didn't impact profits.

Then just Gary kind of stepping back, not to blind side you, but we put a report out about this Prop 37 and the GMO labeling issue in California.

You're pretty broad based in the industry.

Maybe you can shed some perspective on how you think the industry handles that and ConAgra specifically if the vote goes against you.

Yes, Eric, let me handle the question on restating sales.

We had a small portion of transactions in our milling business that just historically we've always reported on a net basis, and as we looked at the accounting rules and just looked to get -- just took another look at that, we decided it would be preferable, given how we report the rest of that business, just to report those sales gross.

I believe it was about $30 million in the milling business in this quarter.

So not material, but we just kind of cleaned it up.

Eric, this is Chris.

In regard to your question about Prop 37, that's not the scope of our remarks today so what I want to say is that we're working with our trade group and with other food companies to get the word out on it.

We think that when consumers understand the nature of the proposal, they will vote against it.

Rob Moskow with Credit Suisse.

This is Rachel [Navadin] in for Rob Moskow.

Congratulations on the quarter.

With the lower inflation outlook, what is your game plan for pricing and given the better environment, do you expect to maybe even roll back prices in certain categories?

Rachel, this is Andre.

We don't see a need for that.

Again, I just want to remind the listeners that it's still inflation that we're dealing with.

It's certainly more moderate than it was a year ago, but it's still inflation.

As Gary pointed out earlier, we will watch where the categories go and where the competitive landscape takes us but we don't see right now a need in our organization to be rolling back prices.

We have a strategy across the full year.

But again, we'll be looking at it.

We'll be looking at the commodity markets as we do day-in and day-out in determining what our posture is but right now our plans are not to see ourselves effectively roll back a lot of prices.

This concludes our question-and-answer session.

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

Thank you.

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 first quarter earnings conference call.

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