康尼格拉食品 (CAG) 2013 Q3 法說會逐字稿

Good morning and welcome to today's ConAgra Foods third quarter earnings conference call. This program is being recorded. My name is Jessica Morgan and I will be your conference facilitator.

All audience lines are currently in a listen only mode. However, speakers will address your questions at the end of the presentation during the formal question and answer session. At this time I would like to introduce your host for today's program, Gary Rodkin, Chief Executive Officer of ConAgra Foods. Please go ahead, Mr Rodkin.

Good morning and welcome to our third quarter earnings call. Thanks for joining us today. I am Gary Rodkin and I am here with John Gehring, our CFO, and Chris Klinefelter, VP of Investor Relations.

We are pleased with the overall accomplishments during the quarter and here I will mention a few. We grew profits in the Consumer Foods and Commercial Foods operating segments. This occurred as we significantly increased our marketing investment to build for the future and take advantage of better margins.

We completed the acquisition of Ralcorp, which is truly transformational for our Company, putting us in a position for faster growth and participating in a very exciting space within our industry, Private Brands. While it is still very early, we are making good progress on integration and identifying growth synergies.

And shortly after quarter end we announced an agreement to form the Ardent Mills JV, which we expect will also be transformational and which brings together terrific leadership in the milling industry to meet changing customer and consumer demands. John and I will provide more detail on those accomplishments and update you on our business and then we'll open 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 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 impact our expected results, perhaps materially, I'll refer you to the documents we file with the SEC, which include cautionary language.

Also, we'll be discussing some non-GAAP financial measures during the call today. And the reconciliations of those measures to the most directly comparable measures for Regulation G compliance can be found in either the earnings press release, the Q&A document, or on our website. Now I'll turn it back over to Gary.

Thanks, Chris. I'm pleased with our third quarter results and with what we're expecting to deliver for the full fiscal year. Diluted EPS on a comparable basis was $0.55 for the third quarter, up 4%, with both the Consumer Foods and Commercial Foods segments posting profit growth, while we significantly increased marketing investment.

In terms of the quarter's EPS performance, it's worth pointing out that our incremental marketing investment was about $0.04 per share this quarter for our base business. That's part of the strategy we discussed earlier this year of taking advantage of better Consumer Foods margins to reinvest back in the business for long-term benefits. As you know, we raised guidance in February for fiscal 2013 to comparable EPS of approximately $2.15, which we are reaffirming today. That's a 17% improvement over the previous fiscal year on a comparable basis.

As we communicated before, the EPS guidance of $2.15 reflects about $0.05 of expected contribution from the Ralcorp business. As a reminder, we owned Ralcorp for only 27 days in the third quarter.

In terms of our operations, let me start with the Consumer Foods segment, where sales were up 7% driven by acquisitions. Volumes improved sequentially by about a point, but continued to reflect the challenges of the marketplace. Organic volume was down 3% and price mix was favorable by about the same amount.

As of now, we have lapped most of the significant pricing we took last fiscal year to deal with inflation. We're confident that volumes will continue to sequentially improve in Q4 and into fiscal 2014 and we expect to see less contribution from pricing for that same reason.

Acquisitions drove the biggest part of the overall sales growth in Consumer Foods this quarter. We've not yet lapped all the acquisitions we completed over the last few quarters that pertain to this segment and several of our brands posted good organic results as well.

As an example, we're seeing good growth from our Hunt's canned tomatoes, as we advertised to communicate their flash steamed difference. Andre told you at CAGNY about the work we're doing in tomatoes at the retail level. That work, along with the A&P spend, is driving growth in this important center store category.

We also saw strong growth from RoTel tomatoes. Both Hunt's and RoTel products took share, grew volume and grew net sales during the quarter. RoTel is a great example of a brand with a very strong regional following that's growing into a national presence, benefiting from strong A&P.

Pam cooking spray and Reddi-wip toppings both did well this quarter. They both gained share and grew sales dollars and volumes. As with other brands, very clear point of difference advertising has played a big role in their growth.

And Marie Callender's continued on its winning streak with gains in net sales, share and volume. You heard us talk about Marie's success at CAGNY. Not only is the food fantastic, Marie has also benefited from messaging that is true to the brand's personality.

Our intent is to be very pragmatic with our messaging and clearly point out the reason to buy our brands, capturing what sets our great offerings apart from the competition. This makes for a strong connection with today's consumer mindset where everyone wants to know exactly what they're getting for their hard-earned dollar. We're committed to investing behind our brands as part of developing loyalty for the long-term.

As you've heard us say before, we have a strong innovation pipeline and continue to introduce great new items that build on the platforms we've been developing. At CAGNY we shared with you some of the latest in terms of baked microwave innovation, frozen desserts and frozen breakfast. New items like these are a key reason for our confidence in our Company's future.

Consumer Foods grew comparable operating profit by 3%, which as I've said before, includes a 33% increase in marketing, as we build for the future and take advantage of improved margins. This investment was made possible by the margin benefits stemming from pricing discipline, good cost savings, and more manageable inflation.

We're working hard to integrate our acquisitions. With regard to the Ralcorp business, which is reported in its own segments, we had only a few weeks' worth of contribution during the quarter, having closed the deal on January 29. In aggregate, these assets gave us $292 million of sales and $22 million of comparable operating profit for that time frame.

We're in the early days of incorporating this portfolio into the ConAgra Foods family. In the near term, the focus is on tactical pricing adjustments and supply chain efficiencies, as well as organizational development work. We expect this acquisition to generate about $0.05 of net EPS benefit this fiscal year. And in that $0.05 per share projection, we have of course planned for customer transition matters and disruption.

We feel good about having closed this transformational transaction earlier than planned and we're confident that the progress we've already made in integration will serve us as a good foundation for growth. We have distinct focused resources working on the integration, covering all facets of operations, so that we consider all opportunities for top and bottom line synergies. We've already identified some product sourcing opportunities, where the existing ConAgra Foods businesses can add value to Ralcorp products. And we've begun to identify top line opportunities.

We're integrating at a pace and sequence that will optimize the long-term growth of this major acquisition, so we are obviously being deliberate and thorough up front to make sure the integration drives success.

It's extremely important that we play this out for the long-term and that we set ourselves up for success. We, of course, will find some opportunities to course correct and other places to build upon Ralcorp's successes. There will clearly be some bumps and bruises as we put these two companies together. We expect that, we plan for that and we ask for a bit of patience while we learn the landscape.

I can tell you that we are very confident in our ability to achieve all the cost synergies we've discussed with you. And we knew it would take a little longer to turn the customer facing side of this into the sustainable organic growth engine that we desire, but I am just as confident we will get there.

We clearly believe that the consumer and customer demand for private brands is not only here to stay, but will play a leading role in the industry's growth. That's the primary reason for the Ralcorp transaction and as we capitalize on the potential for private brands, we're confident it will serve our shareholders well.

Moving on to Commercial Foods. The segment performed well in the fiscal third quarter, up in sales but up more significantly in profit. Profit was up 18% from a year ago, primarily reflecting favorable wheat market conditions, good volumes, mix, and operating efficiencies in the ConAgra Mills operation.

Lamb Weston potato operations posted modest profit growth, largely as planned, given the nature of the comparison. They had a really strong quarter a year ago. Lamb Weston's international volumes declined in a few key Asian markets, but the future outlook globally is still bright.

For some context on the US market, the competitive landscape in the US has become a bit more intense, given how some major customers are handling their bidding processes. We've dealt with this before as a Company. We'll prioritize our capacity for the right mix and manage through it over time. Lamb Weston continues to focus on high potential, high margin products, such as sweet potato fries, which continue to show growth, and to provide other innovative solutions and strong customer service.

I'm sure most of you saw our announcement last month about our agreement to form Ardent Mills. Ardent Mills will combine the operations of ConAgra Mills and Horizon Milling and the ownership of the new Company will be shared between ConAgra Foods, Cargill and CHS. We expect the transaction to close late this calendar year.

Ardent Mills will bring together outstanding leadership in the milling industry in order to continue to meet growing and changing customer and consumer demands. We believe this company will be the go-to Company in terms of innovation, customer service and efficiencies and in the process generate substantial cost synergies. Ardent Mills will have a broad footprint and network of facilities in the US, Canada and Puerto Rico, including 44 flour mill locations, three bakery mix facilities and one specialty bakery.

We expect Ardent Mills to be accretive to our earnings over the long-term, given the growth potentials and synergies and we're excited for the future of Ardent Mills. We believe the formation of Ardent Mills will contribute to our long-term earnings growth potential, while removing some volatility from our sales.

All in all, we're pleased with the very strong year that fiscal 2013 is shaping up to be. In the third quarter, we achieved good profits for our base business, closed on a transformational deal, made significant investment in marketing and innovation, and we also set up our milling business for a great future as part of a focused joint venture. I look forward to our year-end discussion in June, when we can share our view of fiscal 2014 and our upwardly revised long-term goals as a result of the Ralcorp transaction. With that, I'll turn it over to John for more financial details.

Thank you, Gary, and good morning, everyone. I'm going to touch on six topics this morning -- our third quarter performance highlights; some Ralcorp acquisition matters; comparability matters; the recently announced agreement to form a new flour milling venture, Ardent Mills; cash flow, capital and balance sheet items; and finally, some comments on our outlook for the balance of fiscal 2013.

Let's start with the fiscal third quarter performance highlights. Overall, the third quarter results reflect a continuation of the good financial performance that we saw in the first half of the fiscal year. As we previously noted, we have significantly increased our marketing investments and are lapping stronger performance in the back half of the fiscal year. So while we're pleased with our financial performance, our year-over-year profit growth is more modest this quarter.

For the quarter, we reported net sales of $3.9 billion, up 13%, driven by the addition of Ralcorp, as well as pricing and acquisitions in our consumer segment. In our Commercial Foods segment, where sales were up modestly, pricing and mix improvements offset modest volume declines. Net sales also reflect the impact of higher year-over-year wheat prices in our flour milling operations.

Also for the fourth quarter, we reported fully diluted earnings per share from continuing operations of $0.29 versus $0.67 in the year-ago period. Adjusting for items impacting comparability, including significant costs related to our recent Ralcorp acquisition, fully diluted earnings per share from continuing operations were $0.55 versus $0.53 in the prior year quarter, a 4% increase.

While Gary has addressed our segment results, I would also like to touch on a few highlights. Starting with our Consumer Foods segment where net sales were approximately $2.3 billion, up about 7% from the year-ago period. This reflects about 7 points of growth from acquisitions. Organic net sales were essentially flat and reflect favorable price mix of about 3% and a base volume decline of about 3%, which represents a sequential improvement over the second quarter.

Our Consumer Foods segment operating profit, adjusted for items impacting comparability, was $289 million or up about 3% from the year-ago period. The operating profit improvement reflects the benefit from acquisitions, our margin management initiatives, moderating product cost inflation, and a significant and planned increase in marketing costs. The impact from foreign exchange this quarter on both net sales and operating profit for the segment was immaterial.

Our Consumer Foods supply chain cost reduction programs continue to yield good results and delivered cost savings of approximately $80 million in the quarter. For the fiscal third quarter, we experienced inflation of about 1%, a bit better than our expectations. On marketing, Consumer Foods advertising and promotion expense for the quarter was $120 million, up about 45% from the prior year quarter, principally driven by a $27 million or 33% increase in marketing investments in our base business.

In our Commercial Foods segment, net sales were approximately $1.3 billion or up about 1%, reflecting pricing and mix improvements across the segment, which were partially offset by a 1% volume decline driven by lower Lamb Weston volumes. The pass-through of higher wheat costs in the milling operations had a positive $17 million impact on net sales for this fiscal quarter.

The Commercial Foods segment's operating profit, adjusted for items impacting comparability, increased 18% from the year-ago period to $177 million. The strong year-over-year performance reflects improvement in our milling operations and modest improvement in Lamb Weston over a very strong prior year quarter.

Moving on to corporate expenses. For this quarter corporate expenses, adjusted for items impacting comparability, were $84 million for the quarter versus $61 million in the year-ago quarter. The year-over-year increase reflects higher incentive compensation costs and the addition of the Ralcorp corporate expenses. We continue to expect our effective tax rate for the full fiscal year to be in the range of 34%.

Now let me comment briefly on the Ralcorp business. Our results reflect almost four weeks of operations from this acquisition. Net sales for the Ralcorp business were approximately $292 million and operating profit, excluding items impacting comparability, was approximately $22 million, about what we projected. The net accretion for our fiscal fourth quarter should also be in line with our earlier expectations. And we are comfortable with our fiscal 2013 accretion estimate for Ralcorp of about $0.05 per share.

During the integration period and until we implement long-term organization changes related to the Ralcorp acquisition, we will report the results of Ralcorp's operations in two segments, the Ralcorp Food Group segment and the Ralcorp Frozen Bakery Products segment. As we go forward, our focus is going to be on the EBIT, synergy, and EPS accretion goals for Ralcorp that we shared with you at CAGNY.

During our first year of ownership, we won't focus on year-over-year results for a few reasons. First, our focus will be on the information covered in our historical financial statements, which obviously will exclude prior year Ralcorp information during the first year. Similarly, we expect to manage the Ralcorp business differently. For instance, our approach to commodity management, pricing, and balancing margin management and growth will be different, so the past Ralcorp performance won't be our reference point.

Finally, we have a number of reporting and systems matters, such as changes in fiscal periods, units of measure, and segment reporting that we will be working through in the first year. Those can be pretty complex from a housekeeping standpoint and will likely preclude us from having useful comparisons to the prior year. Obviously our goal is to provide transparency into the performance of the Ralcorp business in terms of the current contribution to our results and our focus will be on the near-term goals we shared at CAGNY. Overall we're excited about the opportunities that this acquisition provides us for long-term growth and attractive accretion over the next couple of years, driven by strong synergies.

Now I'll move on to my next topic, items impacting comparability. Overall we have approximately $0.26 per diluted share of net expense in this quarter's reported EPS related to several items. The most significant comparability item this quarter relates to acquisition matters, including transaction related costs, acquisition related restructuring, and integration costs. As you might expect, the vast majority of these costs relate to our recent acquisition of Ralcorp.

In all, we recorded approximately $102 million or $0.16 per share of acquisition related expenses. We also incurred about $13 million or $0.03 per share of incremental tax expense related to the adverse impact of the transaction costs on our income tax rate this quarter.

Next, on hedging for the fiscal third quarter. The net hedging expense included in corporate expenses was approximately $27 million or $0.04 per share. In addition in the fiscal third quarter we recognized an impairment charge of approximately $10 million or $0.02 per share, related to assets that we acquired last fiscal year in connection with the bankruptcy proceedings of a supplier. Finally, we incurred about $5 million or $0.01 per share of expense related to historical legacy environmental matters.

Next I'll address the recently announced agreement to form a new flour milling venture, Ardent Mills. As noted in our March 5 announcement, ConAgra Foods, Cargill and CHS will contribute their respective flour milling operations to Ardent Mills on a cash free, debt free basis. ConAgra Foods and Cargill will each own 44% of Ardent Mills, with CHS owning 12%. We will account for our ownership as an equity method investment. As we don't expect this transaction to close until late in the calendar year, we expect it to have no material impact on our fiscal 2013 results.

We are very excited about the transaction and its potential to create significant value over time as cost synergies are realized. It will be modestly dilutive to earnings per share initially, as interest costs and higher amortization will not be fully offset by the cost synergies realized at first. However, over time, we expect a significant level of value creation from combining the flour milling operation -- from combining these flour milling operations driven by compelling cost synergies.

Also, as noted in the announcement, we currently expect the new entity to be self-financed through cash flow from operations and its own bank debt and credit facility. The structure and amount of the Ardent Mills debt financing will be determined during the pre-close period. We, along with Cargill and CHS, intend to receive cash distributions from Ardent Mills at closing. Based on initial estimates, we expect to receive a distribution of approximately $400 million and we currently expect to use those proceeds to accelerate our debt repayment plans related to the Ralcorp acquisition debt.

Next I'll cover my fifth topic, cash flow, capital and balance sheet items. First, we ended the quarter with $724 million of cash on hand and no outstanding commercial paper borrowings. We continue to emphasize cash flow within our business and for fiscal year 2013 we expect to deliver operating cash flows in the range of $1.2 billion to $1.3 billion. This estimate reflects the cash flow impacts from the Ralcorp transaction and its operations.

On working capital, we continue to make progress against our working capital initiatives. For the full fiscal year, the increase in working capital would be driven by our acquisitions, as we continue to maintain our focus on cash conversion cycle metrics in our base business.

On capital expenditures for the quarter, we had capital expenditures of $109 million versus $79 million in the prior year period. And for the full fiscal year, we now expect CapEx to be approximately $500 million, including fiscal 2013 CapEx related to our recently announced expansion at our Lamb Weston facility in Boardman, Oregon and including approximately $50 million related to the recently acquired Ralcorp business.

Net interest expense was $71 million in the fiscal third quarter versus $50 million in the year-ago quarter. The increase is primarily driven by the additional interest expense related to the Ralcorp acquisition. Dividends for the quarter increased from $99 million in the year-ago quarter to $101 million, reflecting a higher dividend rate partially offset by a lower number of shares.

On capital allocation. As we noted at cage CAGNY, our capital allocation priority through fiscal 2015 will be the repayment of debt. As I previously noted, we expect to use the proceeds from the Ardent Mills transaction to accelerate and increase the targeted level of debt repayment through fiscal 2015.

I would also note that our net debt balance at the end of our fiscal third quarter is somewhat lower than we had planned, as more cash was available at the close of the Ralcorp transaction. Subsequent to quarter end, we paid off $566 million of certain Ralcorp private placement debt to complete our acquisition financing plans. Additionally, we are on track to repay $300 million of debt before the end of our fiscal 2013. Therefore, we are off to a very good start on improving our leverage ratios.

As previously announced, we expect to maintain our current annual dividend rate at $1 per share as we delever and we expect to significantly reduce our share repurchases during this time as well. While we plan to constrain our acquisition activity in the near term as we repay debt, we will continue to prudently support the right investments for our business, including investments to support innovation, production capacity, and our cost savings initiatives. Now, on to our outlook.

We continue to expect our fiscal year 2013 fully diluted earnings per share adjusted for items impacting comparability to be approximately $2.15. This guidance reflects the benefit from owning Ralcorp for about four months of the fiscal year. In our outlook for Ralcorp we have taken into account factors such as seasonality, market conditions, contract timing, and transition impacts and we remain comfortable with about $0.05 of EPS benefit in fiscal 2013, and $0.25 in 2014.

We currently expect the fiscal fourth quarter to show strong year-over-year earnings growth that reflects the contributions from Ralcorp and other acquisitions, marketing costs comparable to the prior year quarter, and a soft lap in our flour milling business.

Overall we are very pleased with the financial performance and the strong earnings growth from our fiscal 2012 comparable base. As we said at CAGNY, we expect to provide our estimate for our fiscal 2014 earnings and our updated long-term algorithm when we communicate our fiscal fourth quarter earnings this summer. Aside from the information we provided on the pending Ardent Mills transaction, we don't have any additional details to offer today on our fiscal 2014 plan or on our long-term algorithm.

That concludes our formal remarks. Thank you for your interest in ConAgra Foods. Gary and I, along with Andre Hawaux 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.

First off, thanks for breaking out the Ralcorp results separately. It does help quite a bit with transparency, both Ralcorp and on the core. I guess my question is on Ralcorp specifically. Obviously it can be a challenge to model a deal in the initial stages, the first 27 days. And as you said, the year-over-year comps may be tough to assess for a while given how you're going to run the business going forward.

But the results, at least in the quarter, for Ralcorp top and bottom line were a bit below what we were looking for. I was hoping you could maybe help put some of the Ralcorp results into maybe better context so we can get a sense if how we should think about it going forward. In other words, maybe what are some of the trends and some of the key Ralcorp businesses right now? We know that private label in general had a bit of a tougher year in 2012. And what is your comment around -- I think you said the need to make some tactical pricing adjustments at Ralcorp. How does that play into that as well?

Andrew, I would tell you obviously we are really very positive on being able to get this deal closed and on that long-term opportunity being very consistent with our recipe for growth. And as you said, it is only 27 days and actually as of today I think we're in week nine. So, still a very steep learning curve. There clearly, as we expected, are some normal disruptions, including some top line challenges as you noted and I would say those stem primarily from some disruption, their own integration, which they were about six months into as we entered the picture, and then of course our integration on top of that.

And then I would tell you as we get into it, we've seen that they had gotten upside down on several key commodities and those tactical pricing adjustments you mentioned, clearly those are in process as we take a look at things that need course correction and employ our center of excellence on revenue growth management, risk management, et cetera. We are in process of making those adjustments.

So, I'd say that clearly is probably -- those two things are clearly right in our -- on top of our radar screen that we are working on and our -- have impacted those results in that first 27 days. But we are very, very confident in terms of the numbers that we have shared both at CAGNY and here today, and that is really driven by a very strong sense of conviction on our supply chain efficiencies.

We're well underway there and believe we will deliver all of those and we also believe, as we get into it, we are starting to see some top line growth synergies as well. So this whole notion of very strong vision or conviction on leveraging our scale and our CPG capabilities into this very fragmented space, that's going to play out. We remain very confident on that and we don't take -- we really don't take too much message from this first 27 days.

Then just second, volume in consumer, as you mentioned was sequentially better, still off about 3%. I guess in the most recent scanner data, it looked a bit better and obviously with some of the increased marketing you did this quarter and the lapping of some of the pricing, are you starting to already see sort of, again, even more sequentially improved volume results as you go into the fiscal fourth quarter?

Andrew, this is Andre. I want to take that question. I am going to elaborate on it a little bit more than even the question that you asked. But to answer your question, yes, we are. We're seeing much more positive scanner data, as I'm sure you are as well, for our -- the start of our fourth quarter and we're very optimistic that our fourth quarter volume performance trends that you'll see will be significantly improved from where we were in Q3.

Let me share a little bit, because I know there's a lot of investors thinking about our volume in consumer for Q3. Let me identify where -- really the issues were in three brands that made up about 90% of our miss and that was Banquet frozen, Chef Boyardee and Orville microwave popcorn.

Let me take each of those and talk a little about each one of them. One is Banquet. We've been talking about this brand all year and it really has to do with a significant amount of pricing we took on this value brand at the beginning of our fiscal year. So, we finally have lapped that and as we look at Q4 numbers in the start of Q4, we're seeing that brand turn around pretty significantly, as we expected. So that's been a pretty consistent pattern and that was a big cause of the volume miss in Q3. We see that getting better in Q4.

Chef Boyardee was simply one thing. It was timing of merchandising. The merchandising that we had versus a year ago, which was in Q3, is now in Q4 and that corrects itself as you'll see in the Q4 results.

The last one is probably the smallest amount of our miss, but it was a miss nonetheless and that was in Orville Redenbacher's microwave popcorn. It's probably one that's going to require us to do a little bit more work on how do we get this microwave popcorn category back to growth and that's something we're continuing to work on.

So based on the shipment trends I'm seeing early in the fourth quarter, as well as the IRI consumption numbers, I think we're very optimistic that we're going to see the Q4 results on volume significantly get stepped up from where they were in Q3. Hopefully that provides the audience some perspective on our volume issues in Q3.

We'll move now to Bank of America's Bryan Spillane.

Just two follow-ups, I guess, to Andrew's questions. One, first, in terms of Ralcorp, was there any sort of disruption or static just because there was -- the business was in transition, you were changing hands. Had customers maybe ordered more ahead of time just to make sure that they weren't going to -- have a little of that extra safety stock ahead of the transition from Ralcorp to ConAgra and is that at all a factor kind of what you're dealing with now?

Bryan, I don't think we've seen any evidence of that. There's the normal customer impatience, I would say, with, hey, the deal's done, we want to see all the benefits of it today. And obviously as we talked through it they start to understand that the integration takes a little while.

But, I can tell you from a customer standpoint, we've had one major top to top recently, really talking about our story of trying to move from a very transactional or procurement based model in private brands to a much more strategic partnership long-term that would leverage those capabilities and scale that we have and it was extremely positive, very engaged and gave us a really good feeling that we were on the right track. But to your original question, I don't think we saw any evidence of inventory loading.

Okay. Just on the marketing spend in the quarter, just two areas. Could you give us a little color in terms of where you're spending and then maybe also just in terms of payback, what the time frame you're looking for in terms of seeing that affect the revenue growth. And then also, just -- is this now part of the base? As we go into next year is this sort of a permanent rebasing of the marketing budget or would you expect to see maybe a further increase next year?

Hey, Bryan, this is Andre. I'm going to take that. Let me tell you where we're spending the money. I'll give you some color as to the brands. It's really in I would call four buckets. The ones -- the primary one is brands that we're seeing very solid growth in. Gary articulated some of those.

We're doubling down some of the spending on brands that, I would call it, that have the hot hand. So, brands such as Marie Callender's, PAM and Reddi-wip, which were cited earlier, where we're gaining unit share, we're gaining dollar share and our marketplace performance is very, very strong.

The other areas we're devoting marketing to is in our innovation space. One of the areas where we put some money behind in the quarter was as we're starting to launch and get this to more scale in Orville ready-to-eat, as an example, we're putting some money there. And obviously we are doing some development work on the innovation that will be launched in the new fiscal year, fiscal '14, with respect to a lot of the innovation you saw at CAGNY. So, there is dollars going behind innovation.

We also are putting dollars behind brands that are expanding, that are very strong regionally today, that are growing and we're expanding their footprint. Gary mentioned one, which was RoTel. We're also doing that with a very strong brand we have, Rosarita, as well as Wolf Chili, as they get out of their market. There's dollars going there.

Lastly, we're starting to get into what we call big platform marketing in the shopper marketing areas. So many of you -- many consumers will see and we're kicking it off officially, Child Hunger Ends Here, our big fourth quarter shopper marketing promotion that will be out there that we kick off at the Country Music Awards this coming weekend. So we're starting to get into this big platform based marketing, which really good marketers in our space do that. You'll see that's where we're spending the lion's share of our money.

Second part of your question, is this really a rebasing of our marketing spending, should we expect to see more next year? We're not going to comment on our algorithm for fiscal '14 just yet. But I think it's suffice it to say, that as we looked at our marketing, we looked at it on a full year basis that we needed to this year take the margin improvement we saw, we have the opportunity to go back and reinvest in our really strong brands and I think you'll see us -- a lot of that has been done and you'll see some of that leveling off. We'll talk more about what we're going to do with marketing when we talk in June about our fiscal '14 algorithm.

We'll take a question now from Ken Goldman with JPMorgan.

Can you talk a little bit about -- you're sort of bucking the trend here. Whereas some of the other consumer foods companies we've seen lately have, for whatever reason, in this current environment cut their advertising spending as a percent of sales. You're going the opposite way.

I know you can't necessarily speak to what others are doing, but can you maybe talk about the environment that you're seeing that sort of allows you to do that, whereas others are seeing something a little bit different out there that perhaps incents them to spend a little bit more on promotions. Especially at a time when you're sort of at the end of your -- right before you're lapping your price increase from last year, maybe you would have decided, perhaps rightly or wrongly, to invest some back in promotions as well. I am just curious how you thought about that decision and when you came to it.

Yes, Ken. I think you're right on the money there. There's no question that we made a conscious tradeoff. We could have dropped those marketing dollars, those big incremental marketing dollars into EPS growth. We chose not to do that because we really don't guide every single quarter to try and land exactly at a specific number.

So, we're committed to the annual number and believe that because we have improved our margins through the pricing architecture and our productivity, that it was a wise long-term move that we could afford to do to invest against the brands the way that Andre just articulated. So we saw that as an opportunity this year that we should start to bolster the pull side of our business and do it in a very smart way, as Andre articulated, rather than just rent the volume with short-term pricing actions because it's not sustainable.

So, that's the basic thought process. There's always challenges in the marketplace and different competitors do different things, but we've stayed pretty disciplined to our model of pricing architecture here and that's allowed us to invest against more long-term marketing benefit.

That's helpful. Just as a follow-up, are you surprised, maybe a little frustrated from a competitive standpoint that some of your competitors -- at least from what we're seeing out there, are doing something -- or made maybe a different decision in terms of whether to spend behind marketing or drop price down a little bit?

Ken, I mean, I would always love to have people compete on a marketing basis where you've got the brands articulating the benefits and letting the consumer make the choice, rather than the short-term price discounting, because as you know that can lead to a very bad place ultimately and we've been there. So, yes, I would prefer it to be there, but we have to recognize that we can't really dictate what competition does, so we'll try and play our game as best we can and so far so good.

We'll move now to David Palmer with UBS.

The question with regard to, I think it was John's comment about the Ralcorp business and the revenue and profit focus will make those results heading into fiscal '14 perhaps not comparable. That implies a pretty big shift in management style of that business. Could you perhaps dig into that a little bit more, how you're going to be managing that business differently?

Yes, let me start, David, and I may -- if I get a little bit off track here, feel free to clarify that. I'd say the first thing is I think the history of Ralcorp was that they focused an awful lot on acquisitions and they were rolling up various pieces of private label. And I think one of the byproducts of that is that's an organization that historically is not really focused on organic growth the way we have.

So it's not that they don't have good capabilities. It's not that they're not really good at costs. They have good customer relationships and all those things, but their DNA was not about organic growth.

So I think as we've kind of started our integration and learning about the business, I think one of the learnings we've got is that, and one of the challenges we have, is we really need to orient the business and the leaders of the business towards organic sustainable growth. That implies some tradeoffs in terms of the things you do day in, day out. They're very good at focused on margins.

But we think there's a balance to be had there between short-term profits in margins and long-term sustainable growth. Not different from what we just talked about in our own business and in the investments we've made in A&P. So, I think that's certainly an area.

I think another area would be, certainly I think, how we will manage commodities and some of the capabilities we bring to really connect our commodity decisions with our marketing and pricing decisions in how we go to market. I think those are some of the muscles that we've built over the last couple years that we'll be able to leverage.

And then I think related to that, the third big area is I think this whole area of pricing architecture and how do we leverage different kinds of analytics with a focus on organic growth as we apply pricing capabilities. So I think there are a number of issues there in terms of how we're going to run the business differently.

David, I would say they ran a very successful model. It's just a very different one. Theirs was acquisitions and cost savings. We are starting to talk and they have responded extremely well to our recipe for growth, that key word being growth. It's new muscles for them and that's something that we're going to bring to the party.

Just switching gears to the commercial side, Paul, there were some comments made about how some of your major customers were putting up more for bidding, perhaps weighing on your margins and presumably that was on the US side of the business and then also it's been clear that the antibiotics issue in China has weighed on the business there. Can you talk about how much that's getting better as well? Thanks.

You bet. Yes. So maybe I'll start with the second part first on the international piece. We had really strong growth the first half, slight decline here in the third quarter. I would describe it as it's not alarming. I think it's more timing issues is the way I would look at that. And really believe in the long-term growth globally as still a big opportunity for us even though we've got to work through the short-term issues as you mentioned.

And then in the US domestic business, there is -- the reality -- some shifts in the distribution business from relationships to category management. As we work through that it will be a little bit clunky. Our team's very focused on driving growth and success with the customers. We continue to do that.

I think one of the benefits is we've got a very diverse portfolio, geographically and product-wise and channels that we go to market in. So I think as we work through these, one particular issue doesn't turn the business upside down, but it will be new muscles that our team's got to develop to effectively work through it.

Operator. Rob Dickerson with Consumer Edge Research has our next question.

I just had a quick question on the frozen business. Obviously, we've all seen the news on Heinz. Historically, sometimes when companies are going through transactions themselves, like you've pointed out, there can be certain dislocation. I'm just curious, have you seen, do you expect to see any dislocation from that core comparator within the frozen case? And if so, is part of your near term marketing strategy also to hopefully be able to pick up some share there?

Rob, this is Andre. I don't see it, haven't seen it in the marketplace with that particular property that you mentioned. So, I'm not expecting anything but we'll be prepared to deal with things if they in fact do come up.

Our game in frozen, as we've shared at CAGNY, is very broad-based. We obviously compete now in many more occasions, including breakfast and dessert, as we expand our adjacencies. That particular competitor is not necessarily in the dessert space as an example.

But we're going to play our game, as Gary's alluded to before, and we'll deal with any and all competitors as they come up. So -- but we haven't seen anything, to answer your specific question.

We'll hear now from Akshay Jagdale with KeyBanc Capital Markets.

I wanted to -- given all the moving parts here with the acquisition, couple of questions. Gary, just regarding how as analysts you think we should track your success. That's related to two things.

And I'm very encouraged to see, obviously, the increase in marketing spending and the significant amount, at that. But when we look at your reported numbers, organic growth, we don't see that reflected. So, help me understand if there's one or two metrics that we should be looking at to judge the success of your marketing spending over the last three quarters going forward.

And then secondly, similar to that, on the Ralcorp deal, what are the metrics we should be looking at to judge your success? Is it just a cost synergy number and being able to meet or beat that over the next year? That would be really helpful.

And then secondly, on commodity costs, I was curious, you mentioned something about Ralcorp being upside down on a couple commodities. In my estimates, your inflation based business is trending better than expected. I think you said it was 1% this quarter. We had projected Ralcorp to also be experiencing better commodity trends. So just if you could help us understand how they're positioned, maybe how much they're hedged and give us a sense of what you meant by upside down on a couple of commodities, that would be helpful. Thanks.

Yes, let me start on the marketing spend. I would tell you that, as you well know, it's not -- put a lot of money on television in one night and see the volume the next day. It's a build over time. So, we believe that our success should be measured on a go-forward basis on improving those volume trends.

And as Andre said, we will see sequential volume improvement. We should see better performance in share in many of our categories. So, I think you should look for us to show that starting in Q4, but going through F '14. That's how I would measure the impact of the marketing spend and Chris, you want to tackle the Ralcorp?

Sure. Hello, Akshay. On the Ralcorp, I would just remind you that we put out some goals at CAGNY that had to do with the incremental EBIT and synergies and EPS contribution from Ralcorp. And that's where our heads are about defining success with that acquisition.

Also, just to bring you into context for, I believe, the third part of your question. John's remarks about the -- John and Gary's remarks about the commodities of Ralcorp were really more about explaining the context for why there is the requirement for tactical pricing adjustments, not necessarily to explain a margin differential in the quarter. With that, Gary, do you have anything else you wanted to --?

Yes, I would just say as we look forward, both the pricing architecture and our revenue growth management center of excellence and our risk management skill set, both will be brought to bear on a go-forward basis and I believe as we integrate you will see us perform differently in that regard as we look ahead.

We'll hear now from Jason English with Goldman Sachs.

Wanted to talk about Ardent Mills. First, congratulations for what seems to be a really savvy strategic move there. To help us understand what this business may look like afterwards, can you give us a sense of the EBIT, the D&A and the CapEx that's tried to the wheat milling business right now?

Jason, this is Chris. I'll say that those are beyond the scope of the details we're going to offer now. There will be more visibility when we get to the date of close of the transaction.

The one metric that you might have, the net sales is projected to be about $4.3 billion of Ardent Mills of the combined business going forward. That gives you a little bit of sense. If you look at ConAgra Mills today, it is about $1.8 billion and Horizon Milling is about $2.5 billion. To give you a little bit of sense of scale. I don't know if that helps, Jason.

Not really. You guys have already broken out the sales in your 10-K on the wheat milling, so it was more of the profitability and the cash flow that I was trying to get to. But I can appreciate the desire to wait. Thanks, anyways.

You bet.

We'll take a question now from Deutsche Bank's Eric Katzman.

Two quick questions. One to John. Given the ConAgra Mills change and the structure there and along with as you get your hands around Ralcorp, kind of where do you see net debt to EBITDA at the end of calendar 2013 or the end of -- or fiscal '14, however you want to describe it?

And then maybe a little bit more broadly, Gary, maybe you could just talk about, I guess this goes to Andrew's question, private label seems to have slowed down a bit and is kind of growing, let's say, in line with branded. What do you see from the consumer given that you now have a pretty kind of broad-based view? And I suppose QSR is being a little bit weaker is probably also a conversation to focus on.

Yes, Eric, this is John. Let me take the first piece of that. I think right now as we look at our debt to EBITDA, again, we came out of the gates a little bit favorable to what we had modeled just based upon some additional cash available.

I think by the end of fiscal '13, we would expect to be maybe slightly below the 4 times and I expect right now I would estimate that by the end of fiscal '14, we should be somewhere south of 3.5 times debt to EBITDA. Again, that's probably a little bit ahead of what we had originally modeled and clearly the Ardent Mills, as well as the fast start we've got, has helped us get off to a good start.

Eric, there always have been kind of short-term episodic blips driven by price gaps between branded and private label and that has narrowed over the last several quarters. But there's a really long history of these patterns and the long-term trajectory we are very confident is going to continue to go upward.

A couple of pieces of insight maybe. Our research says that 74% of consumers now are more open to buying more private brands than they were two years ago. Another factor is you're starting to see more of this tiered business, so as we've talked about, leveraging our capabilities to take private brands a bit more up market. You see that in some accounts. But that's a trend that we see continuing to see this almost good, better, best, and again, there's big runway ahead.

If you take a look at the US penetration at 18% of sales in food and private brands and Western Europe, Canada, Australia, et cetera, significantly bigger than that. I think UK is double that. So when you take all that and take a look at the customers, some of the customer channels that are performing the best and you put all that together, I would say this kind of short-term flattening on private brands is exactly that. The long-term trajectory is still very strong.

We have a question now from Rob Moskow with Credit Suisse.

I was wondering if you could help me a little bit on Lamb Weston. The strong growth in that business has been great the last few years. My perception is that it's given you some added flexibility to reinvest in the branded side.

But I guess I'm trying to understand what the message here is. I've heard comments about competition getting a little more intense and some transitions from relationships to category management, I thought I heard. So is there -- is the outlook still for growth for Lamb Weston for the next year or is it going to be kind of a consolidation kind of period?

Rob, let me start with that, then I'm going to turn it over to Paul. I would characterize it as an environment now that is a bit more challenging, as Paul touched on, with a couple of key customers really changing their game a bit. But again, we've got such a big, broad-based portfolio of channels, customers, geographies, that we continue to see this as a growth business. But a little bit more challenging than we've had very recently. Paul?

I would just for sure look at it as a growth business. We're very pleased with the current results and some of the real short-term dynamics we'll work our way through. The global opportunity is -- continues to look bright, even though you may have a timing issue in the short term. We're committed to reinvest back into this business. When you think about even the capital investment that John mentioned with building the new plant in Boardman, Oregon, those are things we are going to continue to do to really grow Lamb Weston.

We have a question now from Chris Growe with Stifel Nicolaus.

I just had two questions for you. The first question in relation to Consumer Foods, if you look at the price mix contribution in the quarter, was mix positive as well? I saw more price mix than I expected. Was that due to mix or was it just more pricing coming through than I thought?

Chris, this is Andre. It was a combination of both. We had a little bit of price, as I mentioned. We've now lapped most of that going into Q4. But we had good, solid mix results as well in the quarter.

And then related to that, Andre, is there promotional -- do you expect promotional spending to pick up a bit going forward? I think you mentioned a couple categories where it's getting a little bit more heated. Is that part of your plan going forward to be a little bit more aggressive on the promotional side?

No, I think we're going to watch every one of our categories, as we do every day, to determine what we need to do to be competitive. But again, as we've talked about, our game plan for this year, for fiscal '13, was all about taking that margin upside that we were going to be delivering, investing back in our brands and having the right balance that we feel we need between the push and the pull. I don't think we're going to over-emphasize one versus the other. We're going to be mindful. The reference you may have is what I mentioned about one of the big in-store shopper marketing events we're having with Child Hunger Ends Here. Again, that's one of our big platforms basis. There's as much marketing in that as there is push tactics in terms of promotion if you will. That may be what you're referencing.

Yes, that's what I heard earlier. I just had one final one for you and related to Consumer Foods. There was a comment about these -- about margin management initiatives. I was just curious if that is -- is that mix or is that cost savings or is it meant to be a combination of all those factors? What does that refer to that helped the margins in the quarter?

I think what we've been articulating is a while back we, as part of our customer connect initiative, we developed a part of our organization in customer development that was around revenue growth management. And it was all around how do we take not only pricing architecture and look at that, how do we link more closely with our procurement arms and how we buy, so that the presidents are really taking a look at holistically at our whole margin management and it's putting all those disciplines together, if you will. It has been something -- a journey, Chris, we've been on for quite some time now and having and seeing a very positive effects in the business this year and tail end of last year.

We'll move now to Greg Hessler with Bank of America.

I had a question on the contribution of the milling business. The $400 million of expected monetization there, is that included in your $1.5 billion of total debt reduction number by the end of 2015 or is it incremental to that?

This is John, Greg. I would expect that will be incremental. The proceeds we use there to pay down debt will be incremental to our target.

And then, more like $1.9 billion. Can you also just talk about -- so, after the close of the quarter that's when the private placements came out. Can you tell us what your debt -- what your total debt number was after the close of the quarter after that action?

I don't have that in -- I want to say it might be around $10 billion. Or it would be just south of $10 billion. I don't have the exact numbers in front of me but -- yes, so that would be the case. And obviously we had a lot of cash that was sitting on the balance sheet and so that last transaction you referred to was kind of the final transaction to complete the financing plans. It just happened the day after the end of the quarter.

This is Chris. It was something in the mid-500s was immediately reduced.

That's correct, it was about 560.

There are no further questions. Mr. Klinefelter, I'll hand the conference back to you for final remarks or closing comments.

Just as a reminder, this conference is being recorded and will be archived on the web as detailed in our news release and we are available for discussions. Buy this completes our call and thank you very much for your interest in ConAgra Foods.

This concludes today's ConAgra Foods third quarter earnings conference call. Thank you again for attending and have a good day.