ConAgra Foods, Inc. (CAG)

CAG 
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ConAgra Foods, Inc. (CAG)

F1Q11 (Qtr End 08/29/2010) Earnings Call

September 21, 2010 9:30 am ET

Executives

Gary Rodkin - CEO

André Hawaux - President, Consumer Foods

John Gehring - CFO

Chris Klinefelter - VP, IR

Analysts

Bryan Spillane - Bank of America

David Driscoll - Citi Investment Research

Andrew Lazar - Barclays Capital

Terry Bivens - JPMorgan

Eric Katzman - Deutsche Bank

Chris Growe - Stifel Nicolaus

Vincent Andrews - Morgan Stanley

Robert Moskow - Credit Suisse

Alexia Howard - Sanford Bernstein

Presentation

Operator

Good morning, and welcome to today's ConAgra Foods first quarter earnings conference call. (Operator Instructions)

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

Gary Rodkin

Good morning. Welcome to the call and thanks for joining us. This is Gary Rodkin and I'm here with André Hawaux, President of Consumer Foods; John Gehring, our CFO; and Chris Klinefelter, our VP of Investor Relations.

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

Chris Klinefelter

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. So if you'd 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, our Q&A, or on our website under the Financial Reports and Filings link, and then choosing Non-GAAP Reconciliations.

Now I'll turn it back over to Gary.

Gary Rodkin

As you can see from the release, comparable EPS was $0.34. We revised yearly EPS growth expectations to 5% to 7% and we raised our dividend 15%.

Consumer Food sales were down 2% and operating profit was down 14% as reported. And Commercial Foods segment profits were also down. That's up a quarter, but not reflective of our current expectations for the full fiscal year or beyond.

It goes without saying that we are not pleased with the quarter's EPS. We have already implemented course-correcting actions to improve the overall year, and you'll hear about those actions over the next few minutes.

I want to use our time this morning to give you a deeper insight into our first quarter, and more clarity on our outlook for the rest of the year. I'll get into some specifics as will John, and I've asked André to share some of his perspective on the consumer business as well.

As I indicated, Q1 was definitely tougher than we planned for. The degree and depth of promotional activity was greater than expected, and inflation outpaced cost savings. And while we knew we would have some carryover profitability issues in Lamb Weston due to last year's poor potato crop and the soft restaurant industry, those costs were more than expected.

Given that we have been implementing changes to course-correct and deliver good EPS growth this year, the actions we've taken and will continue to take give us confidence in our ability to improve results in the second half of the year and beyond.

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

Let's talk more about this quarter, starting with the macro environment for Consumer Foods. Our Q1 represented a very challenging marketplace. The strong, deal-seeking mindset consumers developed earlier in the recession has become the new normal. As consumers continue to tighten their purse strings and whittle down their pantries, retailers and manufacturers have discounted more heavily to re-energize sales.

We saw softness in some of our key categories despite higher trade costs which impacted our margins and profits. This downward turn in the market environment exacerbated a Q1 that we had planned to be our softest comparison for F '11. We planned for a softer Q1 because of the following factors.

One, the potato crop issue I already mentioned; two, our net cost savings, meaning productivity above and beyond inflation would be skewed to the back half of F '11 versus the first half of F '10. And three, our Consumer Foods new product introductions coming late in the quarter compared to last year when they were launched just prior to the beginning of Q1.

This meant we absorbed the expense this quarter but not the volume deficit. Because the negative impact of these three factors are specific to Q1 and because our SG&A costs in the back half would be lower, we have a high degree of confidence that our results will improve significantly, particularly in the second half.

So how will we navigate in an environment like this one? In a nutshell, our focus is on bringing value based innovation, the right marketing and promotion strategies, and accelerating productivity. We understand the changed marketplace, and our portfolio is capable of succeeding in it.

I believe as we go forward that winning food manufacturers will be those who can deliver highly relevant messaging and innovation wrapped in a very strong price value equation. We're pretty certain that the more intent value mindset of consumers is here to stay.

The food industry, both manufacturers and retailers will not win by continuously dropping prices. Value does not just mean achieve a price; it's much more holistic.

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