ConAgra Foods, Inc. (CAG)

CAG 
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ConAgra Foods (CAG)

F2Q11 Earnings Call

December 21, 2010 9:30 a.m. ET

Executives

Gary Rodkin - CEO

John Gehring - CFO

Chris Klinefelter - VP, IR

André Hawaux - President, Consumer Foods

Paul Maass - President, Commercial Foods Segment

Analysts

David Palmer - UBS

Bryan Spillane - Bank of America

David Driscoll - Citi Investment Research

Ann Gurkin - Davenport

Eric Serotta - Wells Fargo Securities

Terry Bivens - JPMorgan

Eric Katzman - Deutsche Bank

Chris Growe - Stifel Nicolaus

Jackie - Morgan Stanley

Robert Moskow - Credit Suisse

Robert Dickerson - Consumer Edge Research

Presentation

Operator

Good morning, and welcome to today's ConAgra Foods second 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. Please go ahead Mr. Rodkin.

Gary Rodkin

Thank you. Good morning. Welcome to the call and thanks for joining us. I'm Gary Rodkin and I'm here with John Gehring, our CFO; and Chris Klinefelter, VP of Investor Relations. This morning we'll talk about the strategic operating and financial aspects of the quarter, and then take your questions. But before we get started, Chris will say a few words about housekeeping matters.

Chris Klinefelter

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. 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 at the Financial Reports and Filings link, and then choosing Non-GAAP Reconciliations.

Now I'll turn it back over to Gary.

Gary Rodkin

Thanks Chris. As you can see from the release, EPS was $0.45 as reported, and on a comparable basis. The environment in our second quarter remained challenging on a number of fronts: tough retail categories, high inflation, and weaker than planned response to promotions. In our commercial operations, we again had lower profits than planned in our potato business, which was impacted by last year's unusually poor quality crop.

Overall, the second quarter challenges were more severe than we expected, but I want to be clear that we're confident in our ability to deliver much better year-over-year results in our second half for several reasons. I'll talk about those in a minute.

Looking forward to the next year or two, there's some challenges that will be with us for a while, but because of the strength of our foundation, and our proven capabilities, we're confident in our ability to manage through it.

Moving on to a quick highlight of the segments, consumer foods sales dollars were up about 1% as reported, organic unit volumes were up 1%, and market share increased. Our largest business, frozen, posted a very good organic top line. Acquisitions net of divestitures added about 3% sales.

Price mix was unfavorable by 3%, reflecting promotions that were not as effective given tough category and overall difficult competitive conditions. Consumers are shopping from lists, making more quick trips to the store instead of stocking up as much, and being as value-conscious as we've ever seen. So we did not get the lift on the promotions that we would normally expect to see, and that negatively impacted price mix and profitability.

We've learned from this, and we have insights and strategies that we believe will help us better address the new shopping behavior. To be specific, some of our brands are often stock-up products. Shoppers have reduced their pantry inventories, and are shifting a bit more to a just-in-time mode. In response, and in collaboration with retailers, we're looking at downsizing some of our club store packs and we're also considering some changes to our merchandising multiples.

We clearly understand that consumers are being more discriminating in their spending choices. We're working through how to take advantage of that in our communications. This means you'll see and hear us be more direct about our functional benefits in our marketing.

One element of this will be expanding our frame of reference on some of our products. For example, we've begun a drive-time radio campaign on Marie Callender's meals as a great alternative to stopping for takeout on the way home. We believe we have upside potential in more clearly articulating the real value of the food within our portfolio in a way that really resonates with consumers.

Segment operating profit was down 13% on a comparable basis due to the impact of promotions on price mix and inflation and other product cost increases that in aggregate were greater than the cost savings. To be clear, our consumer foods cost savings are on track. We should exceed our $275 million goal this year.

Our expectations all along have been to generate slightly higher savings in the back half compared to the first half. Given the size of the inflation we're experiencing, and which we expect to continue, cost savings cannot fully offset it, which is why pricing actions are necessary. I'll say more about that shortly.

Moving on to commercial foods, sales were up 3%. Lamb Weston volumes increased. We think we're past the worst of the restaurant trends as we're seeing slight improvement. Flour milling sales dollars increased due to higher wheat costs, which are passed through.

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