ConAgra Foods, Inc. (CAG)

CAG 
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ConAgra Foods (CAG)

Q2 2013 Earnings Call

December 20, 2012 9:30 am ET

Executives

Gary M. Rodkin - Chief Executive Officer, President, Executive Director and Member of Executive Committee

Chris Klinefelter - Vice President of Investor Relations

John F. Gehring - Chief Financial Officer and Executive Vice President

André J. Hawaux - President of Consumer Foods

Paul T. Maass - President of Commercial-Foods Business

Analysts

Andrew Lazar - Barclays Capital, Research Division

David Driscoll - Citigroup Inc, Research Division

Bryan D. Spillane - BofA Merrill Lynch, Research Division

Kenneth Goldman - JP Morgan Chase & Co, Research Division

Jonathan P. Feeney - Janney Montgomery Scott LLC, Research Division

David Palmer - UBS Investment Bank, Research Division

Akshay S. Jagdale - KeyBanc Capital Markets Inc., Research Division

Thilo Wrede - Jefferies & Company, Inc., Research Division

Ann H. Gurkin - Davenport & Company, LLC, Research Division

Eric R. Katzman - Deutsche Bank AG, Research Division

Robert Moskow - Crédit Suisse AG, Research Division

Christopher R. Growe - Stifel, Nicolaus & Co., Inc., Research Division

Alexia Howard - Sanford C. Bernstein & Co., LLC., Research Division

Presentation

Operator

Good morning, and welcome to today's ConAgra Foods' Second Quarter Earnings Conference Call. This program is being recorded. My name is Jessica Morgan, and I'll be your conference facilitator. [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 M. Rodkin

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

This morning, we'll talk about our strong second quarter performance, offer a few comments on the strategic rationale of the pending Ralcorp acquisition and then we'll open up the call for your questions. At that point, André Hawaux, President of Consumer Foods; and Paul Maass, President of Commercial Foods, will join us.

Before we get started, Chris has a few remarks.

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. If you would like to learn more about the risks and factors that could influence and affect our business, I'll refer you to the documents we file with the SEC, which include cautionary language.

Also, we'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, Q&A document or on our website under the Financial Reports and Filings link, then choosing Non-GAAP Reconciliations.

In regard to Ralcorp, I'll remind you that we are still some time away from closing and finishing our plans for an integration timetable. Many of the financial details will need to be shared at a later date. That will be after we close -- that will be after we close the transaction, of course, complete our planning work. We won't have any new details on those matters today, and we do look forward to updating you on those in the future.

Now I'll turn it back over to Gary.

Gary M. Rodkin

Thanks, Chris. I am very pleased with our second quarter, where we've posted good growth for both operating segments. EPS on a comparable basis was $0.57 for the second quarter, up 16%. The overall quality of the quarter was high, with strong profits even as we increased marketing investment for the base business by 18% as part of long-term brand building. We're raising our fiscal 2013 expectations to comparable EPS of at least $2.06, which includes a strong increase in marketing for the full fiscal year. That estimate does not include any fiscal 2013 benefit from the pending Ralcorp acquisition. That benefit will be determined after the transaction closes.

In terms of our operations, let me start with the Consumer Foods segment, where sales were up 11%, driven by acquisitions. Organic volumes were down 4%, and price/mix was favorable by 4%. On an unrounded basis, organic volume improved sequentially from Q1 by about 60 basis points. We expected overall organic volumes to be down given consumer purchasing trends in the still challenging economy and importantly, the pricing we took in recent quarters to combat inflation is also a factor. In addition, we have been very disciplined with our pricing architecture and, in some cases, we've deliberately chosen to improve profit margin instead of growing volume.

Acquisitions drove the overall sales growth, but several of our brands also posted good organic results. We expect volume trends to continue to improve sequentially throughout the remainder of the fiscal year as we more fully lap last year's price increases and as the benefit of the recent innovation, marketing and Customer Connect initiatives continue to accelerate.

Frozen, as you know, is a big and important retail category. We continue to innovate here, building on our strength in frozen single-serve meals and increasing our presence in strategic adjacencies such as multi-serve meals and desserts. We're also investing in more marketing in frozen to help bring more growth to the category.

With regard to the quarter, once again, the Marie Callender's brand performed well overall. Single-serve and multi-serve frozen meals showed very good growth in dollars, volume and share. The Marie Callender's Baked platform that allows the consumer to get oven-baked quality in much shorter time in a microwave is doing well, and we've taken that innovation to the Healthy Choice brand, and the baked entrées are doing well there, too.

We have a strong adjacency story in Marie Callender's dessert pies. We're off to a good start in the holiday season in terms of both volume and share, and our Healthy Choice Greek Frozen Yogurt, whether you look at that as a dessert or snack, has performed well since we launched that a few months ago.

In other parts of the store, Reddi-wip and PAM, both leaders in the marketplace, posted very strong growth in share, dollar and unit sales. PAM's innovative new no-residue recipe focuses on its strong competitive difference. We're communicating about that now on air, and it's clearly driving sales.

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