ConAgra Foods, Inc (CAG)
Q2 2009 Earnings Call Transcript
December 17, 2008 9:30 a.m. ET

Executives

Gary Rodkin - Chief Executive Officer
Chris Klinefelter – Vice President of Investor Relations
André Hawaux – Chief Financial Officer
Rob Sharpe - President of Commercial, Executive Vice President of External Affairs

Analysts

David Driscoll - Citi Investment Research
Ann Gurkin – Davenport & Co
Christine McCracken - Cleveland Research
Andrew Lazar - Barclays Capital
Eric Katzman - Deutsche Bank
Terry Bivens - J.P. Morgan
Robert Moskow - Credit Suisse
Chris Growe - Stifel Nicolaus
David Palmer - UBS

Presentation

Operator

Good morning and welcome to today''s ConAgra Foods second quarter earnings conference call. This program is being recorded. My name is John Daniels and I will be your conference facilitator. (Operator Instructions) All audience lines are currently in a listen-only mode. However our speakers will address your questions at the end of the presentation during the formal question-and-answer session. 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 – Chief Executive Officer

Good morning. This is Gary Rodkin and I''m here with André Hawaux, our CFO, Rob Sharpe, President of our Commercial segment and EVP of External Affairs, and Chris Klinefelter, VP of Investor Relations. Over the next few minutes André 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 – Vice President of Investor Relations

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 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 for Regulation G compliance can be found in either the earnings press release or on our website under the Financial Reports and Filings link and in choosing Non-GAAP Reconciliations.

In reference to Regulation G, I will note that our reported diluted EPS from continuing operations of $0.38 has $0.05 of net expense from items impacting comparability as detailed in the press release, resulting in an EPS of $0.43 on a comparable basis for this quarter. On that same basis, the $0.27 of diluted EPS from continuing operations reported in the prior year quarter contained $0.03 of expense from items impacting comparability, resulting in EPS of $0.30 on a comparable basis. Lastly, as detailed in the press release, Consumer Foods operating profit of $247 million was up 2% as reported this quarter and down 8% on a comparable basis.

Now I''ll turn it back over to Gary.

Gary Rodkin

Thanks, Chris. Given the current market environment, I''m happy to be able to reconfirm our earnings outlook for fiscal 2009. Second quarter comparable EPS of $0.43 reinforce our full year outlook. For the quarter, our Commercial Businesses delivered another strong performance. We saw good controllable cost performance across the company. Changes to our consumer merchandising programs showed positive results late in the quarter, and our key new products performed well. At the same time, several challenges that we forecasted for Consumer Foods affected our results as we expected. As I said last quarter, we know what the issues are and we''ve taken significant actions to improve the operating performance in Consumer Foods. This has put us in a good position to deliver on our commitment for profit growth in this segment during the back half. Let me go through some of the segment highlights of the quarter.

Consumer had a solid quarter in many respects. As expected, our non-measured channel business was very strong, and recent IRI numbers indicate the start of a more favorable trend in the mainstream grocery channel. Overall, consumer sales were up a little more than 4% on a comparable basis and volumes were down a little less than 4%. Consumer volume reflected our need to work through some fine tuning on our pricing. We chose to err on the side of somewhat aggressive list pricing and to course correct surgically with merchandising. I firmly believe we can grow net sales in a way that preserves the vitality of our brands. Competitive promotion remained fierce in the frozen business, but we now have the right measured responses in place and we''re starting to see better marketplace results toward the end of the quarter. We also remain very pleased with the performance of Healthy Choice Café Steamers, which are now up to an annualized run rate of more than $140 million in our sales and represent more than 30% of Healthy Choice frozen sales.

This is a testament to the power of our game-changing innovation, and you can expect to see more of it in the back half of the year, particularly in our frozen operations. You''re still seeing only the tip of the iceberg in terms of our innovation pipeline, which focuses on delivering step changes in the uniqueness of our products. While solid Banquet volume and sales growth, didn''t fall through to the bottom line as previously discussed with you, that issue is being addressed by the introduction of a revamped line of Banquet dinners late in our third quarter. In our grocery businesses, Healthy Choice Fresh Mixers were introduced nationally during the quarter and are performing well. Consumer feedback is very positive. This line of high quality, nutritious, shelf stable, convenient meals hits the bulls eye on the lunch day part and nicely complements our primary focus on the dinner segment in frozen. We have more plans in place for this innovative platform in the future.

We''ve also continued the momentum on key brands like Hunt''s tomatoes and Hebrew National hotdogs and although several of our high-share grocery brands were down on volume, we''ve adjusted our merchandising on these brands to bend that trend while still maintaining good margins. In the snacks business we saw healthy growth, both top and bottom line. All key brands showed sales growth as consumers spend more time at home, and we''ve supported the brands with high-quality advertising. Most of our Enabler group performed well, with sales up significantly behind pricing and generally good volume performance. Consumers are seeking the excellent value propositions offered by brands like a Libby''s or a La Choy, and some of our strong regional brands like Rosarita turned in excellent performances. The exception was Wesson Oil. Wesson showed a continuing hangover from a high cost inventory built earlier in the year. It was also impacted by our overly aggressive reductions in trade events and further declines in market prices for edible oils. Both of these hit volume and contribution in a meaningful way.

Moving from sales to profit, Consumer Foods bottom line was down about 8% versus last year on a comparable basis. I''m not happy with that, but it is in the zone that we expected. The decline largely results from significant inflation, selected brand volume losses resulting from some price elasticities, and the issues with Wesson and Banquet. On the A&P side, our spend was down a bit this quarter, but we are spending what we need. I expect our overall A&P spend to be in line with last year''s amount, with an ROI emphasis getting more bang for the buck. Good things continue to happen on the supply chain side. Our cost savings are materially ahead of schedule, with benefits for this quarter consistent with our forecast and above our original plans. As expected, inflation remained heavy across a big part of our inventory, even with moderating market costs for some ingredients. Overall inflation in Consumer Foods was $170 million, up about 12% from our costs a year ago. Remember that declines in commodity costs do not immediately fall through to results, and the cost of some key elements of our basket of goods, such as proteins, continued to rise. The delay in realization of lower costs in key ingredients reflects both a normal lag in applied inventory valuations and our hedges in supply contracts, which smooth costs both when they''re rising and when they''re falling. Although the declines will favorably impact costs in the future, we still expect to see aggregate cost increases, but at a lower rate than what we''ve seen in the last few quarters.