Good morning, and welcome to today's ConAgra Foods Third Quarter Earnings Conference Call. [Operator Instructions] My name is Kerry Steeling, and I will 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.

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.

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'd like to learn more about the risks and factors that could influence and affect our business and cause our results to differ from expectations, 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 directly comparable measures for Regulation G compliance can be found in either the earnings press release, the 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.

Thanks, Chris. As you can see from the release, EPS from continuing operations was $0.50 as reported and on a comparable basis, up 16% over last year's comparable amounts from continuing operations. That's a change from what we saw in the first half of fiscal '11. We expected this improvement, and we remain in position to deliver on our full-year guidance as we told you last month at CAGNY. All the work we've done, strengthening the foundation of the company over the past few years has put us in a position to better navigate difficult times like these. The insights we've developed in these challenging economic conditions, particularly over the last few quarters, have helped us develop realistic plans and a better sense of what to expect, as we go forward. While this continues to be a tough business climate, we're taking the appropriate actions to work through it. And I'll say more about those actions in a minute. Highlighting the segment performances. Organic sales growth in Consumer Foods was about flat year-over-year for Q3. Reported sales for that segment were up 2%, driven by our acquisitions. Sales in Commercial Foods were up 7%. Operating profit for each segment was up modestly versus last year on a comparable basis, again better than what we saw earlier this year. I'll touch on the main points for each segment starting with Consumer Foods. Inflation pressures continue, and we're battling them with pricing actions underway, continuing supply-chain cost savings, reduced advertising and promotion expense and lowering incentive compensation expense. It goes without saying that pricing is top of mind for everyone. The recent and continued inflationary environment has made it necessary to take prices up responsively. I'll remind you that in this industry, from a timing standpoint, pricing lags input cost inflation. We…

Thank you, Gary, and good morning, everyone. I'm going to touch on four topics this morning. I'll begin by addressing our third quarter performance. Next, I'll address comparability matters. Then, I'll move on to cash flow, capital and balance sheet items. And finally, I'll share some comments on our outlook for the balance of fiscal 2011. Let me begin with some comments on our third quarter performance. For the quarter, we reported net sales of $3.2 billion, up 4%, and we reported fully diluted earnings per share from continuing operations of $0.50 versus $0.49 in the year-ago period. Adjusting for items impacting comparability, fully diluted earnings per share from continuing operations was also $0.50, or 16% higher than the comparable $0.43 from continuing operations in the year-ago period. Operating profit on a comparable basis was up 3% in our Consumer Foods segment and up 5% in our Commercial Foods segment. Now let me provide you a few more segment highlights. First on Consumer Foods. Net sales were $2.1 billion, up 2%, reflecting flat base volume and price mix and a benefit of about 2% from acquired businesses. These new businesses, net of divested businesses, contributed approximately $35 million to net sales in the quarter. Inflation and other changes to our cost base for our Consumer Foods business outpaced cost savings in the quarter. Our Consumer Foods supply chain cost-reduction efforts continue to yield good results, and we delivered cost savings of approximately $70 million in the quarter. Further, for the full fiscal year, we still expect to deliver in excess of $275 million of cost savings for this segment, which obviously helps us battle higher inflation. On marketing, Consumer Foods advertising and promotion expense for the quarter was $83 million, down approximately $19 million from the prior year. For the…

[Operator Instructions] It looks like our first question comes from David Palmer with UBS.

I wanted to ask you a question on pricing and just how those communications are working this time around versus maybe a few years ago when the company may not have been on its front foot with regard to pricing. Obviously, there was the peanut butter issue back then. Do you find that there is any lags and leads in terms of the pricing and the margin pinch this time around in some of your more passive categories? And a separate question on Frozen. We've heard there's -- I believe it was Heinz, just to name one, is seemingly getting more front-footed and marketing-minded, innovation-minded with regard to that category. How do you see that Frozen category behaving with regard to price? And just the general attention to that category from the other players.

David, let me start. I'll have André add some color. First, on pricing, it's never easy. You know that, we all know, particularly, given the challenging overall environment. However, given the amount of noise and the kind of universal understanding of the commodity pressures, we are getting our pricing through with our customers. And we have taken a good bit, almost half the portfolio on the consumer side in Q3, and we'll be taking more in Q4. Those come in the form of both list prices, as well as changes in our Trade Merchandising. So that is proceeding as we have planned. And in Frozen, I'm glad to hear what you said about one of our competitors because we believe that is the right way to compete in this category. So we are continuing to move forward with our innovation and marketing agenda on Frozen. You will see from us, as we've said, our Trade Merchandising rates will change, as we go forward. So everything as planned. André Hawaux: The only thing I would add, David -- I think Gary said it very well. I think on the Frozen piece, we are seeing the competitive set move to competing more on innovation and marketing, which we believe is the right way to go. So we're encouraged by that. That has been our drive, and our mantra has been around our platform innovation in Frozen and specifically, driving our marketing in that vein so that consumers understand the great value that is in Frozen, the great quality. So the category actually grows. So we're very encouraged by what we see the competitors doing in this space.

And was there any pricing in particular that's out there in the Frozen aisle. Are you seeing pricing going up?

We are. Let me just -- as I said in the third quarter what we see and what we believe will happen in this space will be this, as you know, is a very frequently promoted category. I think we believe that we'll continue to see frequency, but the depth -- and therefore we're approaching it via trade -- will be something that changes. So the promotional frequency will stay the same. But the depth of frequency will change, and you'll see price points go up. And we're actually starting to see that if -- you'll start to see that flow through in IRI very shortly.

We'll take our next question from David Driscoll with Citigroup.

Gary, honestly, the tone of the press release sounded a bit negative. Advertising, spending and compensation spending have been cut, and you really didn't provide any quantitative information on the magnitude and timing of future commodity inflation, nor pricing. And the fourth quarter EPS expectations had been cut. So I feel like you just have to -- I would like for you to answer the question on, how bleak is the situation because of inflation? And can you guys give us some numbers here regarding the rate of inflation in Q3 and then expected in Q4, the size of your hedges going forward and then finally, just the size and timing of the pricing that you do expect in the fourth quarter?

David, we were trying to be extremely transparent as we always are in our release. So we're telling the facts as they come. We did trim back a bit of our marketing because of the competitive pressures and the inflation. We expect to see those levels go back up, as we go forward. On incentives, it's purely mathematical exercise. We pay for performance. So whatever our performance is dictating on an operating basis is the incentives that we pay, and therefore they are lower than they were a year ago. As it pertains to inflation, this quarter, about 5% to 6%. And as we go forward into F12, we're talking about around 7%. So yes, it is a challenging environment. We are taking a lot of actions. You've heard us talk about pricing, we are serious about that. You heard me say at CAGNY, not a choice, it's an imperative. That's not the only thing we're doing. We're making our marketing work harder. We’ve got lots of innovation, lots of productivity. So we don't intend to be bleak or negative whatsoever, just realistic.

If I could just do one follow-up. When do you think pricing will catch up with inflation such that we're matching on a quarterly basis?

Yes. That's a tough one because the dynamics in the industry are such that we announce and then there's a time lag that gives customers a chance to adjust. So it's always going to be a bit of a time lag. It keeps rolling forward. So what we took in Q3, you'll see take more impact in Q4.

We'll take our next question from Andrew Lazar with Barclays Capital.

If I look at the sequential pricing improvement that you got 3Q -- in the third quarter versus 2Q. I'm trying to get a sense of -- I know volume weakened a little bit but not dramatically. So I'm trying to get a sense of your early read – and admittedly, I know it's early in what some of the elasticity might look like as this pricing has come through. And more importantly, trying to get a sense of how we should think about the fourth quarter. Obviously, we'll see even more pricing, hopefully, sequentially. But what are you getting a sense of on elasticity, and I guess how do we think about volume in the fourth quarter? André Hawaux: Andrew, this is André. I think we were encouraged by what we saw in Q3. I would just caution the audience that we took, as Gary said, just slightly, just under 50% of our portfolio. The rest comes in Q4 and then there's more. So what we're cautious about is what we saw in Q3, we're encouraged by, but we also know that the consumer will now go through another round of pricing at the next level as we price the lion's share of our portfolio. By the end of Q4, we think we'll touch probably, Andrew, in the neighborhood of 90% to 95% of our portfolio. And that's what gives us just caution, just to try to understand what the elasticities will be as consumers deal with this. And that's been our issue all year. As we look at some of our categories, which are very high stock-up to Gary's point, categories like single-serve convenient meals, we've seen folks just buy less of those products, still very good value. So that's where we're a little cautious at this point.

Andrew, the sequential improvement, we were seeing a pretty reasonable gap between volume and net sales in the first half of the year, a couple of points. That certainly has improved a lot in Q3, on about flat volume. But André’s right, as we get all of this impacted on the shelf, we just want to play it in a realistic or even more conservative standpoint. We clearly are trying to impact how much we take and how much we bring to the bottom line with a very significant productivity, combination of productivity and price. So it really is about both of those things. But we have said, we are willing to make some modest volume trade-off. We’re serious about that because it's the right thing for us to do. I think the key word is modest. But it's kind of we're going to have to wait and see how consumers adjust.

That makes sense. Just a quick follow-up. I know that you even mentioned last quarter and you have been, obviously, aggressive in taking account pricing. That's justified and that's needed, even if it meant that you'd be leading where you needed to. But just curious. Have you felt that you had to lead the way in many, many more categories perhaps than the last time around, such that while it may be more uncomfortable, to your point, it's what you need to do and you're, obviously, seeing it come through? André Hawaux: Andrew, it's André. I'd answer that, yes, we have -- we probably felt a little bit uncomfortable. But as Gary has mentioned over and over again and at CAGNY, it is an imperative for us. It's not one decision that we take lightly, but it's something we have to do given what we see with respect to inflation.

And we'll take our next question from Bryan Spillane with Bank of America.

Gary, my phone dropped, so I don't know -- forgive me if this has already been asked. But just in terms of advertising spend coming down to the second half and shifting more I guess to trade promotions. If you look forward into 2012, do you expect that same dynamic to happen? And I guess going through the various companies that have talked about their plans, I guess over the next calendar year, it just seems to me that there's a few companies at least that are increasing advertising spend and increasing spending behind new product introductions, which helps at least justify the price increase. So I guess I'm trying to get a sense for how you guys are thinking about that advertising spend and relative to supporting the price increase. And does that put you in any kind of position of weakness as you’re trying to raise prices at the same time? André Hawaux: So a couple of things, Bryan. This is André. I think this year -- as we saw the year unfold, we did have to make some Sophie's choices, if you will relative to our marketing spend. And I think John and Gary articulated earlier, we have to make the spending that we had in the marketplace as effective as possible because we did see a shift between our advertising spending and our trade promotion spending. But that focus has been largely on innovation. If you take a look at a lot of the campaigns that we've had, whether it's the Honest to Goodness on Healthy Choice, it's Time to Savor on Marie Callender. That's all been focused on innovation. And you all will start to see the marketing we’ll be putting forward on top of those. So the use of our dollars that we had in this space in fiscal year 2011 was as effective as we can make it, given what happened in the overall macro industry. I think for us as we build our plans -- and we'll share more of this, obviously, in our Q4 call -- we will actually be reversing that trend and taking out trade promotions that we believe are ineffective and taking pricing up and also moving more of those dollars to pull dollars because that's exactly the formula we want to be able to basically thrive on as we go forward. So it's going to be more pull and less push in the outer years.

And then just -- John, just one follow-up on the corporate expense. I think we had modeled the compensation expense coming down, correctly. But were there other savings -- benefit-related savings that flow through that line in the quarter as well?

I would just say there were a handful of fairly minor improvements and it could have been across a number of departments and functions in corporate. Probably nothing significant to call out by itself.

We'll take our next question from Eric Serotta with Wells Fargo.

Hoping you could touch on the dynamics in the Frozen case. You talked about some improvement there. Looking forward, it seems like some of your competitors have a good deal of activity going on with what Heinz is doing and expanding Smart Ones and introducing the TGIF entrées. You've already seen Nestlé with LEAN and the steaming bag. Just wondering what you're seeing in terms of freezer space. Are you holding your own there, gaining, losing? And on balance, has this increased innovation been positive for the category?

Eric, I think we like when we see that kind of activity in the freezer case because we believe that's a platform that we can compete very well on, and we welcome it. In terms of space, we are at least holding our own, in some cases gaining. So we feel good about that. But that's the right way to compete in this segment, with innovation and product quality and marketing. So we welcome that.

We'll take our next question from Terry Bivens with JPMorgan. Terry Bivens - JP Morgan Chase & Co: Two things. How dependent, Gary, are your savings on getting the volumes running through the plants?

Clearly, absorption is always something that we keep an eye on. What we're not going to do is run the plants at whatever costs in terms of discounting just to keep the plants full. But we do have a very tight focus on absorption, and it does matter to us. Terry Bivens - JP Morgan Chase & Co: Okay. I mean your guidance incorporates, obviously, a lower level of volume, I would think, for the time being anyway.

Yes. I'd say that we're not rejecting bullish volume growth for the time being. That's correct. That's why it's so important for us to work on the productivity side to make sure that we offset any of those potential absorption issues. André Hawaux: Terry, just a comment on that. Our forecast that John shared with you on CCRs, ConAgra cost reductions, and consumer all link to our volume forecast. So we build those plans, and then we link them together so that nothing we are sharing on is not linked to our volumes. Terry Bivens - JP Morgan Chase & Co: Okay. And perhaps just a quick question on some of your store-brand efforts. How much of the consumer products portfolio is that, now and how’s that doing in this kind of environment?

Terry, this is Chris, if you look at the total private label, it's slightly less than 10.

Yes, that's for the total company. I'd say it's south of that. On the Consumer business, it's probably in the, I don't know, 7% range or so.

7% or 8% range, yes. Terry Bivens - JP Morgan Chase & Co: Yes, that's what I was asking about really. André Hawaux: Terry, I would say there's a couple of very strong growth categories there as we’ve talked about and we shared with you all at CAGNY. I think what we call our Snacks Breakfast business, which is largely our Bar business, is actually doing very, very well, and we continue to gain share and momentum with that business. I think the other categories, which we typically call power of two, things like canned pasta and cooking spray, I think we're doing very well at where those categories are. But the emphasis really has been on our Snacks Breakfast business and that is growing in the low-double digit range.

And we'll take our next question from Eric Katzman from Deutsche Bank.

I guess a couple of questions. Gary, when I look at the Q&A that talks about the brands, those that are up and those that are down, there were -- kind of versus last quarter, there were actually more in the upside of it than down. And I'm trying to kind of understand that relative to no volume growth out of the Consumer segment?

A lot of that has to do with mix. Not all volume is created equal. So our base organic volume growth was about flat, maybe slightly up in this quarter. And some of that has to do with some of the pass-through categories like oil and spreads.

Okay. All right. And then just on the -- unrelated, on the flour milling, you said that did very well. Were you just particularly well hedged given the curve in wheat? Or did you take share from competitors because the products that you're putting out are better than the competitors’? Can you just talk a little bit more about that?

Sure. This is Paul. It's not a market share situation. It's just really about margin management in an extremely volatile environment.

So you just basically played the wheat volatility well. Is that a fair way to say it?

I think that's a simple way to put it. When you're dealing with -- if you follow the grain markets, the kind of volatility that we had in the marketplace, a lot more activity when it comes to contracting with customers and just managing our entire kind of book of business. And it really focuses much more on that.

Okay. And then I guess, John, last question. The company bought back a really large amount of stock in the quarter. And at the same time, you took your long-term growth targets down on the business. So can you just kind of walk through the idea of buying back so much stock and yet lowering the targets? I guess just based on your discount model, even with the lower growth expectations, that was still a reasonable use of cash at this value.

Yes. Let me just remind everybody on -- most all of the share repurchase that we executed this quarter and that we're expecting for the second half of the year, relates to the proceeds from the PIK notes that we got earlier in December. And so if you just look at the full year impact of the shares we've taken out, that really just offsets the impact of the interest income we've lost from those PIK notes. So if you look at a full-year impact, both of those things are about a wash. So I really don't know that that's been a significant impact on how we look at our algorithm. Our algorithm was really, I think, more just looking at the environment we're in and the categories and inflation and all the various operating aspects of the business.

Okay, all right. And then just if I could squeeze one last one in. The corporate expense normally in the fourth quarter kind of moves up quite a bit, and I guess that you're probably truing up comp among other things. How do we think about that number for the fourth quarter given that comp expense is going to be down over the year? Or maybe it isn’t, maybe it's just the second half but I guess it would be down in the fourth quarter either way.

I guess what I'd say is the comp expense has been coming down over the course of the year. We try to gauge it, as we go. At this point I don't have a specific comment on where I expect corporate expense to be. But the prior quarters are probably reasonably good indicators.

And our next question comes from Ann Gurkin with Davenport. Ann Gurkin - Davenport & Company, LLC: At CAGNY, you all talked about your revised long-term guidance of 6% to 8%, which included some tuck-in acquisitions, if I understood correctly. Should we think about that kind of range as we look to '12? Are you looking at making some tuck-in acquisitions? Can you talk about kind of your portfolio configuration?

Yes, Ann. I would tell you what we have included in that algorithm are minor tuck-ins that wouldn't account for more than -- at the most, a point. So not a huge factor. What we are talking about now and what we tried to convey at CAGNY, is that we believe we're at the point where we can start to look a bit more aggressively on the acquisition front. Not that we're going to go crazy and turn the place upside down, but we are looking to change the equation a bit more from more divestiture to, hopefully, a bit more acquisition. So we are looking for growth, and we're going to do it in a responsible way. Not any it [ph], what I'm talking about right there is not truly built into the algorithm.

And this is Chris, the only thing I would build on that answer, there's nothing specific about acquisitions for fiscal '12 to talk about today.

We'll take our next question from Vincent Andrews with Morgan Stanley.

Just a couple of questions on the working capital. And particularly, the accrued payroll line was down substantially. I assume that has something to do with the incentive comp. But can you just help us on that line?

Yes, Vincent, that's right. It's primarily driven by – there’s just change in incentives year-over-year. So I think you’ve got it right.

Okay. And then secondly on the inventory, you stated in the prepared comments that, that was really just going to be a function of the rising commodity cost number, the cost of the inventory. But there’s -- as we look at that line through the balance of the year, no portion of that is going to be a function of sort of your volume performance or elasticity. Is that correct?

No, I don't see any significant. If you're referring to where do we see at year-end, I don't think you're going to see a material difference between this year and last year from a quality standpoint based upon volumes. I think as we've said before, given the nature of some of our products and crop-based products, we do tend to liquidate inventory from kind of the half, mid-point of the year on down through year-end. So we would expect to see some continuing decline on our inventory balances.

Okay. And then lastly, is there any way you could break out the benefit in the quarter from the cost-reduction efforts that was in corporate expense?

This is Chris. When we're talking about cost-reduction efforts today, most of those are in the Consumer Foods cost of goods sold. And then as John was discussing earlier, a big piece of what you see in lower comparable corporate is due to incentives. And as a lesser degree of things that we have that will cut across a variety of departments that are smaller in that math.

It's just the ongoing impact of trying to drive a zero overhead growth culture and it’s just what we try to drive every day.

Okay. So it's a smaller piece of the delta. I got it.

Yes.

We'll take our next question from Rob Moskow Credit Suisse. William Sawyer - Crédit Suisse AG: This is Will Sawyer for Rob. I want to talk a little bit more about acquisitions. I know that's actually been a priority, continues to be. I wanted to get a sense of what your limitations were from a leverage standpoint, kind of limiting the size of the deal that you could possibly do? And a follow-up to that, are there any categories or parts of the store that you guys are focusing on in your acquisition search?

I'll start, this is John. I think, as we said at CAGNY, one of our financial priorities is to have a strong balance sheet and an investment-grade credit rating. So I don't want to get into specific ratios or anything else here today. But while we think we certainly have some capacity, I would say one of our boundaries at this point is to maintain an investment-grade balance sheet.

And in terms of our scope of what we are looking at, it's where we think we can leverage our capabilities. That's really what the determining factor is.

And we'll take our next question from Alexia Howard with Sanford Bernstein. Alexia Howard - Sanford C. Bernstein & Co., Inc.: Just wanted to ask about food service trends that you're seeing. We're hearing from a number of companies that quick service is picking up quite a bit. I'm wondering what you're seeing in that area versus casual dining, maybe the higher end as well.

This is Paul. I would probably frame it as we believe the bottom's in. So things are improving, and I think you kind of termed it right, we feel like the bottom's in, and the trend is a bit more favorable.

And particularly down at the value end of QSR versus the higher end. Alexia Howard - Sanford C. Bernstein & Co., Inc.: Great. And then could I just follow up with a question on the pace of innovation. It feels as though, I think a couple of years ago, you came out with some -- a lot of new products at the same time, maybe that was 2009. Right at the moment, it feels as though you're in an upswing, as well, in the pace of innovation. And I'm just wondering how you think about the right long-term percentage of sales from new products. How do you think about the planning purchase, I guess, for what to bring in when? André Hawaux: Yes, Alexia, this is André. I think we're very comfortable with what we shared many of you down at CAGNY. Also we have in the pipeline that we'll be sharing with you in the future as we talk about our growth plans. I think for us we have been pretty steadfast in saying, we're not going to be driven by number of SKUs we launch every year. That we’re really going to be driven around platforms. So you see us in Frozen, with steaming as one of our platforms. You're now seeing something with our multi-serve offering with microwave tray so for us it's really going to be around platform innovation. We're not going to be overfocused on number of SKUs because we want the things to launch to -- we call it sticky innovation around here and make sure that these are SKUs that are going to be in the marketplace for a very, very long time.

Yes and it's meant to be incremental and proprietary. And I think when you see Pop Up Bowl get onto the shelf, that will be a real good example of something in the center store. Alexia Howard - Sanford C. Bernstein & Co., Inc.: And do you have a particular target for percentage of sales from new products each year or not really? Is it more about just the right timing for these new platforms? André Hawaux: It's more of the latter, which you mentioned. It's about the right timing and making sure they're incremental, they're platform-based. We see long-term runway on them. So we don't necessarily have a number. Some years, it's going to be higher. Some years, it's going to be lower.

And ladies and gentlemen, this does conclude our question-and-answer session. Mr. Klinefelter, I'll hand the conference back over to you for final remarks or closing comments.

Thank you. This concludes our conference call. And just as a reminder, this conference is being recorded and will be archived on the Web as detailed in our news release. And as always, we are available for discussions. 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.