Conagra Brands, Inc. (CAG) Q4 2011 Earnings Report, Transcript and Summary

Good morning, and welcome to today's ConAgra Foods Fourth 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.

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, 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, 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 $0.62 as reported and $0.47 on a comparable basis, up more than 24% over last year's comparable amount from continuing operations, putting us at $1.75 on a comparable basis for the year. The quarter's EPS was challenging given 9% inflation in our Consumer Foods segment. In the quarter, we faced accelerated inflation and experienced the customary lag between inflation and necessary pricing. It's tough out there, but we are making progress in key areas of our business and we're confident in our ability to manage through. Net-net, Consumer Foods sales increased 1% as reported but declined a point after adjusting for the impact of acquisitions. Comparable operating profit was down 7%. In contrast, the Commercial Foods segment posted very good sales and operating profit growth. A few details on each segments' quarterly performance. Consumer Foods sales growth was slightly positive as reported, including favorable price/mix of about 2%, about 2 points of benefit from acquisitions and a volume decline of about 3%. Organic sales were down about a point. We did have sequential improvement in price/mix. As you know, pricing increases have been and continue to be ongoing, given today's high inflationary environment. There are more net pricing actions to come. The volume decline reflects the difficult market conditions, specifically weary shoppers and some impact of elasticity in light of our price increases. Despite that, we did have some brands that performed well during the quarter. Marie Callender's continued its terrific success, making gains in revenue, volume and share. We also saw excellent revenue, volume and share growth for Hunt's canned tomatoes and Reddi-wip and Slim Jim also performed well during the quarter. Overall though, our Consumer Foods performance was impacted by the fact that we incurred 9% inflation for the segment this quarter. John will say more about that later. 9% was the highest quarterly rate of inflation we incurred in fiscal '11. We were able to partially offset these higher input costs with productivity, which came in at about $65 million for the quarter. Of course, inflation and pricing are relevant to near-term performance, but I want to emphasize that we remain focused on the fundamentals, basic elements of our operations that are very meaningful for the long term and intended to grow share volume and net sales. We're confident in our long-term potential because of the stronger foundation we've built over the last few years in the core areas of the company, including innovation, marketing, supply chain and customer partnerships. And all of these things play important roles in our future plans. We're comfortable that the stronger operating platform that we've built over our multi-year transformation period puts us in a good position over the long term for organic growth, as well as confidence in our ability to add assets to our base through smart acquisitions. That means we expect over time to return to high-quality share volume and net sales performance in our core existing businesses and also to leverage our resources to expand into higher growth adjacent categories. We have recent successes to point to along those lines, such as our Frozen and Snacks innovation, as well as our acquisitions over the last few years. For example, Alexia, which is about 2.5x the size it was when we bought it 4 years ago and the Marie Callender's Dessert business, which posted double-digit top line growth in its first year under our control, thanks to leveraging our sales and marketing infrastructure. We also acquired just this month the Marie Callender's trademark which had been a license, which gives us even more opportunity to expand and grow a very large and core brand within our portfolio. This kind of success comes from our stronger foundation, which we're taking to the next rigorous level with an initiative introduced in fiscal '11 called Customer Connect. Simply put, Customer Connect is a comprehensive integrated customer-focused approach that will drive profitable growth for us and just as importantly, provides profitable growth for our retail partners, all at the speed necessary to win in a changing marketplace. There are 2 enabling steps. First, we're building a more cross-functional focused customer interface, one that is designed to strengthen our strategic partnerships and accelerate top line growth. And second, we'll deploy a well-studied best practices to take our pricing architecture and trade promotion effectiveness and efficiency to the next level. The Customer Connect initiative is another example of how we are continuing to improve and enhance foundational capabilities across the company. With our ongoing work to create stronger operations and accelerate growth in our core business, we're also focused on gaining more presence in private label and expanding internationally. These actions will help us deliver on our growth objectives over the next few years. These strategies are fundamental to our future, they are front and center for us. The competencies we've developed over the last few years give us confidence to add to the portfolio in meaningful ways in attractive categories, which is one reason for our proposal for Ralcorp last month. I'll say more about that last point before I finish my remarks this morning. While top line growth plays a key role in our future, cost savings and productivity improvements are also very important. In the recently completed fiscal year, we delivered slightly more than $280 million in savings from our consumer supply chain. Our supply chain programs are comprehensive end-to-end programs that make long-term strategic sense and they're one of the key reasons we're confident in our ability to generate this important fuel going forward to invest in growing our top and bottom line. Although the environment will continue to be challenging, we expect to deliver improved year-over-year Consumer Foods segment profitability in fiscal 2012. That expectation is based on pricing actions underway, ongoing productivity and a strong innovation pipeline we've built over the last few years. Moving on to Commercial Foods. Sales were up 15% and comparable operating profit was up 14%. The foodservice environment is getting a bit better and Lamb Weston's volumes showed nice improvement, particularly in markets outside the U.S. We've also begun to take pricing in some channels at Lamb Weston to deal with increased input costs. And there is clearly more planned in F '12. The cost supply for potatoes has been very tight. Higher input costs will continue for us. Potato crop quality is better than what we were processing a year ago and that makes it more production-friendly. At Lamb Weston, we're also seeing a more favorable product mix with increased emphasis on higher growth, higher-margin products, such as sweet potato fries, which are on trend and performing very well in both foodservice and retail channels. Our flour milling business turned in another very strong quarter leveraging volatile market conditions. Prices are higher due to increased wheat costs, and we're navigating the markets well. This business has truly step-changed its performance the past several years. As we look to fiscal 2012, we expect to grow comparable EPS at a low- to mid-single digit rate over the $1.75 we earned on a comparable basis in fiscal 2011. We see this as a realistic earnings view given the difficult macro conditions in the marketplace. We're taking into account gradually improving pricing, our recovery at Lamb Weston and the benefits of innovation coming to market in fiscal '12. Clearly, the marketplace will continue to be challenging. In our outlook, we're anticipating very high inflation year-over-year, particularly in our first half, as well as the customary lag between inflation and pricing. We expect to navigate this, this difficult environment and deliver growth in fiscal 2012. We're not standing still, we've initiated changes that will improve our performance as we work through this adjustment period. And as we indicate in today's release, our growth will be concentrated in the back half. It's also worth noting that in planning our EPS performance for fiscal '12, we've committed to discipline investing behind our key brands. We're investing in our brands for the long-term health of our equities, and we do not plan to boost our bottom line by reducing marketing support. We're also facing increased pension expense of about $25 million year-over-year or about $0.04 per share. That's just a fact of life given where rates are and what they do the pension obligation and expense formulas. John will say more about that. Let me briefly discuss our previously announced proposal to acquire Ralcorp, I appreciate your interest in the matter. As you know, on May 4, we made a proposal to acquire Ralcorp for $86 per share in cash. As we've said before, we continue to believe this company would be a good strategic and financial fit for ConAgra Foods. We believe private label has a strong future, one where we can leverage our core capabilities to generate good growth. Based on the response we've received from both our shareholders and Ralcorp's shareholders, we believe that investors recognize the sound, strategic and financial logic of a combination of our 2 companies. Just to be clear, we will not have any further comments on this matter today. Thanks for taking part in today's call. And now I'll turn it over to John.

Thank you, Gary, and good morning, everyone. I'm going to touch on 4 topics this morning. I'll begin with our fourth quarter performance highlights. Next, I'll address comparability matters. Then on to cash flow, capital and balance sheet items. And finally, I will provide some comments on our outlook for fiscal 2012. Starting with the fourth quarter. Today, we reported fully diluted earnings per share from continuing operations of $0.62 versus $0.27 in the year-ago period. Adjusting for items impacting comparability, fully diluted earnings per share from continuing operations were $0.47 or 24% above the prior year. Let me touch on a few operating highlights for the quarter. First, in our Consumer Foods segment, net sales were $2.0 billion, up about 1%, reflecting 2 points of favorable price/mix and a benefit of about 2 points from acquisitions, net of divested businesses. These factors were partially offset by 3% base volume declines. Our Consumer Foods' operating profit on a comparable basis was $273 million, down 7% from the year-ago period. This softness was driven principally by inflation and pricing dynamics. As you know, inflation has continued to accelerate. For the fourth quarter, we experienced inflation of about 9%. While costs were higher across nearly every category of our inputs, the larger dollar impacts were driven by protein, fats and oils, energy and packaging. While we are beginning to see the impact of our pricing actions, the fact is that our net realized price increases have lagged the accelerating inflation impacts. Our Consumer Foods supply chain cost reduction efforts continue to yield good results and, as Gary mentioned, we delivered cost savings of approximately $65 million in the quarter or about $280 million for the year. Based on our cost savings performance over the past several years and the significant pipeline of opportunities, we remain confident in our ability to continue to deliver strong cost savings throughout fiscal 2012 and beyond. On marketing, Consumer Foods advertising and promotion expense for the quarter was down approximately $6 million or 8%. And for the fourth quarter, foreign exchange impacts on Consumer Foods' net sales and operating profit were immaterial. Turning now to our Commercial Foods segment. Sales for the segment were up 15%, driven by the impact of higher wheat prices in our milling business, as well as volume growth and improved pricing mix at Lamb Weston. Commercial Foods' operating income was up approximately 14% as both Lamb Weston and ConAgra Mills posted significant increases over the prior year. Lamb Weston's improved top line performance was able to offset higher input costs, resulting from tight raw potato supplies and other commodity price increases. As a reminder, we were lapping a prior year quarter that was impacted by a very poor crop. ConAgra Mills posted another strong quarter driven by good mix and commodity management, offset by lower volumes. Our ConAgra Mills business continues to have strong momentum and management is executing well. For the total company, our core selling, general and administrative expenses for the quarter came in slightly better than our 0 overhead growth target. We continue to challenge our team to control costs and to achieve high ROI on incremental G&A investments. Now I'll move on to my second topic, items impacting comparability. Overall, comparability items impacted and benefited the fourth quarter's earnings per share by $0.15 per diluted share, driven by several items. First, as we previously noted, during the quarter, we reached a settlement with our insurance carriers related to claims arising out of the Garner incident. As a result, we received approximately $48 million of cash during the fourth quarter, bringing our total cash proceeds to approximately $168 million. We also recorded a pretax gain of approximately $105 million or $0.16 per share related to the settlement of these business interruption and property insurance claims. Next on hedging. In the fourth quarter, we had approximately $7 million of hedging gains in corporate expense or approximately $0.01 per diluted share, which we treat as a comparability item. And finally, we recorded approximately $11 million or $0.02 per share of restructuring charges. These charges relate to business relocation and consolidation initiatives undertaken in the prior year and network optimization program charges we announced earlier this year. Now let me turn to cash flow, capital and balance sheet items. First, we closed the quarter with $972 million of cash on hand and no outstanding commercial paper borrowings. On operating cash flow, we generated over $1.3 billion of cash flows from operating activities for fiscal 2011, slightly above our target for the year. On working capital, we have executed well on our working capital initiatives. However, rising commodity costs particularly in our flour milling business have resulted in higher inventory and working capital balances. For the full fiscal year, changes in working capital had a negative impact on operating cash flows of approximately $100 million as the benefit from improvement in our cash conversion cycle was more than offset by higher inventory costs. Overall, we are very pleased with our cash flow performance for the year. Next on capital expenditures. For the quarter, we had capital expenditures of $119 million versus $123 million in the prior year. And for the full year, CapEx was approximately $466 million. Net interest expense was $55 million in the fourth quarter versus $39 million in the prior year. Interest income from the PIK notes associated with the sale of our Trading & Merchandising operations in 2008 contributed $22 million in the year-ago period. Dividends for the quarter were approximately $98 million versus $89 million in the prior year. And also, during the fourth quarter, we acquired approximately 6 million shares of our common stock for about $138 million. We have approximately $125 million of share repurchase authorization remaining. Given our strong liquidity and cash position, I would like to remind you of our capital allocation priorities, which are unchanged. First, we remain committed to a top-tier dividend payout. We know that a healthy dividend is important to many of our investors. Also, we remain focused on organic growth and profit enhancement investments, including new product introductions and capacity expansions, as well as investments necessary to support our strong cost savings initiatives. We also continue to pursue growth through acquisitions given our operating capabilities, as well as the balance sheet strength, we have built over the past several years. We're very confident in our ability to add to the portfolio where there is a strategic fit and a good financial return. And finally, while growth is a priority, we also recognize that at times, share repurchase programs are an attractive option for our shareholders. Now I'd like to comment on our fiscal 2012 outlook. As Gary mentioned, we expect fiscal 2012 diluted earnings per share, adjusted for items impacting comparability, to grow at a rate in the low- to mid-single digits from our fiscal 2011 base of $1.75 per share. While we expect fiscal 2012 earnings growth to be below our long-term algorithm, we do believe this is a realistic assessment of how our business will perform, given the near-term challenges of high inflation and other economic factors and the need to make the right investments for the long-term health of the business. This fiscal 2012 earnings estimate reflects net sales growth at a rate in the mid-single digits, including some benefit from the impact of higher wheat prices in our milling business. Sales growth for the Consumer Foods segment specifically is planned to be in the range of 3%, driven largely by improved net pricing. This estimate also reflects modest gross margin improvement in our Consumer Foods segment driven by pricing and mix improvements and strong cost savings, partially offset by the impact of higher input costs. For fiscal 2012, we are targeting $275 million of cost savings in our Consumer business. And we are planning for a modest increase in our advertising and promotion costs and a more effective mix of that spend as we optimize the impact of these dollars across an evolving media landscape. The outlook also reflects approximately $25 million or about $0.04 per diluted share of unfavorability due to higher pension costs. While we are very comfortable with our pension funding levels, the significant drop in interest rates and therefore, our pension discount rate through the end of our fiscal 2011 has significantly increased the amount of pension expense we will recognize in fiscal 2012. Also, consistent with our pay-for-performance approach, total SG&A will also reflect higher incentive costs, given the expected margin in comparable earnings per share improvement we see in fiscal 2012. And finally, the effective tax rate for 2012 is expected to be in the range of 34% for the full year, although this rate may fluctuate somewhat from quarter-to-quarter. With respect to the performance of our operating segments, for fiscal 2012, we do expect improved operating profit in our Consumer Foods segment, driven principally by pricing and mix improvements and supply chain cost reductions. In our Commercial Foods segment, we believe operating profit will show strong growth. In Lamb Weston, we expect improved profits driven principally by better pricing, mix and operational efficiencies, partially offset by higher input costs. And we have planned for modest profit growth in our ConAgra Mills business, which has performed extremely well over the past several years. Overall, we are committed to our long-term algorithm of 6% to 8% comparable earnings per share growth, and we are optimistic about our long term -- long-term strength of our businesses. While we are confident about our full year guidance, I would note that we expect EPS growth to be skewed toward the back half of the fiscal year. And we have planned first quarter earnings to be lower than the prior year. This timing is driven principally by 2 factors. First, in our Consumer Foods segment, inflation for the first quarter will be even higher than this past quarter, and it will take some time to overcome the inflation pricing lag in this business. Second, we also have some near-term raw cost issues and a pricing lag at Lamb Weston, given the timing and the nature of the annual contracting process, which occurs in the early fall. As a result, we expect lower margins in the first few months of fiscal 2012 until costs and prices can be realized. Turning to cash flow. We expect continued strength in our operating cash flows in fiscal 2012. We expect cash flows from operating activities to be in the range of $1.2 billion to $1.3 billion, with working capital improvements contributing in the range of $100 million. Further, we expect capital expenditures to be approximately $475 million. We have approximately $360 million of debt maturities in fiscal 2012, which, at this point, we expect to repay with cash on hand. One other item. We recently announced the purchase of the Marie Callender's brand trademark for approximately $58 million. In addition to securing control of this asset, we will also realize a modest reduction in our annual royalty expense. That concludes our formal remarks. I would like to thank you for your interest in ConAgra Foods. Gary and I, along with André Hawaux and Paul Maass, will be happy to take your questions. I will now turn it over to the operator to begin the Q&A portion of our session. Operator?

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

You said that there was a pricing versus inflation mismatch lately and that should continue, I suppose, for the next 1 to 2 quarters. It sounds like you're calling for a back-weighted year. I guess the first question is, why has there been a lag impact, a mismatch there? It seems that some companies in the packaged food space have successfully priced ahead of inflation or at least it looks like they have so far, and while others are experiencing a pinch, perhaps you could sort of diagnose for us what you're seeing there. And then maybe separate that impact, that sort of lag lead impact on your prices versus simple discounting by competitors, which is hitting your volume. André Hawaux: David, this is André. I think we saw it probably the most exasperated in Q4. As we went in the quarter, we did price according to where the inflation -- we felt the inflation was going to be. It came in slightly higher, as John articulated, almost 9% in the quarter. And as a result, we're having to, of course, correct and get that in the marketplace. We've taken another round of pricing at the end of our fiscal year, which you all will see impact us in Q1. But also, as John mentioned, we will see a pretty high level of inflation as well in the first quarter of fiscal year '12, which will probably necessitate another round of pricing. So we believe that we will get through to the coverage covering our inflation with pricing and our cost reduction by Q2, and we'll start to see a favorable margin impact there and then through the balance of the year. That's the way our plans are currently lined up right now.

And how much of this is sort of the net surprise that you probably had in the last few months versus what you probably would have thought, would have been a 6% to 8% growth, perhaps back in February around CAGNY time? How much of that is really the competitive environment? Or is this really simply that, that next level of inflation causing a mismatch in the near term? André Hawaux: I think it's a balance of 2 things. I would say the inflation is the primary one. I do believe in most of the categories in which we compete, and just I want to remind the audience that we compete in over 35 to 40 categories in IRI, of which the top 15 make up about 70% of our business. I think there we're seeing to your point earlier, David, rational competition in most cases. There are outliers obviously in every single one of the categories, and I won't drain each one of them, where we see most of our competitive set doing the things that they would have to do as well to protect their margins given the high input costs that is not discriminating against anyone. I think inflation is here across all our competitive set. There are places and certain categories though that where competitive pricing has stalled our ability to potentially take as much pricing as we'd like. But that's the nature of the game, but I'd say the lion's share, to your point, is really driven by the higher inflation pieces we've seen.

We'll move now to Bank of America's Bryan Spillane.

Just, I guess, one question in terms of pricing, you had a competitor out this morning who talked about some difficulty in terms of passing price increases through and basically just needing to document more than need for the pricing. So I guess can you talk to how the conversations have gone with retailers and whether it's been any more difficult and maybe even more recently to raise prices? And then also, do you anticipate having to do more? Are you doing anything differently in order to make sure that you've got that squared away in terms of being able to smooth that process out? André Hawaux: Yes, Bryan. This is André. I think retailers, first of all, don't like you walking in and raising prices. That's never been something that our retailers have enjoyed. I think one of the things that we do now quite well is we do equip our teams when we go in to talk about the various commodities and the elements that make up our basket of goods, if you will, and show the various market actions that are going on, both from a macro standpoint and things that are affecting our business. So they don't like it, they -- we do have to be much more factual with them and we have to provide a lot of data. It is not easy. It is very difficult to continue to put through. Many of ours are a combination of both pricing increases, list price increases that we do and also changing out the depth and frequency of our trade. So it's a combination of both list and trade. But again, no one likes it, but they understand it. And we're not the only ones in the marketplace doing it. So -- and everybody is arming themselves with the data that actually take pricing.

Bryan and David, this is Gary. Just to amplify what André has said. You know that everyone is experiencing significant input cost inflation, and we are starting to gradually see every day our merchandising price points go up. It's as André says, category-by-category, competitor-by-competitor, but I have to tell you that we have made it crystal clear that we are serious about increasing our net pricing to help mitigate this much higher input cost inflation. We have made it very clear that we are not going to go backwards on pricing. And if that means that we need to make some modest trade-off on the volume in the near term, we are willing to do that.

And then Gary, as you look into fiscal '12 having made the changes that you made at CAGNY to the -- to your long-term objectives and giving a pretty clear assessment of how the environment has changed, does it give you more conviction or confidence in the forecasting that you've done and budgeting that you've done for 2012 and maybe you would've had in 2011, given now that you have a adjusted, a more realistic view or a different view of the environment?

Yes, I think that we clearly are on top of this. It really hit somewhat as a tidal wave in the back half of this year, and we got ourselves a little bit behind by not having that crystal ball as finely tuned as we would like to in 20-20 hindsight. But I do believe we've made a number of changes that will line us up a lot better as we go through this continuing tough environment, but that we've made some changes in terms of organization rewiring to make sure that we've got a very cross-functional look and a lot of connectivity between the cost and the pricing and actually changing, as we look forward, some of the rewiring on exactly how we do handle the net pricing architecture. So, yes, I think we feel much better about it. We're better than we were a few years ago. This will take us actually to the next level as we really have looked hard at studying best practices and made the appropriate changes.

And we'll take a question now from David Driscoll with Citi Investment Research.

Gary, so you've reduced the long-term earnings guidance, you've announced the desire to want to acquire Ralcorp. I get a tremendous number of questions for people asking kind of if we -- we don't know if you can acquire Ralcorp or not. So I think most of us just want to try to think about what happens to ConAgra on a go-forward basis if you don't get it. And then this question really comes back to the underlying model that you had going on, prior to this intention to acquire RAH. The underlying model was really driven by cost cutting, focusing the portfolio, all the great work you guys had done, divesting assets and then focusing on new products. I mean there was a real story right there and now folks are questioning what the longer-term future is. If you don't get RAH, are you still going to be able to drive this business going forward? Are the cost cuts still there? Is the runway of those cost savings program still that long runway that you had previously envisioned? So hopefully, you can be a little sensitive to this and explain to the investors how we should look at it.

Yes, David, I would tell you that absolutely, with very strong conviction, all of those fundamentals that you talked about are still very much in play and in as good a shape, better shape than they've ever been in the company. One example would be the innovation pipeline is stronger than it's ever been before. The supply chain, our productivity ramp is just as robust as it's ever been. So we feel very, very good about the fundamentals of the business. This has been a tough external environment that we will get through. But specific to your question, as I said, we remain interested in Ralcorp. But having said that, our core issue is really about the rapid increase of the input cost inflation. We are going to get through it and as this year progresses, our net pricing actions take hold, we will work our way through that. But our fundamentals, our foundation is so much stronger that we believe we can confidently add to the portfolio, whether it's this opportunity or another, our success over time is going to be based on returning our core to growth. I think we're already demonstrating that in one of our key businesses, Lamb Weston, and it's smartly pursuing strategic adjacencies that would be branded adjacencies. It will also be in looking for private label growth and it will be in rationally and gradually increasing our scale internationally. So we've got a comprehensive strategic plan, a big focus on the core business, given the fundamentals that we've improved, but we have also recognized that we are serious about adding to the portfolio.

If I could follow-up with one specific question to 2012, fiscal '12, you mentioned in your prepared comments about incentive compensation costs. I think when I looked at the corporate line today, correct me if I'm wrong here, but on a comparable basis it's down like $40 million year-over-year. You called out what looks like much, much lower compensation costs. When I think about 2012, is the reversal of this happening? And can you quantify, this sounds like a very big headwind in the F '12 guidance. Am I correct about these components?

David, the absolute most important thing to remember here is that we pay for performance. So when we don't perform, it's just straight black-and-white math, we don't get paid as well and these programs pay for themselves, so the only way we earn our incentives is to have the performance that warrants them. John?

Yes, and certainly, Dave, there is a mechanical aspect to this as we put our plans together, we do rebuild incentives. And to your point about the reverse being true next year, we are planning for our incentives to be back at target under the assumption that we will earn them. So there is a big, fairly large swing the other way. But again, I don't know that I view that as a headwind as much as I do a plan that will fund once we perform.

I appreciate the comments. I'll pass it along.

We'll move now to Andrew Lazar with Barclays Capital.

So I appreciate that, one of the biggest part of the mismatch in the quarter was just the sort of incremental inflation that you faced and kind of the need to go back and take additional pricing. But if we're -- if we go back to the end of last quarter, and you were looking ahead to the fiscal fourth quarter, was 2% net price realization in the Consumer Foods division about what you would have expected then or were you hopeful it would have come through more quickly? André Hawaux: Andrew, it's André. I think we were -- we're hopeful it would have come through more quickly. But you got to remember, it was a combination of we were expecting pricing and we were expecting our strong performance in CCRs, which we did see to offset the level of inflation that we had called. Inflation was slightly higher so that was the mismatch that we've talked about this morning.

Yes, that part I definitely get. I was getting at just what we're hearing generally speaking in terms of it just being a little bit more taking more time obviously just to get some of these through. More scrutinization by retailers, the need for more justification from manufacturers just to kind of make this happen and so, perhaps it's just also a bit of timing around just how quickly you get it through. André Hawaux: Well, yes, and I spoke to that, I think earlier, and let me just be clear. So the requirements -- the detailed discussions and the getting into the, as I said, the details of the cost increases and why we're seeing the commodity costs, that continues to be with probably more rigor than we've had. But for the most part or typically what you have, Andrew, is you've got a 60-day window typically, where you've already committed pricing. It's gone through, you've got your merchandising set. And if you're going to change that, unless you're willing to really disrupt your merchandising schedules and your relationship with customers, you've got that normal customary 60-day lag effect on most of the portfolio. And it's shorter in those -- well, I call those pass-through categories that are largely commodity, things like oil and spreads, where we're able to affect those prices in about 30 days. So it's typically in that 30- to 60-day time frame that you just -- it's just natural. It's across the industry is the way -- the way this is done largely because you're locking up your merchandising calendar a quarter in advance.

And we'll take a question now from Robert Dickerson with Consumer Edge Research.

Operator, we're not hearing anything.

And hearing no response, we'll move on to Davenport, Ann Gurkin. Ann Gurkin - Davenport & Company, LLC: I wanted to start with the volume drop in the quarter in Consumer Foods, is that in line with expectations? Or how should we think about that volume versus pricing metric as we go into the first half of fiscal '12? André Hawaux: Ann, this is André. I think it's a combination of things. I think in -- and so we're really -- what you're really speaking to is elasticity. I think with respect to some categories, we actually feel pretty good. The elasticities are coming in kind of where we called it. With respect to some other brands, I mean, again, we have a big portfolio and we've taken overall about 60% of it with price. And I think on some brands, the consumer reaction in this environment has been stronger than we thought. But the reality is we do believe that, and what we're starting to see as we opened up to fiscal '12 is that, that's starting to come back a little bit. So early on, some of those brands were hit pretty hard in the fourth quarter, but we're seeing some of that start to get better. Ann Gurkin - Davenport & Company, LLC: Okay, that helps. And then, with respect to private label pricing, you talked a little about the Commercial Foods and Lamb Weston, but can you talk about the timing of getting price increases through on your private label business and kind of feedback there? André Hawaux: Yes, it's going depend, Ann, in our business so we have similar to Lamb, it's not tied to the crop obviously. But we have some businesses that we have in private label that are big businesses. So they do an RFP, you bid and you get the business for a certain period of time, so you're locked in, in some of those businesses contractually. That's not the whole portfolio. And in other places, we've taken, for instance, in our Snacks, Breakfast business, our bar business, we actually have taken prices because not all of those businesses are RFP. So it's a mix bag and we are taking pricing in our private label space as have others where the inflation warrants it and where we can that we're not locked into a specific contract. But as we cycle out of those contracts, we have new pricing going in that reflects the new input costs.

Ann, I would comment on Lamb Weston, the contracting nature of that business. There's a lot of variability but there's a number of contracts that are done annually kind of crop year to crop year. And from a real high-level perspective, the transition would really be kind of at the end of the first quarter, is where it resets.

And we'll move again to Robert Dickerson with Consumer Edge Research.

I just want to focus on the balance sheet a little bit. They're obviously generating a decent amount of cash flow and CapEx in an absolute basis seems to be kind of holding flat or it's within guidance. And now as we look forward into fiscal year '12, it would seem as if you're getting your leverage ratios obviously down more. So that being said, is your fiscal year EPS outlook, does that include any incremental buyback from outside of the -- what's left on your authorization? And I also have a follow-up.

We have only anticipated in our plan what we have authorization for because it's an –- our board -- that's an issue our board needs to be behind.

Okay, okay, makes sense. And then, just to clarify, if you are in current discussions with respect to acquisitions, are you able to be in the market buying back stock or maybe should the expectation for us be that, as we look forward into Q1 and the rest of the year as long as you're in current conversations, potentially privy to nondisclosed information that we shouldn't expect the remainder of the buyback on the authorization to be made this year?

Rob, this is Chris. I believe that a lot of those rules depend on how the specific buyback arrangement is crafted. And so there are some specifics we're not going to get into, but I'll just echo what John said, which is that our plan, we only have $125 million or so on the plan. It's a reasonable assumption that would be knocked out in reasonable period of time and we'll have to leave it at that.

And we'll move now to Jason English with Goldman Sachs.

A question for you on the inflation outlook. It's -- getting a good beat on that has obviously been a challenge for both you and myself throughout the year. I think you've laid out an outlook of 7% to 8% for fiscal '12 with a little bit more front-half loaded. How comfortable are you with that? And what kind of visibility do you have? And specifically what sort of coverage might you have for the year?

Well, I guess in terms of our comfort level, I'd say we're about as comfortable as we be given the volatility of the markets today. So we are looking every day at the markets and the forward curves and our position. So I think it's the best estimate I think that's available again given the circumstances. We do undertake a number of actions in order to try to manage costs. We do some of that through derivative hedging, we also do it through long-term contracts and supply contracts. I won't -- I'm not going to get into specific coverage that we have on our buy. But I would tell you, again, we're looking at those positions daily and we're obviously trying to balance the need to protect our P&L going forward. But we also need to balance that with the risk that if you lock in too far out in very volatile markets and things collapse, we could end up with a very different competitive problem. So very challenging environment, I think we feel good about our processes and the estimate we have, but it's a lot of hard work going forward.

And Jason, it's important to remember, the overlaps on inflation are clearly a lot tougher in the first half of the year.

And that's just a function of the absolute prices that we will be lapping at the end of next year, are going to be lapping much higher prices than in the last couple of quarters.

That's helpful. One follow-up on a related topic, 70%, does that include the inflation in your pass-though categories like oils? And if not, can you give us a fully loaded number?

Yes, that does include what we see on the consumer side. It includes all the categories.

We'll take a question now from Eric Katzman with Deutsche Bank.

I guess just a quick one on the F 2012 estimate for interest expense and then some guideline about corporate expense, and then I'll just have a more broad-based follow-up.

This is John. I'll start, the interest is ballparked at around $200 million. The reason for that is we don't have the income in it that we had this year. And on corporate, while we wouldn't say that it is always a precise number, what we're looking at is numbers that are in the same range of each other. We'd be in the mid to high 3s for the year, and we don't see any tremendous volatility across quarters at this point.

That corporate -- so that includes the higher pension and then some assumption on the incentive accrual?

It does, but realize not all of those numbers are just corporate. Some of those flow through in the business as well, and particularly...

Okay. And then for André, I think that you answered the question earlier that you had passed through on about 60% of the categories. I realize everything is kind of a moving target these days with inflation, but didn't you say that you had passed through about 50% of the portfolio last quarter and the target was to pass through like 90% by the end of the fiscal year? André Hawaux: Yes. So Eric, where we were as we came out of the quarter, we came out with about 60% of our portfolio will be priced as we enter the fiscal year. And by Q1, we will be about 80%. There are some brands that we've analyzed that have to be fast followers that can't lead given their market position. Again, this goes through our entire portfolio where you start looking at brands where we have fairly relatively low share positions. So some things got course directed during the time frame in which we spoke, but those are the numbers that we now have baked into that are both active and live with pricing as we speak today, that's about 60% of the portfolio. The pricing that we have lined up for P3 and P4 in the new year gets us to about 80%. And then the work that we've done with other brands, which adjusted we would have -- we'll have more pricing if the leaders in those categories take pricing because the math says that we have to be fast followers given our relative share position.

And we'll hear now from Rob Moskow with Crédit Suisse. Robert Moskow - Crédit Suisse AG: Just a question about Customer Connect, can you give us a sense of how that's different from your -- how you use to approach your customers, your customer marketing teams? Are you bringing in like your procurement managers to help justify why your costs are higher? André Hawaux: Rob, this is André. Let me just take a more holistic perspective on it because I think what you're talking about is a very tactical thing that we do today when we bring pricing. And we arm our sales teams with information from the procurement organization to talk about the macro trends on commodities and things like that. But Customer Connect is significantly more holistic than that and is really sort of very patterned on a lot of those things that we've done in supply chain when we talk about end-to-end. We took a compressive look at our customers, we interviewed them through a third party and talked about where we -- what disciplines we lack versus best in class. And more importantly, where we were on the continuum of being a transactional supplier with them versus a strategic. And they said that we had moved from the old days of transaction supplier -- transactional supplier to more collaborative, but we weren't quite in the best of class what they would view as strategic. And what they said is, we -- our teams weren't cross-functional enough. So we didn't bring to the discussions with them enough of the supply chain side where we help jointly take cost out of our collective systems, where, while our Shopper Marketing was good, we could beef up those resources. We could beef up things like category management and more importantly, we could get involved in longer-range joint business plans. They said that the top of the class there really brings all those things to bear and ConAgra brings many of those things to bear, but not all the way to bright. So that's one piece as we face the customer. The other thing we've done working again with outside folks is to say how do we stack up against best of breed around what I call pricing architecture and trade management. And this is something we've now brought to the center and we are now working through bringing it to the center and not having it as disparate as it was in the past. So there's a lot of opportunity for us, as Gary mentioned, we've taken a lot of steps over the last 4 or 5 years to get better but to ultimately get to best in class. What we've learned is you create a center of excellence for revenue management and trade management and you centralize those resources with the appropriate skill sets and the levels that you need, and that's the journey we're on and that's the path we're on now because as we've talked to more people, that is clearly best in class and we're not there yet. So I think that's the move and it's very holistic. It has a lot of similarities, as I said, to what the success we've had in supply chain and that's the path that we're on. And we feel very confident that this is going to pay very big dividends as we move through fiscal year '12. Robert Moskow - Crédit Suisse AG: Now André, that's very interesting. Do you feel like you need to bring in more talent from the outside, maybe best-in-class managers from other CPG companies to help you execute that plan? André Hawaux: I think, clearly, the skill set around pricing and some quant things, the quant skills we need, the answer, Rob, would be, yes. We have some very strong folks internally, so I don't want to diminish their contributions. But yes, I do believe we will strengthen and build more muscles as we bring other people and whether it's from CPG or other sectors, it really is that skill set around pricing being a strategic lever, not a tactical lever.

Sanford Bernstein's Alexia Howard has our next question. Alexia Howard - Sanford C. Bernstein & Co., Inc.: Just want to ask about the pace of innovation, I guess I'm linking that back to the improvement in price elasticity that you're expecting this year. I guess, last quarter, price and volume was pretty flat. Now you've got to the 2% price increase, but volumes are down 3% and yet, for this year, you're expecting an improvement back to a neutral volume position. Is that partly driven by an expectation that the pace of innovation will accelerate here? And how are your recent new products doing in the market?

Alex, this is Chris. Let me start on the -- now just to be clear, we're not saying that we do expect flat volumes for '12. We have anticipated plans with pricing and Gary's remarks were that we are prepared for some modest volume declines, but I don't want you to be confused that we have said that fiscal '12 is starting out with an expectation for flat volumes. André? André Hawaux: Yes, so Alexia, let me talk about -- we believe, as Gary articulated, that we have a very strong innovation pipeline. I'm going to give you an example of why I believe that, that's very true and how that's become -- that's getting manifested in the marketplace. And I'm going to use Frozen as the example because I think it's the one that we can bring it most to life. Number one, if you take a look at what I've shared with this group in the past about the things we need to do on Frozen was, one, we need to win in single-serve meals, we need to broaden our footprint into multi-serve meals because we were really not capturing any of that growth in that because we weren't really present in that space and lastly, capturing adjacencies with our brands, things like food pies, desserts, et cetera. The innovation has really supported all those things, and if you look at all 3 of those things and single-serve meals for fiscal year 2011 that just ended, we won, we gained share. We continue to increase our distribution across all of our brands: Banquet, Marie Callender and Healthy Choice. Multi-serve meals, with the advent of the micro right tray and our multi-serve expansion with Marie Callender, we gained share, we grew that business very nicely, again, continuing to deliver on that. And capturing adjacencies, we did well with not only the acquisition of American Pie, but the ability to also take Banquet into a food pie process as well and into that space. So tray-in-tray has been key to our success there, that's innovation. That we're the only ones that have that and same thing with micro right trays. So the example I would give this audience is Frozen is where we have hit on all the things that we talked about. And we have a lot more work to do across our portfolio, but that as the example when Gary and the teams speaks about platform innovation and leveraging our innovation to do the things we need to do in the marketplace. And we're also seeing pricing -- if you look at sequential pricing in Frozen that you can look at from an average price per unit standpoint, using ROI or Nielsen or whatever you're looking at. You see sequential price improvement in periods '10, '11 and '12 as we exit the year, and as we go into the new year we're seeing it as well. So innovation is allowing us to price and those are the things we're doing. So Frozen for us is really our internal case study of how we do it and how we do it well. We now have to bring that to other pillars. Alexia Howard - Sanford C. Bernstein & Co., Inc.: Great. I'll pass it on.

We'll hear now from Priya Ohri-Gupta from Barclays Capital.

You talked a lot about acquisitions and in the past you've talked about how you're very committed to maintaining investment-grade rating. I'm wondering if you could just add a little bit more color on your thought around credit ratings with regards to acquisitions and whether you'd be looking to potentially flex that a little bit for the right opportunity potentially.

Yes, this is John. I would start with we are committed to investment-grade rating. We would be willing to pressure that and flex it a little bit, to make the right acquisition. And we think there's plenty of room to do that in our current rating, but if we -- as long as we stay at investment grade, we would be willing to go down for some period of time, but not below investment grade is where our target is.

Great, that's very helpful.

And we do have a follow-up question now from Robert Dickerson. [Consumer Edge Research]

Yes. I just had a quick clarification question on John, Lamb Weston, I know there's a put option end of July and I'm assuming that there's no real obligation on your end or cover or expectation that you would be interested in purchasing the majority ownership in that.

I don't -- I'm sorry, this is Chris. I'll turn it over to John, but I don't think there's of anything to express that, that would be material and I don't think that's on our radar.

Okay, perfect. That's all.

And there are no further questions. Mr. Klinefelter, I'll hand the conference back to you for final remarks or closing comments.

Thank you. And just as a -- well, this concludes our remarks today 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 Fourth Quarter Earnings Conference Call. Thank you again for attending, and have a good day.