Conagra Brands, Inc. (CAG) Q2 2012 Earnings Report, Transcript and Summary

Good morning, and welcome to today's ConAgra Foods Second Quarter Earnings Conference Call. This program is being recorded. My name is Jessica Morgan, and I'll be your conference facilitator. [Operator Instructions] At this time, I'd like 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; Chris Klinefelter, VP of Investor Relations. This morning, we'll share with your our perspectives on the quarter and the balance of the year, and then we'll open up the call for your questions. At that point, André Hawaux, President of Consumer Foods; and Paul Maass, President of Commercial Foods, will join us. Before we get started, Chris 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. 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 to the most directly comparable measures for Regulation G compliance can be found in either the earnings press release, our Q&A or on our website under the Financial Reports and Filings links, 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 $0.41 as reported and $0.47 on a comparable basis. It was a little higher than planned, but as a point of reference, last year's comparable amount was $0.45. We're pleased with the business performance of the quarter. We demonstrated good top line performance, with both our segments reflecting pricing needed to help offset inflation. Our Commercial Foods segment posted a strong double-digit rate of operating profit growth, driving the over-delivery for the quarter. We're on track for our full year commitments, which you'll hear more about later from John. Right now, I'd like to share a few highlights from the quarter for each segment, starting with Commercial Foods. We saw favorable results in terms of pricing actions, volumes and mix. Our double-digit sales increase was driven by pricing across the segment, necessitated by significantly higher input costs. In our milling operations, we passed through our higher wheat prices. And in our potato operations, we increased prices to deal with higher operating costs. If we stripped out the top line growth from the milling operations given their pass-through nature, we'd still be looking at a sales growth of about 7% for the segment. That's a strong top line performance. This combination of pricing, volume and mix helped drive a very strong profit increase of 26% for the segment, and Lamb Weston, in particular, had a strong profit performance versus a year ago. To the point on mix, higher-margin sweet potato products are doing well in the food service channel. And Alexia, our premium Frozen line, along with our private label potatoes, are driving results at retail. From our vantage point, the quick-serve restaurant business has stabilized in the U.S., and our customer partnerships across the board are as strong as ever. I'll touch on a few international highlights for Lamb Weston's business. We're excited that the Lamb Weston/Meijer -- that Lamb Weston/Meijer, a joint venture mostly focused on Europe, is posting improved results, and we're also seeing strong results in other important markets. For example, Southeast Asia's up 30% over year -- year-over-year, and our sales to China are up 23% year-over-year. We expect to keep capitalizing on high-growth global opportunities at Lamb Weston, the cornerstone of our strategy for our potato business. If you remember back a few quarters, we were struggling in Lamb Weston with some margin and operating cost issues. We've overcome those earlier challenges, and we're executing very well on the key operating initiatives, which are resulting in improved mix, pricing and efficiencies. Our milling operations had good profit results as we managed commodity markets well and continue to focus on a more profitable mix of products, including more sales in the growing whole grains market. As I said, we're very pleased with the Commercial segment's results this quarter, and we attribute the over-delivery of the quarter's EPS primarily to our Lamb Weston team's progress. Moving on to our Consumer Foods segment. Sales there grew 4%. Price mix was favorable by 5%, showing sequential improvement as we planned, and volume declined 1%. We accelerated our pricing during the quarter with increases to address the ongoing commodity inflation that we're facing. There were many brands that had good sales performance to offer a few that grew both dollar sales and units: Slim Jim, Peter Pan, Reddi-wip, Chef Boyardee, Marie Callender's and Banquet. I do want to point out that during the second quarter, Consumer Foods came very close to offsetting incremental inflation through a combination of net pricing and strong cost savings. This means comparable gross profit was very close to last year's amounts. In that regard, we've come a long way since the beginning of this wave of inflation. For the past several quarters, we've not been able to make up for the severe commodity inflation with our pricing and productivity actions. We're not declaring victory, but we're making good progress. Taking all things into consideration, I'm pleased with our teams' ongoing efforts to implement appropriate net pricing actions and to generate strong productivity. But we remain cautious about overall business conditions, given ongoing commodity inflation, particularly in proteins, as well as a soft macro environment. While sales grew, the segment's comparable operating profit declined 4%. We did increase our marketing investments slightly, and overall marketing spend should be up modestly for the year, but the rate of investment is not smooth across quarters. When we take a step back and look at the broader implications of the ongoing initiatives across both segments, there's plenty to be encouraged about. For example, we're more confident with our pricing methodology and architecture than ever before. The impact of higher prices on our volume in the Consumer Foods segment was within our expectations, actually a bit better. But we take a realistic approach in our outlook and caution that we could experience more volume impact over the next few quarters as consumers react to the market environment. Despite somewhat moderating inflation on some commodities, we're still battling tough inflation in some of our key inputs like proteins. In fact, we expect comparable year-over-year input cost inflation to peak in our fiscal third quarter and for that quarter to reflect our toughest COGS headwinds. Revenue management is one part of our Customer Connect transformation. Of course, trade partnerships are another. Recently the Kantar PoweRanking report, which measures those partnerships, listed its top 10 food makers as ranked by retailers. This year, I'm happy to say that we moved up a notch within the top 10, with specific improvement in growth and profitability, best sales force and customer teams, most innovative marketing approach and consumer insights and category leadership. This is an important validation of the progress we're making in this critical business driver. We're also on track to deliver another $275 million this fiscal year in cost savings through our supply chain. In addition to our cost savings, we've invested substantially over the years in our people, processes and infrastructure in our supply chain. I'll tell you in a minute about a couple of key achievements that are a testament to the very strong foundation we've built here. Our operating foundation is strong throughout our business and can be leveraged for future growth, given the progress that's been made over the last few years improving our portfolio, operations and culture. We're now in a position to focus more on adding to the business. When we talk about M&A opportunities and strategic fit, we primarily mean that we're focused on expanding in, one, core adjacencies; two, private label; and three, international. Marie Callender's pies and Alexia transactions, which we've discussed before, are great examples of expanding into adjacencies that fit with other product lines which we know well. We're extremely pleased with how those have worked out. The addition of Elan Nutrition bars and, most recently, National Pretzel Company, are examples of expanding our private label footprint. We've talked about how participating in the private label space with the right assets and the right categories can add significant value to customers and open up new doors for growth. We have some very good private label assets in our portfolio already, and we know what good looks like for the private label space. Those insights helps us shape our private label expansion plans. Expanding internationally is our third growth focus area. And I'll point to the recent increase in our ownership of Agro Tech Foods, Ltd. of India, which broadens our participation in a large exciting developing world market. Let me offer a few words about those most recent transactions, National Pretzel and Agro Tech, which were closed after the end of the second quarter. National Pretzel Company is a great private label asset in a very good category, salty snacks, with strong market share and good organic growth upside. Performance over the last few years has been very good. National Pretzel Company annual sales approached $200 million, and this acquisition gives us strong innovation opportunities and another growth vehicle for private label snacks. Also, after quarter end, we increased our position in the Indian company Agro Tech Foods, Ltd. We're now the majority owner of that company. This is a great way of participating in the high-growth potential of that important emerging market. We expect this to add about $150 million of sales over the next 12 months, led by cooking oils and popcorn, in its first full year under our majority ownership. I'll let John touch on other financial detailer -- details related to these transactions. We do want to reinforce that we evaluate M&A opportunities with a disciplined process. It goes without saying that M&A activity requires a great deal of patience, so of course, there'll not be news every quarter or even at regular intervals. We're only interested in opportunities that have a good strategic fit and come at a fair price in light of the future growth prospects. We also have EPS and ROIC standards as a company that guide our process, and of course, we have expectations for organic growth once we own the assets. But overall, we have to be convinced that we're getting the right assets with the right growth potential for the right price, and that any new assets make appropriate contributions to create shareholder value over a reasonable timeframe. Before I close, I'd like to share with you 2 milestones that demonstrate the returns we're seeing from consistently investing in areas that matter the most, food safety and the safety of our people. First, we learned in November that we had been nominated for and had won the Manufacturer of the Year award from the Safe Quality Food Institute. We were recognized for our commitment to food safety and for our early and widespread adoption of food safety certification in all of our plants. Second, we achieved a workplace safety milestone rarely achieved by any manufacturing facility in any industry. Our team at our Rensselaer, Indiana popcorn plant exceeded 1 million labor hours without experiencing an OSHA recordable injury. Keep in mind, we're talking about a very large operation, one that makes almost 600 million bags of popcorn annually. That's a tremendous accomplishment that reflects our teams' commitment to employee safety. In closing, I think you can see that we continue to make progress across many facets of our business. I'm pleased with that progress, particularly in light of the overall economic environment. And this continues to be an environment that requires us to be realistic in our outlook. After taking our operational progress, our acquisitions and the business climate into consideration, we are reaffirming our guidance of low to mid single-digit growth over last year's comparable EPS. At this point, I'll turn it over to John.

Thank you, Gary. Good morning, and happy holidays to everyone. I'm going to cover 4 topics this morning. I'll begin with our second quarter performance. Next, I'll address comparability matters, then on to cash flow, capital and balance sheet items, including our recent M&A activity. And finally, I'll share some comments on our outlook for the balance of fiscal 2012. Starting with our second quarter performance. For the quarter, we reported net sales of $3.4 billion, up 8%, driven by improved pricing and growth in our Lamb Weston business, pricing in our Consumer segment and the impact of higher wheat prices in our flour milling operations. We reported fully diluted earnings per share from continuing operations of $0.41 versus $0.45 in the year-ago period. Adjusting for items impacting comparability, fully diluted earnings per share from continuing operations were $0.47 versus $0.45 in the prior year quarter. Overall, the quarter came in a few pennies stronger than we had planned. This favorability was driven principally by strong performance in our Commercial Foods segment. Now I'd like to provide a few details on our business segments. First, in our Commercial Foods segment. Net sales were $1.2 billion or up 16%, reflecting good volume and mix trends, as well as disciplined pricing, especially in our Lamb Weston potato operations where we increased prices to offset higher input costs. While the pass-through of higher wheat costs in the milling operations also contributed to this top line growth, net sales were still up approximately 7% across the segment, excluding the impact of higher wheat costs. Overall, segment operating profit on a comparable basis was up 26%, as both ConAgra Mills and Lamb Weston posted significant year-over-year increases, driven by volume, mix and pricing improvements, as well as improved operational efficiencies. We are pleased with both the second quarter performance of this segment and the trends going forward for the balance of the year. In our Consumer Foods segment, net sales were $2.2 billion, up 4% driven by pricing improvements of 5%, offset by a 1% volume decline. While in recent quarters our pricing has lagged inflation, we made significant progress in the second quarter in getting our pricing and productivity caught up with input inflation. In fact, this quarter, the impact of our pricing actions, in combination with our cost savings, essentially covered inflation. For the quarter, we experienced inflation in our Consumer Foods business of approximately 10%, driven principally by proteins, packaging and dairy. We continue to see significant inflation pressure over the back half of the year, with year-over-year impact from inflation peaking in the third quarter. And while we will continue to execute our pricing and cost-savings programs, we don't expect to see year-over-year margin expansion in this segment until the fourth quarter. Our Consumer Foods supply chain cost-reduction programs continue to yield good results and delivered cost savings in excess of $70 million in the second quarter. We expect these programs to deliver approximately $275 million of cost savings for the full year, consistent with our previous estimate. On marketing, Consumer Foods advertising and promotion expense for the quarter was $102 million, up about $3 million from the prior year quarter. For the full year, we expect A&P to be slightly above the prior year. For the quarter, foreign exchange had an immaterial impact on Consumer Foods net sales and operating profit. Overall, operating profit on a comparable basis for the Consumer Foods segment increased approximately 4% from the year-ago period. Corporate expenses for the quarter were $89 million on a comparable basis versus $83 million in the year-ago quarter. The increase relates principally to higher incentives and pension costs. The tax rate for the quarter was approximately 33%, which is in line with our estimated full year fiscal rate of 34%. Now I'll move on to my second topic, items impacting comparability. Overall, we have $0.06 per diluted share of expense in this quarter's EPS related to 2 items. First, hedging. For the second quarter, the hedging loss included in corporate expense was $27 million or $0.04 per share. We also recorded $16 million or $0.02 per share of restructuring and other onetime charges related to our cost reduction and organizational efficiency initiatives. Consistent with the first quarter, these charges relate to both our network optimization programs and organizational realignments, principally in our Consumer Foods segment, designed to improve organizational effectiveness and reduce costs. Next, I'll cover my third topic, cash flow, capital and balance sheet items for the quarter. First, while we repaid approximately $345 million of long-term debt during the second quarter, we still closed the quarter in a very strong cash position, with over $700 million of cash on hand and no outstanding commercial paper borrowings. Also, we're still on track to deliver very strong operating cash flows for fiscal 2012. We expect operating cash flows for the year to exceed $1.2 billion, consistent with our previous estimate. On working capital, we continue to make progress against our working capital initiatives. For the full year, we expect that working capital improvements in our base business will contribute to cash flow from continuing operations as we continue to improve our cash conversion cycle metrics. On capital expenditures, for the quarter, we had capital expenditures of $65 million versus $82 million in the prior year period. And for the full fiscal year, we expect CapEx to be approximately $450 million, which is slightly lower than our previous estimate. Net interest expense was $51 million in the second quarter versus $34 million in the year-ago quarter. I would note that the prior year quarter included approximately $19 million of interest income from the notes receivable related to the sale of our Trading & Merchandising operations. These notes were repaid in December of last year, so we are done lapping the interest income in prior periods. Dividends for the quarter increased to $95 million from $88 million in the prior year quarter, reflecting the increased dividend rate, offset by a lower number of shares. Now let's turn to capital allocation. I have several matters to touch on today. Let's start with growth. We have said that growth is a priority, and that we are focused on strategic adjacencies, international and private label. Recently, we completed 2 transactions that fit well with our growth strategy. First, we recently completed a transaction that provides us with majority ownership of Agro Tech Foods, Ltd., our India affiliate. This majority ownership will enable us to further leverage the strategic platform for growth in an important emerging market. We will begin consolidating its result in the third quarter. Initially, we expect the earnings impact to be negligible, but we are bullish about the long-term prospects of this business. I would also note that as a result of the required purchase accounting, we will be recording a gain on this transaction in the third quarter, which we will treat as a comparability item. Second, we recently closed on the acquisition of National Pretzel, a leading pretzel -- private label pretzel provider. This acquisition fits well with our private label strategy and with the extensive snacks capabilities we already have. The acquisition and operation of this business will be reflected in our financial statements beginning in the third quarter. While we need to complete the purchase price accounting, which will impact amortization expense, we currently expect that this business will contribute approximately $0.04 of EPS in the first 12 months, with the EPS contributions skewed somewhat towards the latter months. As you've heard us say consistently over the past several quarters, we continue to pursue growth through acquisitions. While the timing of acquisitions depends on a number factors, not all of which we control, we will continue to pursue opportunities where there is a strategic fit and a good financial return. And as we have demonstrated, we are ready and willing to leverage our capabilities and our balance sheet to create value by investing for growth. And we will do so with discipline. Our approach to growth through acquisitions has been consistent. In addition, the other elements of our capital allocation policy also remain unchanged. Specifically, we remain committed to a top-tier dividend payout. We also remain focused on organic growth and profit-enhancement investments, including new product introductions and capacity expansions, as well as investments necessary to support our cost-savings initiatives. On share repurchases, we do expect to acquire shares from time to time, funded by cash flows from operations. As we've said before, it is not our practice to add leverage or change our capital structure to fund buybacks. We did purchase about 4 million shares during the second quarter for approximately $95 million. As we had nearly exhausted our previous authorization, our Board of Directors recently approved a $750-million addition to our share repurchase authorization. As a result, we currently have approximately $780 million of available share repurchase authorization. To summarize, I would note that given our track record of consistent cash flow generation, we believe that we can continue to have a very balanced approach to capital allocation over the long term. The approach starts with our commitment to an investment-grade credit rating, but also recognizes the importance of maintaining our strong dividend and executing share repurchases from time to time. In other words, adding to the portfolio should not preclude us from executing the other elements of our capital allocation policy to create stakeholder value. Before I close, I'd like to comment on our fiscal 2012 outlook. As Gary mentioned, we continue to expect 2012 diluted earnings per share, adjusted for items impacting comparability, to grow at a rate in the low to mid single digits from our 2011 comparable base of $1.75 per share. Our 2012 full year earnings estimate reflects net sales growth at a rate in the mid single digits. We also expect our Commercial segment to deliver strong year-over-year improvement in both sales and operating profits. In our Consumer segment, pricing and mix, plus cost savings, are expected to essentially offset the impact of inflation of about 10% for the full year. Operating profit for the Consumer segment for the full fiscal year is expected to be about the same as the prior year. At the corporate level, we continue to expect higher cost this year, driven by higher incentive and pension costs. Overall, we're confident about our fiscal year guidance, and we expect great performance in our Commercial segment to continue through the balance of the year. However, given our current assessment of the back half for our Consumer Foods segment, including the inflation pressures, especially in the third quarter, timing of marketing investments as compared to year-ago quarters and a somewhat cautious view of volumes given our necessary pricing actions, we currently expect EPS in the second half of the year -- EPS growth, I'm sorry, in the second half of the year to be concentrated in the fourth quarter. Overall, the environment remains challenging, but we continue to have confidence that we can leverage our pricing and cost-savings initiatives, as well as our innovation and marketing capabilities, to position the business for long-term success. That concludes our formal remarks. 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 back over to the operator for our Q&A session. Operator?

[Operator Instructions] And it looks like our first question today comes from Andrew Lazar with Barclays Capital.

Just 2 quick things for me. First, with respect to the third quarter commentary around being prudent and cautious and what have you. I just want to make sure that it's not based on anything that you're necessarily seeing currently in any of the data you have from a volume perspective. So the down 1%, I think, was probably somewhat better than maybe -- certainly than a lot of the data that we all get suggested, and you said you're obviously somewhat pleased with that. Is there reason to expect at this point, based on something you're seeing, that, that likely gets a little worse before it gets better or are you just being conservative?

Andrew, I think there are -- there's really 3 reasons that we see the back-half growth concentrated more in Q4, and that's basically the timing of inflation, as we spoke, year-over-year. Specifically, our projected inflation for Q3 is the toughest cost of goods headwind for any quarter this fiscal year. The second is that we are -- we think appropriately cautious about volumes, as the recent price increases have only been in the market for a few months and the fact that we have more coming in some of the value-oriented areas of the portfolio, which, in some cases, have greater-than-average elasticities. And the third is the timing of our marketing investments are skewed more in Q3 versus in Q4. So when we put these factors together and, really, the nature of the quarterly year-over-year comparisons in general, that's why we see the growth in Q4. That's really it.

Got it. Okay, that's helpful. I appreciate it. And then...

Sure.

One last thing, with respect to sort of the outlook around M&A and what have you. And we certainly appreciate the perspective on discipline and patience, and I think that's clearly what most would want. When you listen to some of the other sort of private label consolidators, they're certainly telling a story more recently of the potential for an accelerated rate of M&A on their own parts going forward. I guess just based on what they're seeing in the market and the pipeline that's out there and such. And I guess what I'm getting at is seeing that and seeing the private label is a big part of your -- or one of the planks of your M&A, does that give you -- is it hard to balance, I guess, a sense of urgency that you may need in that space, given what others might do versus kind of the patience and the discipline? Or are you ready to go ahead and do some things more quickly if they appear? Because it seems like the other players are going to be going on another spurt, if you will.

Andrew, you mentioned that it's private label is just 1 of the 3 planks for us, so we want to make sure we keep that in mind. But we are clearly ready, willing and able when it makes sense for us. It's got to have the right strategic fit. It's got to have the right kind of metrics that we talked about. But make no mistake about it, we are clearly ready to jump if the right property comes along with the right kind of attributes.

Got it. Do you feel your -- this is the last thing. Do you feel your, I don't know, contact and tentacles, if you will, in sort of the private label space, more broadly, will allow you to do some things over time? Or I guess what I'm getting at is I'm trying to get a sense of whether you feel that disadvantaged at all to some of the players that have been looking at maybe some of these assets for a long time, because that's something that's come up here and there. So I'd just love your thoughts on it.

Yes. Andrew, I think that's a fair question. And I would say, if you asked us that a few years ago, the answer might have been, yes, that we might not feel as confident. But I would say, that is not the case today. We've got a pretty strong infrastructure and experience level with the businesses, $1 billion worth of private label businesses that we're already in prior to the acquisitions of Elan and National Pretzel. So I think we've amped up our infrastructure. We've got the right experience. And the thing I think that advantages us the most is that we can leverage the infrastructure and the capabilities that we have as a large $13-billion CPG company, which, in many ways, can be leveraged, whether that's food safety, innovation, marketing, packaging, you name it. We can leverage those things more than we think some of our competitors can.

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

I wanted to follow up a little bit on the Consumer Foods volumes. So in the second quarter -- I agree with Andrew, these were certainly better than what we were expecting and what we saw in the Nielsen data. André, Gary, can you 2 talk about this just a little bit more in depth? And specifically, how was the growth in the unmeasured classes of trade, like dollar and club? And then can you speak a little bit to retail inventory levels? André J. Hawaux: David, this is André. Let me take that multifaceted question. I think we do, as we said, feel very good about where the volume came in. I would also just reiterate Gary's comment that he made about the process. We look at the out quarters and more pricing that we're going to be taking as a result of inflation. Some of that pricing will be in the value added -- some of our value brands, and we're just being cautious on what the elasticities will be going forward. With respect to non-measured channels, it was -- our growth was significantly more than our measured channel growth in this particular quarter. Our mass merch business was up double digits in terms of net sales. We also had a strong convenience business, which was also up double digits, that really on the strength of our Slim Jim portfolio. So we did very well there. Our dollar channel stores continue to grow, and we had a very good performance in our club business. So I think that answers most of the elements of the questions that you have.

And then just on the EPS guidance range. So with the good second quarter results, your EPS range of -- the language you guys gave, I translate that into 1% to 6% EPS growth. It's a bit wide versus what we see. And with a strong second quarter, I would think maybe you guys would have some tendency here to narrow the range. Is there -- maybe this is rehashing some of the things you've already said, but are there some specific concerns you have that make kind of the back half more difficult to predict and that would be why you wouldn't say narrow the range a bit?

Dave, this is John. Let me try to take a shot at that. I guess, overall, I'd say our -- again, our view for the total year really hasn't changed in terms of EPS. And just given the volatility in the business world right now, we're not going to get into parsing up narrowing the range at this point. What I would say is that, and I think Gary has probably touched on this, as have I, inflation has ticked up a bit in the third quarter. We talked about some of the headwind we have there and just the need to remain cautious about potential impact on volumes as we continue to assess pricing actions. So I don't know that that's anything new versus what we've said earlier in the discussion, but it's a -- I'd say we're confident about the full year. But these are volatile times, and we just think we need to be looking around corners at some of these issues.

We'll take a question now from Bank of America Merrill Lynch's Bryan Spillane.

Two questions. One, just on the commodity inflation outlook. I think you mentioned protein going up, also potatoes. Just -- if you could talk a little bit about what's happening with potatoes, and has that been more inflationary than what you were expecting going into the year?

Yes, this is Paul. We had a -- if you remember, we had kind of a rough crop transition in the first quarter. And the contracting nature of our business, most of that is set. And -- but clearly, we've had inflation, the potato perspective. But we've got that in. We've got a good line of sight on exactly what that is, and we've priced -- I think the key thing about our business is the alignment between what's happening on that input cost with what we're contracting, and that's made a big difference. And so the pricing...

Okay. So what you've -- what you're seeing on inflation there isn't any different than what you were expecting earlier in the year?

Exactly, yes.

Okay. And then a follow-up question, I guess, to -- for Gary, just on the -- on National Pretzel. I think you touched on it in answering Andrew's question, just your ConAgra's potential ability in private label to leverage your infrastructure. Can you just talk a little bit about maybe what you're seeing now in terms of your ability to deliver, I guess, the floor cost to the retailer relative to some of the -- what you think your competitors are doing? Just -- even just how big you think that gap is in terms of your ability to get that cost to the retailer on the floor.

Yes. Bryan, it's really important. When we take a look at private label, particularly as we look from a growth standpoint, we are looking at things that are not going to be just run on a bid for the absolute lowest price. We're looking for quality products. We're looking for products where we can differentiate with innovation. I think you're going to see that over time in a big way in National Pretzel. You see that in our bars business. And we really -- our concept of private label, as we look out across our strategic plan, is that it's going to be much more tiered, not just the lowest price generics as we've seen in the past. And the best evidence of that is places like Trader Joe's, Whole Foods, Costco, et cetera. So we look to play not exclusively, but more in the areas where we can be value add and really leverage our capabilities. And that's, I think, a really important takeaway.

We have a question now from Jon Feeney with Janney.

Gary, I wanted to ask specifically about -- as you look at the -- your acquisition strategy, you've been very clear about your desire to use your balance sheet. Do you -- how -- time-wise, how patient will you be before you just start to maybe buy back stock? Or I guess that's the only really other capital allocation alternative and, certainly, a pretty attractive one, the way -- and one that presents a significant hurdle rate. If you could tell me what sort of rate you use as far as a minimum hurdle rate when you think about financial accretion in that context. And is there a timeframe at which you say, "You know what, the better way to do this is to buy back stock because our core business isn't generating so much cash and growing so well?"

Yes, John, this is John Gehring. Let me take a shot there. At the risk of maybe reiterating some of the things I've already said, I think, first of all, given our cash flow, we think we can, for a while yet and probably a long while, continue to focus on growth, as well as execute our other priorities, including some level of share buyback. In terms of our level of patience, I would say this is a strategy. And inherently, I think that means it's going to be fairly long term. So I think we're going to stay at it for a while. We are interested in growth. We think the best thing, long term, for this company is to get larger and more profitable and generate more cash. So I think the answer is we're going to stay with it for a while and -- until we absolutely see there's a flaw in the strategy. But at this point, we're confident in the direction we're going.

Okay. I'm sorry, I was just going to follow up to that. I mean, when I look at your trends versus others in the industry, and a lot of the improvements that have been made in the company the past 3 or 4 years, I've concluded this is pretty deeply undervalued. Do you share that opinion? And does that influence your trade-off between buying back stock and doing acquisitions?

Yes. Obviously, we share your opinion.

I don't know. That's not obvious.

We do. We believe that we've got a much different company than we had 5 years ago. Many people tend to have very long memories, and we believe that we've made a lot of progress. And the capabilities that we've put in place are going to be leveraged as we go forward here. So I guess the short answer is, yes, we believe that we are undervalued.

We'll move now to Rob Dickerson with Consumer Edge Research.

Just a couple of quick questions. I guess, one, back to the buyback. You bought back 4 million shares in Q2, but none of that really flows through into diluted. Is the expectation going forward in the following quarters from Q3, Q4, that there will be continued option exercises? Or if you were to continue to buy back, let's say, $100 million a quarter, should we see a little bit more of that flow-through?

This is Chris. I'll start. I mean, the thing that I'll tell you is that our share repurchase plans have really not had any connection to what we've tried to predict in respect -- in terms of option exercises. It's really not a strategy of trying to gain some type of short-term EPS. We know that there is EPS benefit, but it's kind of independent of any timetable that would have to do with options. Our plans, as John mentioned, are to repurchase shares prudently from time to time, given the market conditions. And you can see from our past actions, we don't let it sit too long. So just please be aware, they don't have anything to do with our expectations about what's going on in terms of employee option exercise.

Okay, fair enough. And then the -- just the housekeeping item is the CapEx guidance. And I know it only went down by $25 million, but was there any color around that? Any rationale?

This is John. I don't think there's any really significant messages in there. It's just a function of we're a big company. We have a lot of projects going on. Some of them come in a little high, some come in a little low. And then we have some timing that impacts some of these projects. So I'd say there's no message relative to our willingness and interest in investing in our business.

Okay. And then lastly, to your point, you mentioned private label more of a tiering system, Trader Joe's, what have you. I think I've heard before -- I talked to a few people that -- I mean, it seems like you may even be having like a new private label kind of a health bar product going into a number of different retailers outside your standard snack bar product, which would be considered a little bit higher end. Kind of as we look forward next couple of quarters and into next year is, is part of that strategy then to not just really be playing on an organic basis, not just acquisitions but on an organic basis in higher end, potentially, more profitable private label products? André J. Hawaux: Yes. So this is André. I mean, you're absolutely right. We've just launched a bar, a protein bar and a meal replacement bar, that has those attributes that you mentioned. And if you recall from Gary's earlier comments, that's the reason we bought -- to give ourselves additional capability. When we acquired Elan over a year ago, that was for that very reason. We knew we could then sort of trade up and get into some other capabilities that we currently didn't have in our bar business, and that's largely in the fast-growing area of protein and meal replacement.

And we'll take a question now from Thilo Wrede with Jefferies & Company. Thilo Wrede - Jefferies & Company, Inc., Research Division: Two questions for you. In your Consumer segment, there are several brands that after 4 or 5 quarters of declining sales now had a turnaround and had positive sales. Is that driven by things being done differently by innovation, or is it just easy comps that you are now lapping?

Thilo, I would need a little bit more specificity to answer your question. Some of the things that you mentioned are valid. Some of it will be promotional comps. But I -- if you could give me the brands that you're speaking of I could probably reference it.

Yes. So for example, Chef Boyardee had 5 quarters of declining sales, now turned positive, same for Hunt's. I think La Choy was 5 quarters negative is now flat. So those would be 3 brands where performance improved in the second quarter.

Yes, let me comment on Chef specifically. I think Chef, it's a combination of retailers certainly getting behind it. But we've just recently launched a new marketing campaign touting the value of that value product for families, and that's actually worked really well for us. And Hunt's continues on, on the campaign of -- a new campaign as well, that we're driving in the marketplace. And again, we're the #1 share in branded canned tomatoes. So that's done very well for us as well. Thilo Wrede - Jefferies & Company, Inc., Research Division: Okay. And then one more question maybe about your acquisitions. I would say that National Pretzel and Agro Tech, those were more bolt-on deals. Did you do those to tide you over until you can do something more transformational, whether opportunistic? That -- how do you balance these bolt-on deals versus transformational transactions?

Yes. Thilo, I think the most important thing is availability. We don't speculate. But some properties have to be available that meet all the criteria, starting with strategic fit, et cetera. So we've got a pretty wide lens. André J. Hawaux: The only thing I'd add is the whole notion of -- we're not looking just either at transformational or kind of some of the smaller bolt ons. We're trying to look at, as Gary said, everything that's available to us. And if they make sense, size alone is not a criteria that will determine whether we go forward or not.

And we'll move now to Deutsche Bank's Eric Katzman.

I guess 2 questions. First one on the private label initiative. My -- I guess my understanding -- I think you said, Gary, it's about $1 billion business in total, but it seems like almost all of that is grain based. And obviously, Ralcorp's piece of it, if you have gotten that, was grain based. Do you kind of feel is it just going to be a focus strategy in M&A on -- and, I guess, organic private label growth on grain-based products? Or are you willing to, let's say, do Frozen if a retailer was to come to you? And then I have a follow-up on Commercial.

Yes. I would -- Eric, I'd say that, clearly, we happen to have a good bit of grain based, but that's not a specific strategy. We also have a big position, for instance, in potatoes and cooking sprays. So no, we're not looking to be just in grains. We're looking at categories where we can get growth.

Okay. And then on the Commercial side, it may not be a direct comp, but I think your profits peaked in that business a couple of years ago at around $590 million for the year. And you obviously did very well this quarter. Most of the outperformance, you're talking more positively about it. How do we -- given that we don't have a lot of visibility on that business, like how do we think about the kind of profit trajectory of that business over time? Is it -- can you get back to those levels? Is it -- or is there something either in the macro environment that limits it? How do we think about that, Gary?

Well, actually, I think I'll put the -- this, first, over to Chris.

Yes. Eric, I'll offer a couple of remarks then turn it over to Paul. The -- keep in mind that you're exactly right, and we had some very strong earnings levels a couple of years ago. Those -- keep in mind, we have a flour milling business where the market dynamics are always going to be a little bit different. It's very difficult to say that some point in time, we're just going to go back and match that exactly. We -- since that time, we also went through some crop issues that you've heard us talk about with Lamb Weston with recent cycles. But to anchor it back to some point where all things were working very well into -- and an extremely high earnings level would be a difficult one. What we can say at this point, we are very confident in the fundamentals of the business. A lot of things are going exactly the way we would want them in terms of pricing and the operating dynamics, but we'd really be hesitant to anchor it on some number just a few years ago. Paul?

Yes. And the only color I would add is just I'm very pleased with the progress we're making, and so we do have favorable momentum that you're seeing here in the second quarter. And I really believe that the growth outlook in Commercial, it'll be there. And we've got a lot of confidence in the team and the focus that we've got on the business to really grow it -- going forward.

We have a question now from Chris Growe with Stifel, Nicolaus. Christopher Growe - Stifel, Nicolaus & Co., Inc., Research Division: Just a couple of quick ones for you. I just want to get -- be a little clear on the Commercial -- I'm sorry, on the Consumer Foods business for the third quarter being a little more cautious around the profit expectations for that division. You have pricing. It sounds like that's going into place. Is it just that you're being more cautious around the volume expectations? Or I guess what I want to understand is that it sounds like you're close to offsetting your cost inflation this quarter with pricing and cost savings. With more pricing, will you be above the level of cost inflation in Q3, just worried about volumes?

This is Chris. I'm going to start. Let me just reiterate something you heard from Gary and John. I realize that we have upwardly revised our inflation estimates. And so you're right to the point where we're coming close to the point of offsetting them. We believe that we're in a position to continue doing that, but we have upwardly revised our inflation estimates. And in addition to that, we have some pricing kicking in, Q3, on some areas of the portfolio that are value oriented and that have higher-than-average elasticity expectations. So that's -- there are concrete reasons why we're expecting what we're expecting for Q3. André? André J. Hawaux: Yes. And I just -- to build on that also, Gary reemphasized that the marketing investment is skewed a little bit more to Q3 than it is to Q4, based on timing. So those would be the points that I raised that Gary articulated earlier. Christopher Growe - Stifel, Nicolaus & Co., Inc., Research Division: Okay. Just to follow up from an earlier question. How would you suggest that the retail inventories, are they in a good place today? Are they where you want them to be? Were there any kind of benefit in the quarter from new product shipments, that kind of thing, that maybe boosted inventory a little bit? André J. Hawaux: We -- Chris, we don't see that we had any benefit or downside as a result of retailer inventories, and the innovation pipeline for us has been relatively smooth across the year. Most of the launches were, for us, in Q1, so we don't see that being a big determinant of their volume for this particular quarter.

And we have a question now from Ann Gurkin with Davenport. Ann H. Gurkin - Davenport & Company, LLC, Research Division: Just to follow along. Were there any onetime gains or inventory gains or new business wins in the Commercial Foods segments that helped that volume?

No. It was -- Ann, it was pretty much just good basic organic performance. Ann H. Gurkin - Davenport & Company, LLC, Research Division: Great. And then secondly, I've heard a number of companies talk about how they think it's best to work with their retailers. So be curious to your thoughts on what is the best strategy to work with retailers right now, whether it's grocery stores or mass merchandisers or dollar stores? What can ConAgra do to best partner with these retailers to drive volumes and sales?

Well, Ann, I would think that the things that we're doing -- and we talked a little bit about our Customer Connect organization last quarter, but really the focus for us has been around working jointly with the retailers around joint business planning. And all of them have a slightly different process, if you will, because there -- no 2 are the same. But we really believe that looking both in -- on a short term and really working with retailers on a long-term basis around categories that'll help them grow and being somewhat agnostic to brand or areas where we really want to drive that business. The other thing we bring is shopper insights, and really, folks are asking us much more to be focused on the category dynamics, not so much the brand dynamics. And more people are trying to -- we're trying to field a lot more custom research, so we understand the consumer that happens to shop at a club versus a dollar store versus a mass merch. So we're getting much more specific and granular about the work we do with specific retailers.

And we'll move now to Crédit Suisse's Robert Moskow. Robert Moskow - Crédit Suisse AG, Research Division: This may not be the place to ask the question, André, but I was wondering about Hispanic marketing. Most of your consumer staples peers have accelerated their efforts in that area. I really haven't heard much about what ConAgra is doing. Is it a focus of yours going forward, or you're really just working on Customer Connect for now? André J. Hawaux: No. I think -- Rob, I think it is a focus of ours. I mean, we're starting from a -- we were relatively not that big in this segment. And I think our growth rates in terms of dollars, I won't quote them right now because I've don't have them off the top of my head, but we've made significantly more investments in the Hispanic marketing. And we have more plans, as we look at our 3-year strat plan of marketing, to do even more in that space. So we're starting from -- I would say, from a small base. But we're certainly going to accelerate that as we look at like others look at the demographics that are out in front of us, and we need to be in that space.

And we have a question now from Alexia Howard with Sanford Bernstein. Alexia Howard - Sanford C. Bernstein & Co., LLC., Research Division: Could I focus in on the Frozen entrée segment for a second? I'd be curious about what you're seeing in terms of competitive dynamics, and also what you're seeing in terms of the consumer. In particular, I'm curious about whether you're seeing an increasing coupon redemption rates, and what that might say about whether the consumer is strengthening or weakening in that particular segment. André J. Hawaux: Alexia, this is André. I'll take that. Let me just take Frozen and a couple of areas for us. For instance, we are very happy at the progress we've made this particular season with the acquisition we did of American Pie, which united the Marie Callender pie equity. We have seen category growth rates very significantly in the double digits, and we've gained significant share as we've expanded distribution of that product and really have, what I'd say, won the holidays. So I feel really good about what we've done in the dessert area, which is -- again, is a core strategic adjacency for us. Number two, in multi-serve, with the advent of Marie Callender Bakes, which uses the MicroRite tray, we've done very well in that space as well. The category has been up for us, and we have also gained share in multi-serve. As you know, single serve in this economy probably has been the toughest element of the Frozen categories. What we're seeing is, again, across our brands, Marie Callender continues to deliver very strongly. The healthy segment of Healthy Choice, that competes with several other competitive offerings, has probably been the toughest hit relative to volume, but we're taking a fair amount of pricing in that category. And it's also one that probably is most influenced by the economy, as we see carried lunch to work decline. I -- and I'd say, we've been very happy in the quarter about where our value offering was with respect to Banquet. The competitors have been very rational. This category is highly promoted, but we're seeing promoted price points move up as all of us deal with rising input costs across these businesses.

And our final question today is a follow-up question from Andrew Lazar with Barclays Capital.

Just a quick one. Gary, most of the businesses you're in, in your private label business, tend to be in categories where you don't operate in the branded side. Not always, but I think most, if I'm not mistaken. I'm just curious is that a dynamic you want to generally continue, meaning keeping kind of those categories separate, or I guess would you consider opening up your thought process on doing both? I know it can get a little bit more complex that way.

Yes. Andrew, we never say never, of course. But our strong preference is to kind of have the separation of church and state. So we would prefer to be in categories where we're focused on one or the other. So that's really what our primary interest is.

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

Thank you. 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're available for discussions. Happy holidays, and thank you very much for your interest in ConAgra Foods.

This concludes today's ConAgra Foods Second Quarter Earnings Conference Call. Thank you, again, for attending, and have a good day.