ConAgra Foods Earnings Call Insights: Gross Margins in Consumer Foods, Organic Growth in Consumer Foods

On Thursday, ConAgra Foods, Inc. (NYSE:CAG) reported its fourth quarter earnings and discussed the following topics in its earnings conference call. Take a look.

Gross Margins in Consumer Foods

Jason English – Goldman Sachs: Lots of questions. I think I’ll leave a few to people who are going to come after me and get into a couple of detailed things here. Gross margins in the Consumer Foods segment, were they up, down or flat this quarter?

Andre Hawaux – President, Consumer Foods: Jason, this is Andre. They were up this quarter.

Jason English – Goldman Sachs: So, the decline was primarily driven by Commercial Foods in Agro. Is that just a factor of the milling stuff you talked about?

Chris Klinefelter – VP, IR: Jason, this is Chris. You are talking about for the total company, our fourth quarter margins were up slightly year-over-year, all segments included. So, if you got a different number, we’ll go ahead and talk about it offline.

Jason English – Goldman Sachs: Yeah. We do have a different number. So, I will circle back offline to try to get some of the adjustments corrected on that one. And last question, your acquisitions, are they margin accretive to your Commercial Food business or are they diluting the margins right now?

Chris Klinefelter – VP, IR: Jason, this is Chris. I believe you mean the Consumer Foods.

Gary Rodkin – CEO: Yeah, we would expect them certainly to be accretive to our products.

Jason English – Goldman Sachs: But to margins?

Gary Rodkin – CEO: Yes, there will be margins overtime. I don’t have the details here sitting in terms of the pieces that fell into the quarter, but overtime that’s the objective.

Organic Growth in Consumer Foods

David Driscoll – Citi Investment Research: I wanted to go back, Gary, onto the organic growth in Consumer Foods. So, it seems =like just from the guidance, it’s very limited organic growth in Consumer Foods in F ’13. Can you please spend a little bit more time and talk about why, and I did hear I guess at the end of the part of the script a fairly large increase in advertising. Is that the number one factor to call out here for the organic growth rate being, it’s got to be embedded in the guidance at may be 1% of EPS growth, something like that?

John Gehring – EVP and CFO: Well, David in consumer, we clearly have talked about how volume will be modestly down this year, but it will improve as the year goes on and we overlap the pricing. Obviously, we’ve talked an awful lot about shopper behavior across the industry buying less units exacerbated by the significant price increases taken this year. And then in our case, we singled out Banquet moving over a $1 impacting volume to the tune of about 40% of our volume drop this year. But, those moves – those pricing moves are the right thing holistically, certainly from an overall financial standpoint. We’re going to overlap those pricing actions, as we get through the year and eventually we’ll also start to hopefully see consumers flatten out in terms of their behavior on what kind of inventory they’re carrying and how they’re managing their leftovers, that’s going to flatten out over time. But, we’re planning realistically and we’re very, very confident in the algorithm. The margins will improve this year in consumer, because we clearly are going to have less severe inflation. We’re moving more towards pull versus push and that’s why you see us committing to a realistic increase in our marketing dollars. But overall, we feel very good about our Consumer Foods business. We will see some modest growth on the organic business side and we will get a good boost from our acquisitions.

David Driscoll – Citi Investment Research: Well, two quick follow-ups. On the pace of volume declines, can you talk a little bit about March, April, May, and then what you’ve seen in June, so far. Is it consistently negative or are you seeing a trend that’s maybe suggesting improvement.

Andre Hawaux – President, Consumer Foods: David, this is Andre. I would say that to your question in terms of what we saw in the fourth quarter I think I’d just repeat what Gary mentioned. Again, the lion’s share of that volume decline was in a brand we took pricing actions on that is very, very sensitive and that was Banquet. In terms of consumer consumption as we read the scanned data as well as the all-outlet data, I would say we’ve seen a slight improvement but to Gary’s point the consumer sentiment is still where it is. We are not seeing unit consumption growth rates yet across all channels of our business. So I’d say it’s still kind of environment that Gary discussed.

David Driscoll – Citi Investment Research: Final question. Just on this promotional spending or advertising and promotional spending increase, I assume by promotion, that’s consumer promotion not trade promotion, and that 10% increase can you just describe a little bit the logic behind such a large increase?

Andre Hawaux – President, Consumer Foods: A couple of things, David. This is Andre again. I would say what we are talking about here is we have a lot of innovation that we are bringing to market in fiscal year ’13. That is going to require some of the products that Gary articulated that’s going to require we believe some consumer promotion. We also feel very good about some of our brands where we’ve taken pricing this year and we’ve continued to gain share because we have a consumer preferred product and we want to continue to make those investments. They will be choice full; they will be in big category where we can make a difference. They will also span some of the new items, new types of marketing such as digital and other things that we are really pushing really hard on.

Gary Rodkin – CEO: The final point I would again as we are trying to shift away from being more push-oriented towards more pull. So, the total dollars, it’s buckets that change, it’s not really total increased spend.

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