ConAgra Foods Earnings Call Insights: Ralcorp Businesses and Ralcorp / ConAgra Transition

ConAgra Foods, Inc. (NYSE:CAG) recently reported its third quarter earnings and discussed the following topics in its earnings conference call.

Ralcorp Businesses

Andrew Lazar – Barclays Capital: First of all thanks for breaking out the Ralcorp results separately. It does help quite a bit with the transparency both Ralcorp and on the core. I guess my question is on Ralcorp specifically. Obviously it can be a challenge to model a deal in the initial stages, the first 27 days and as you said the year-over-year comps maybe tough to asses for a while given how you’re going to run the business going forward. But the results at least in the quarter for Ralcorp, top and bottom line were a bit below we were looking for. So I was hoping you could maybe help put some of the Ralcorp results into maybe a better context, so we can get a sense of how we should think about it going forward. In another words, maybe what are some of the trends in some of the key Ralcorp businesses right now? We know the private label in general had a bit of a tougher year in 2012. What is your comment around – I think you said they need to make some tactical pricing adjustments at Ralcorp. How does that play into that as well?

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Gary Rodkin – CEO: Yeah, Andrew, I would tell you obviously we are really very positive on being able to get this deal closed and on that long-term opportunity being very consistent with our recipe for growth. As you said, it is only 27 days and actually as of today, I think we’re in week nine, so it’s still a very steep learning curve. There clearly as we expected are some normal disruptions including some top line challenges as you noted. I would say those stem primarily from some disruption, their own integration, which, there were about six months into as we entered the picture and then, of course, our integration on top of that. Then I would tell you as we get into it, we’ve seen that they had gotten upside down on several key commodities and those tactical pricing adjustment you mentioned, clearly those are in process. As we take a look at things that need course correction and employ our Center of Excellence on revenue growth management, risk management, et cetera, we are in process of making those adjustments. So I’d say that clearly is probably – those two things are clearly right in our – on top of our radar screen that we are working on and have impacted those results in the first 27 days. But we are very, very confident in terms of the numbers that we have shared both at CAGNY and here today, and that is really driven by a very strong sense of conviction on our supply chain efficiencies. We’re well underway there and believe we will deliver all of those. We also believe as we get into it, we are starting to see some top line growth synergies as well. So this whole notion of very strong vision or conviction on leveraging our scale in our CPG capabilities into this very fragmented space, that’s going to play out. We remain very confident on that and we don’t take – we really don’t take too much message from this first 27 days.

Andrew Lazar – Barclays Capital: Then just second, volume in consumer as you mentioned was sequentially better. I’m still off about 3%. I guess in the most recent scanner data it looked a bit better and obviously, with some of the increased marketing you did this quarter, in the lapping of some of the pricing, are you starting to already see sort of again, even more sequentially improved volume results as you go into the fiscal fourth quarter?

Andre Hawaux – President, Consumer Foods: Andrew, this is Andre, I want to take that question. I’m going to elaborate on it a little bit more than even the question that you asked. But to answer your question, yes, we are. We’re seeing much more positive scanner data as I’m sure you are as well for the start of our fourth quarter and we’re very optimistic that our fourth quarter volume performance trends that you’ll see will be significantly improved from where we were in Q3. So let me share a little bit, because I know there’s a lot of investors thinking about our volume and consumer for Q3. Let me identify where really the issues were in three brands that made up about 90% of our miss and that was Banquet Frozen, Chef Boyardee and Orville microwave popcorn. So let me take each of those and talk a little bit about each one of them. One is Banquet, we’ve been talking about this brand all year and it really has to do with the significant amount of pricing we took on this value brand at the beginning of our fiscal year. So we finally have lapped that and as we look at Q4 numbers and the start of Q4, we are seeing that brand turn around pretty significantly as we expected. So that’s been a pretty consistent pattern and that was a big cause of the volume miss in Q3. We see that getting better in Q4. Chef Boyardee was simply one thing, it was timing of merchandising. The merchandising that we had versus a year ago which was in Q3 is now in Q4 and that corrects itself as you’ll see in the Q4 results. The last one is probably the smallest amount of our miss, but it was a miss nonetheless, and that was in Orville Redenbacher’s microwave popcorn. It’s probably one that’s going to require us to get to do a little bit more work on how do we get this microwave popcorn category back to – back to growth and that’s something we’re continuing to work on. So based on the shipment trends I’m seeing early in the fourth quarter as well of the (NYSE:RRI) consumption numbers, I think we are very optimistic that we’re going to see the Q4 results on volumes significantly get stepped up from where they were in Q3. Hopefully, that provides the audience some perspective on our volume issues in Q3.

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Ralcorp / ConAgra Transition

Bryan Spillane – Bank of America Merrill Lynch: Just two follow-ups I guess to Andrew’s question. One first, in terms of Ralcorp, was there any sort of disruption or static just because the business was in transition. You were changing hands and customers, maybe ordered more ahead of time to just to make sure that they weren’t going to – have a little of that extra safety stock ahead of the transition from Ralcorp to ConAgra. Is that at all a factor kind of what you are dealing with now?

Gary Rodkin – CEO: Brian, I don’t think we’ve seen any evidence of that. There is the normal customer impatience, I would say with, hey, you know the deal is done, we want to see all the benefits of it today. Obviously as we talk through it, they start to understand that the integration takes a little while. But I can tell you from a customer standpoint, we’ve had one major top to top recently, really talking about our story of trying to move from a very transactional or procurement based model in private brands to a much more strategic partnership long-term that would leverage. Those capabilities and scale that we have and it was extremely positive, very engaged and gave us a really good feeling that we’re on the right track. But to your original question, I don’t think we saw any evidence of inventory loading…

Bryan Spillane – Bank of America Merrill Lynch: And then just on the marketing spend in the quarter, just two areas, could you give us a little color in terms of where you are spending and then maybe also just in terms of paybacks, you know what the timeframe you are looking for in terms of seeing that effect that the revenue growth. Then also just, is this now part of the base as we go into next year, is this sort of a permanent rebasing of the marketing budget or would you expect to see maybe a further increase next year?

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Andre Hawaux – President, Consumer Foods: Brian, this is Andre, I’m going to take that. Let me tell you where we’re spending the money, I’ll give you some color as to brand, but it’s really in – I would call, four buckets. The primary one is brands that we are seeing very solid growth and Gary articulated some of those, but we’re doubling down some of the spending on brands that I would call it, that have the hot hands. So brands such as Marie Callender’s, PAM and Reddi-wip which were sited earlier, where we are gaining unit share, we’re gaining dollar share and our marketplace performance is very, very strong. The other areas we’re devoting marketing too is in our innovation space. So, one of the areas where we put some money behind in the quarter was as we’re starting to launch and get this to more scale in Orville ready-to-eat as an example, we are putting some money there, obviously we are doing some development work on the innovation that will be launched in the new fiscal year, fiscal ’14 with respect to a lot of the innovation you saw at CAGNEY, so there is dollars going behind innovation. We also are putting dollars behind brands that are expanding, that are very strong regionally today that are growing and we’re expanding the footprints, so Gary mentioned one which was RO*TEL. we are also doing that with a very strong brand, we Rosarita, as well as Wolf Chili as they get out of their markets, so there is dollars going there. Lastly, we’re starting to get into what we call big platform marketing, in the shopper marketing areas. So many of you – many consumers will see and we’re kicking it off officially, our Child Hunger Ends Here are big fourth quarter shopper marketing promotion that will be out there that we kick-off at the country music awards this coming weekend. So we’re starting to get into this big platform-based marketing, which – really good marketers in our space do that. So, you’ll see that’s where we’re spending the lion’s share of our money. Second part of your question; is this really a rebasing of our marketing spending? Should we expect to see more next year? We’re not going to comment on our algorithm for fiscal ’14 just yet, but I think it’s – suffices to say that as we looked at our marketing, we looked at on a full year basis that we needed to this year, take the margin improvement we saw, we have the opportunity to go back and reinvest in our really strong brands and I think you’ll see us – a lot of that has been done and you’ll see some of that leveling off. We’ll talk more about what we’re going to do with marketing when we talk in June about our fiscal ’14 algorithm.

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