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Ralcorp Holding (NYSE:RAH)

ConAgra Foods to Acquire Ralcorp Holdings

November 28, 2012 8:00 AM ET

Executives

Gary Rodkin - ConAgra Foods Inc. - CEO

Chris Klinefelter - ConAgra Foods Inc. - VP, IR

Kevin Hunt - Ralcorp Holdings - President and CEO

John Gehring - ConAgra Foods Inc. - CFO

Analysts

Andrew Lazar- Barclays Capital

David Driscoll - Citi

Bryan Spillane - Bank of America

Ken Goldman - JPMorgan

Jonathan Feeney - Janney

Rob Dickerson - Consumer Edge Research

Chris Growe - Stifel Nicolaus

David Palmer - UBS

Thilo Wrede - Jefferies

Alexia Howard - Sanford Bernstein

Greg Hessler - Bank of America-Merrill Lynch

Priya Ohri-Gupta - Barclays

Todd Duvick - Stifel Nicolaus

Operator

Good morning, and welcome to today’s ConAgra Foods to Acquire Ralcorp Holdings Conference Call. This program is being recorded. My name is Jessica Morgan and I will be your conference facilitator. All audience lines are currently in a listen-only mode. Our speakers will address your questions at the end of the presentation during the formal question-and-answer session.

At this time I would like to introduce your host for today’s program Gary Rodkin, Chief Executive Officer of ConAgra Foods. Please go ahead Mr Rodkin.

Gary Rodkin

Good morning and thank you for joining us on such short notice. I hope that everyone had a happy thanksgiving. I am Gary Rodkin and I am here with John Gehring, our CFO and Chris Klinefelter, our VP of Investor Relations. I am also pleased to welcome Kevin Hunt, CEO and President of Ralcorp Holdings who is with us for today’s call.

By now I am sure you’ve seen our exciting news regarding Ralcorp. On today’s call, we’ll discuss today’s announcement and then take your questions. Before I begin, I’ll turn it over to Chris for some housekeeping matters.

Chris Klinefelter

Good morning. During today’s remarks, we’ll make some forward looking statements and while we are 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 file with the SEC which include cautionary language.

Now turn it back over to Gary.

Gary Rodkin

Thank you Chris. We are very pleased to announce today’s agreement to acquire Ralcorp which we believe is highly compelling, strategically and financially. Before I go into some of the highlights of this transaction, I’ll summarize the key financial terms. Our agreement is $90 per share in cash which represents a 24.9% premium to Ralcorp’s 30 day average closing price. This implies an equity value of $5.1 million and an enterprise value of approximately 6.8 billion including assumed debt. The transaction has been unanimously approved by both company’s board of directors. With Ralcorp, ConAgra Foods will be one of the largest packaged food companies in North America and the largest North American private label package food business. We see a significant value creation opportunity from integrating Ralcorp into our business overtime. We are excited about the top line growth potential of the new company and I’ll say more about this later.

This opportunity also creates scale and drives efficiencies; especially we expect run rate cost synergies of $225 million by the fourth year after closing. This does not address revenue growth potential which I’ll discuss later in this presentation. The acquisition strengths our top line and EPS growth potential over the long term and we expect it to be accretive to EPS in year one. We current expect the transaction to close by March 31st, 2013 subject to regulatory approval and approval from Ralcorp’s shareholders.

As you know, private label is a strategic growth area for us and Ralcorp is a company that’s a great fit for that strategy. I am pleased to say that the agreement process was a friendly collaborative one. We’ve enjoyed getting to know Ralcorp’s senior management team. We have great respect for them and we understand the compelling product offerings Ralcorp brings. This makes us very comfortable that we can deliver on the promise of this combination. The transaction enhances our position as one of the largest packaged food companies in North America. Together, we’ll have net sales of approximately $18 billion and more than 36,000 employees. This transaction gives us an even stronger platform across sales channels and price points, increasing our importance with customers and suppliers. Together we’ll be the largest private label food manufacturer in North America, a clear leader in this business segment that’s growing faster than branded food.

When you take our existing $950 private label business and combine it with Ralcorp, we’ll have net sales of approximately $4.5 billion in that business segment. We’ll be able to capitalize on the long term growth momentum in the private label business which has been growing about twice as fast as branded on $1 basis over the last 13 years and create a stronger platform for long term growth.

Ralcorp enhances ConAgra Foods position in several attractive segments which are highly complementary to our existing offerings. Ralcorp is the private label leader in a number of large and growing segments including cereal, pasta, crackers, jams and jellies, syrups and frozen waffles. When we look at our two businesses, there is minimal overall between the branded and private label offerings which we expect will help us present a balanced portfolio to our customers. We also see a significant opportunity to leverage the CPG capabilities that we have to derive sustainable profitability growth within our private label business.

As you may recall, we approached private label in a very consumer centric way with a CPG mind set. We have a deep understanding of how to deliver value to the customer and consumer and our approach is always driven by sharper and consumer insights. We’re also able to use the operating capabilities that ConAgra Foods has developed and strengthened in recent years across all parts of our business such as our productivity, procurement and risk management expertise and our strong research, quality and innovation platform.

In addition, both of our organizations have prioritized food safety and together we believe that we can food safety an even stronger differentiator with our customers. And again, we are very pleased with the expected financial benefits to our shareholders that this transaction brings with good cost energy potential overtime, an EPS accretion from the start excluding onetime costs.

I am sure most of you are familiar with Ralcorp, but let me give you a brief overview of the business. Ralcorp is a leading private label packaged foods company with approximately 10,000 employees and operations in the US, Canada and Italy. I should note that Ralcorp uses the terms private brand rather than private label, I will use private label for consistency in this presentation. Ralcorp operates in large segments that are key to the customer and consumer. With sales of $4.3 billion in 2012, it operates in two business segments today with four major lines of business.

Turning to the Ralcorp food group first, which accounts for about 75% of Ralcorp sales. Ralcorp’s food group houses three of Ralcorp’s segments and is really their center of the store private label business. They have a strong line-up of offerings and segments that we think are attractive long term and are certainly staples in American households from ready to eat cereal to pasta to a range of products under the Snacks, Sauces and Spreads umbrella. We think this full product line will make our combined businesses strategically well positioned to partner with our customers, to solve a range of their needs all from one manufacturer.

The frozen bakery products business segment represents about a quarter of the business or 1.1 billion of sales. This falls into three main lines. First, there is a retail business which is frozen private label products such as frozen waffles and refrigerated dough business that Ralcorp acquired about a year ago. The in-store bakery business is the largest supplier of cookies and part (ph) baked breads in North America. This includes the Lofthouse brands which is the largest cookie brand in the in-store bakery.

Finally, in the food service business line, Ralcorp is a leading supplier of national quick serve restaurants, food service distributors and casual dining chains. Ralcorp does business with virtually all the top retailer in North America, as well as many quick service and food service distributors which we find very attractive in terms of being strong at retailers that are growing well ahead of the overall industry.

At this point, I’d like to ask Kevin to add his thoughts. Kevin?

Kevin Hunt

Thanks Gary. I want to echo Gary’s sentiment and say how excited we are to be here today to announce this combination with ConAgra Foods. This is truly an exciting day for Ralcorp, our shareholders, our employees and our value customers. We have had a very busy few weeks as you might imagine. Our discussions with ConAgra Foods have not only been productive but have been very positive in terms of the two teams getting to know each other and gaining and understanding of the commonalities we have. We think this combination will be a great fit.

We also believe this combination with ConAgra Foods delivers immediate and compelling cash value to our shareholders and offers significant benefits to our employees and customers. This transaction is the combination of our efforts to create shareholder value. We believe that now is the right time to join with ConAgra Foods and take our business to the next level.

By combining our position as the leader in private brand food production in North America, with ConAgra‘s strong leadership in position in branded package food, we are confident that the combined company will be better positioned for long term success. As a part of ConAgra Foods we will also be able to offer our customers a wider, more attractive portfolio of products.

I'd also like to take a moment to express my appreciation for the hard work of our dedicated employees. We have an extremely talented group of people working at Ralcorp which has enabled us to grow the company to a position of strength. As part of a larger diversified organization with the necessary scale and resources to be a leader in today's rapidly evolving marketplace, we expect there will be significant benefits for Ralcorp employees over the long term. Following the close of the transaction, I look forward to working with the Ralcorp team, ConAgra Foods executives and the integration teams to ensure a smooth and seamless transition.

I am sure you realize that also this morning we announced our fourth quarter results. We issued our results in a press release and our 10-K will be available shortly. We request that you keep your questions focused solely on today's announcement about our exciting combination with ConAgra Foods. If there are any further questions regarding our earnings results, please feel free to follow with Scott Monette or Matt Pudlowski offline.

With that, I'll turn the call back over to Gary.

Gary Rodkin

Thanks Kevin. Let me now turn to slide five. In regard to private label overall, we have been clear for a long time that we believe value is here to stay at the supermarket and at the food isles. We think private label is ideally positioned to capitalize on this long term trend and that’s why it’s been one of the three accelerated growth billers in our recipe for growth strategy. Industry data shows that private label in the US has grown market share regardless of the economic cycle. If you look at the chart on the left of the left of this slide, you can see that private label has outperformed branded almost every year since 1998.

Branded compound annual growth over that period was up 3% in terms of year-over-year dollar sales growth. For the same period, private label compound annual growth was up 6% or three points higher than branded growth. In relative to many economies in the developed world, we believe there is a long runway ahead. As you can see from the second chart on slide five, private label in the US only represents an 18% share of the overall packaged food market to we see significant upside over the long term.

Turning to slide six, as I mentioned earlier, these charts show Ralcorp’s leadership position in large attractive segments. Of the many segments in which it participates, Ralcorp holds the number one or number two position in 85% of them. There are 14 segments where Ralcorp is number one, as you can see on the right of this slide. I am not going to list them all but clearly the position of Ralcorp’s offerings is exciting for future growth prospects.

I wanted to pause to comment on Ralcorp’s recent performance. You’ve likely seen (inaudible) release and while I am not going into those specifics, we recognize they faced some headwinds in the recent quarters. We understand the short term challenges the business has worked through and are encouraged by the company’s business plans and initiatives going forward. We are confident that this is a good business for the long term and with our combined experience, we expect the business to continue to grow.

We also see a very strong fit between the two company’s capabilities. Ralcorp has an advantaged category presence and a private label leadership position, a fast, efficient emulation capability, a deep industry knowledge and relationships. These all fit very well with and will benefit from the capabilities that ConAgra Foods has developed over the last five years. The combined company will have a sharper and consumer inside driven approach, a partnership that we have with our customers to drive growth, our focused and proactive approach to consumer and commercial product innovation, a total margin management approach which helps us to manage complexity such as that within supply chains, to optimize margins. We also have a proven track record of reducing cost and improving processes on a continual basis and of course we also have unique experience managing both branded products and private label.

Together, we believe there is an exciting opportunity to further capitalize on the opportunity in private label and be a preferred strategic partner to our customers while delivering food consumers love. In terms of size, we’ll have top five supplier status with many of our key retail customers, we’ll be a leader in attractive growing segments plus have significant positions in large and fast growing channels of retailers and combining Ralcorp with our business will also augment our product capabilities for our commercial customers. We believe there is a significant strategic growth opportunity from applying our CPG capabilities to Ralcorp’s existing business and leadership position in a very fragmented private label sector. As with any major transaction, we recognized that integration doesn’t happen overnight. We are realistic about the work ahead and we’re very confident that our team together with Ralcorp’s talent has the experience and focus to execute in a highly efficient manner.

With that background on the attractiveness of private label for us, let`s look at the total picture for ConAgra Foods going forward. We have a strong belief that a balanced approach across the branded private label and commercial segments of the food business will enable us to best address the full range of consumer and customer requirements and allow us to better adapt to changing food industry dynamics over time. As you can see from the pie chart on slide eight, our performance sales mix with Ralcorp will be 43% branded, 32% commercial in food service which includes our strong Lamb Weston potato business and a large part of Ralcorp's Frozen Bakery business, and 25% Private Label.

As we've told you before, we are keenly aware of the differences between the branded and private label and we are already operating effectively today with both. There is little category overlap between our branded and private label portfolio and that has always been our strategy. We remain fully committed to our Brands and that's clearly the largest part of our business.

We're laser-focused on continuing to execute against our core business, while also taking advantage of the new scale in Private Label this transaction will provide. While this transaction makes us the leader in private label, it also enhances our commercial and food service offerings and capabilities.

We believe that our operating capabilities can be leveraged efficiently to add value to each part of our business to deliver faster, profitable growth across our balanced portfolio. With that, I'll hand it over to John to cover the financials.

John Gehring

Thank you Gary. I would like to address some of the key financial elements. This transaction, which delivers an attractive premium to Ralcorp's shareholders, also is highly attractive to ConAgra Foods shareholders in terms of financial benefits. We expect to achieve strong financial returns and to generate value through attractive cost synergies. We have also secured committed financing.

Let me take each one of these in turn. First, and importantly, we see this transaction as giving us an enhanced platform for growth over the long term. And I want to be very clear; this opportunity is about accelerating our organic top line growth over the long-term.

As you've seen, private label is an attractive growth area and now, we're positioned to capitalize on that. We expect the deal to be accretive to EPS in year one with increasing accretion overtime as synergies phase in and we expect to continue to generate strong operating cash flows.

We also see significant value creation potential from cost synergies, which we expect to reach around $225 million per year by the fourth year. These will be primarily driven by supply chain including procurement efficiencies and I'll provide some examples in a moment. The transaction is expected to be financed by cash on hand, existing credit facilities and new borrowings. We have fully committed financing from Bank of America Merrill Lynch and expect to secure attractive interest rates for new debt issued. We remain fully committed to our investment grade credit rating and consistent with that commitment, we expect currently to issue up to $350 million of equity to provide flexibility.

In the near term, we also expect to maintain our annual dividend of $1 per share and significantly reduce share buybacks while prioritizing rapid deleveraging. And so while we still need to finalize the specifics around financing and some of the transaction related accounting, we are confident that acquiring Ralcorp will strengthen our growth rates as well as our cash flows over the long term. We will provide further updates on the potential benefits to our financial outlook and our algorithm in due course as integration plans, the pace of expected synergies and the financing components of the transaction are finalized.

Now let's discuss what we believe are strong cost synergy opportunities. As we've mentioned, we expect to be able to deliver strong cost synergies by leveraging the capabilities that ConAgra Foods has developed and with the assistance and experience of the Ralcorp teams. The synergies will come primarily from supply chain across procurement, manufacturing and logistics.

For example in procurement, we expect to optimize a common supply base where the overlap is very significant and to leverage the relationships and capabilities we have in our commercial platform to drive cost synergies.

In manufacturing and logistics, we intend to implement our efficiency and productivity programs, which have helped us deliver strong cost savings results year after year. There will also be some areas to reduce corporate overhead in SG&A although that is a smaller portion of the savings that we are planning. Like all of the integration areas, we will be very thoughtful and very deliberate, moving forward and we will certainly utilize the expertise of Ralcorp as we determine together the best way to create more value from our two businesses.

We are planning for those synergies to phase in over time. And the run rate of $225 million should be reached by the fourth full year after acquisition or fiscal year 2017. The key for us in this transaction is to retain and leverage expertise from Ralcorp, while we also leverage what we know from creating a true operating company so that the result is a very smooth integration that drives sustainable, profitable growth for the long-term.

And now, I'll hand it back to Gary.

Gary Rodkin

Thanks, John. Before concluding, I want to briefly outline why this is the right time for us to take this important and strategic step and why we believe we can execute and capitalize on the attractive opportunity it presents. Over the past 12 months, we've completed five acquisitions and we've used each one to evolve and enhance our integration capabilities. Along with our total company transformation, we now have significant experience managing the transition to one true company. We're confident in Ralcorp's expertise and fully intend to leverage the experience of both companies' leadership teams. We are also fully committed to dedicating the appropriate resources, both internally and externally to ensure a smooth transition. We have a clear strategy that balances growth from the core as well as new opportunities across branded, private label, commercial and international all while building a stronger, more engaged culture. And our team will continue to be focused on driving performance and growth in each of our existing businesses.

In conclusion, I want to reiterate what an exciting day this is for us and how pleased I am to be in a position to add such a promising organization and an on-trend business to our portfolio. We are clearly very optimistic about our future and I have a lot of confidence about Ralcorp being part of ConAgra Foods. This addition will help us from a scale perspective and importantly, help us accelerate top line growth.

Together with our product offerings, we will be among the most attractive in the food industry today and our balanced portfolio of brands, private label and commercial businesses will position us as a very important strategic partner for our customers and help us deliver food that consumers love. We see meaningful upside potential from leveraging our CPG capabilities in the Private Label sector and significant value creation potential from continuing portfolio momentum, attractive cost synergy opportunities and strong cash flow generation.

Finally, we believe strongly in the long term strategic rationale of this transaction and believe it creates compelling value for the shareholders of both companies.

With that, John, Kevin, Chris and I will be happy to take your questions.

Questions-and-Answers

Operator

(Operator Instructions). And it looks like our first question comes from Andrew Lazar with Barclays Capital.

Andrew Lazar- Barclays Capital

I guess my question would be, you know what does ConAgra see today that perhaps it may not have seen last year that prompted a higher offer for the remaining part of Ralcorp particularly given the past year and the overall obviously food industry and private label in particular as you mentioned earlier, Gary, has been a bit tougher. And Kevin, do you think the changes we have seen in private label are structural changes or just as Gary mentioned some shorter term issues that you can kind of see your way through the next year looking better?

John Gehring

We're focused right now on the deal that was available to us and the deal we did now and we're obviously very excited about that deal. I guess we weren't necessarily going to get into trying to decompose history of what did or didn't happen a year ago, but obviously from a shareholder value, what we think we can do with this combined business and the value it creates obviously, we're very excited about the value there. I'll turn it back to Gary just maybe to comment on some of those value drivers.

Gary Rodkin

Yes Andrew I would say this is an extremely compelling deal. You know that over many years, private label has grown faster than branded. Ralcorp clearly has leading positions. Most of them number one, in attractive growth segments. Over the long-term, Ralcorp has demonstrated really good organic growth and when you combine their strong marketplace positions and scale in private label with our CPG capabilities like innovation and category management and our supply chain productivity, customer service, etcetera, then you have got a very powerful story in a very fragmented private label industry and I should also point out, the fastest growing customers in the food industry are those that put the highest priority on private label or their own store brands.

Andrew Lazar- Barclays Capital

Got it. Got it. And then just as a follow up. I guess some of what we've seen over the last year or so, whether it be from Ralcorp or TreeHouse obviously, it's been tough for the industry as a whole. Your comfort Gary, that what you see is sort of the organic growth opportunity of private label going forward is still as robust as perhaps it has been overtime, rather than what we've seen maybe in the last year or so.

Gary Rodkin

Yes, I absolutely do and I won't repeat what I just said, but we believe very, very strongly from many different perspectives, whether it's looking across the pond or over our Northern border at developed economies that have much higher percentage of private label sales, we see that trend continuing.

We see the customers that are the highest in terms of private label penetration growing the fastest. And I'm sure you know who those are. And most importantly, this is a very, very fragmented industry where we believe the direction strategically that customers want to go with their store brands is much more of a CPG approach. And those are capabilities that we've worked hard over the last years to develop and that's going to be the big leverage that we've got.

Operator

And we’ll now move now to David Driscoll with Citi.

David Driscoll - Citi

I would like to ask a couple of questions on the RAH business. I don't cover that company, so forgive me Kevin, if there is a few questions that other folks might know. First one, in the press release this morning, I don't think I saw a total debt number or a weighted average interest rate. Could you provide that?

Kevin Hunt

That information will be available in the K, which should be out in the next few days. So I would defer to that in terms of the debt number and the interest rates. I just think that's going to be more accurate.

David Driscoll - Citi

That's fine. The reason for the question is, is that there is a big piece of assumed debt here. And I at least, got the sense from looking through your financials that the interest rate you have on this debt is quite high. John, I don't know if can you speak to this at all and just help us understand how when we think about the accretion dilution models for next year, is that the right way to do it, just take the assumed debt at the current weighted average interest rate for Ralcorp and then combine it with whatever our expectations are for the market rated debt that you'll get when you issue to complete the transaction?

John Gehring

Well David, first thing I'd say is, while certainly we've got a number of different models and scenarios are running around the capital structure of the combined company, I would say part of the decisions we're working through is just what parts of the debt do we assume, what parts of the debt do we not assume. And I would say all of that is still being evaluated. I think over the next couple of months or the period here to close, we are going to be working on finalizing that structure and I won't tell you how to build your preliminary models, but I would just advise that there could be some impacts from this decisions we make around the final capital structure. Maybe if I could be a little bit helpful, as you look at all of the new debt that we will likely issue, we certainly would see an interest rate south of 4% on an average basis there.

Operator

And we’ll move now to Bank of America’s Bryan Spillane.

Bryan Spillane - Bank of America

Just a question or maybe a clarification, so in addition or in the context of the $225 million run rate on cost savings, is that on top of whatever on-going productivity programs were occurring at Ralcorp? And then also, what your expectations were for ConAgra. And I think we were using a run rate on savings of about $225 million or $230 million at ConAgra. I'm not sure what it would have been at Ralcorp. So I guess if we can just talk about the cost savings in terms of, are the synergies on top of what the on-going savings programs were or is it inclusive of that?

John Gehring

Yes, Bryan I think, short answer is, it would be on top of what our respective individual cost savings programs are. I would note that in our process, we have been very careful not to double count the cost savings from the programs that the Ralcorp team has been working on. Certainly, we're going to continue to evaluate all these pieces. But with the collaboration we've had to date and the information we've gotten, we feel very comfortable that the 225 is an incremental number and it doesn't have any issues with double counting.

Bryan Spillane - Bank of America

And then, Kevin, I don't know if you've communicated at all publicly to investors just what the size of the on-going productivity at Ralcorp, what it has been?

Kevin Hunt

Yes, we have. There has really been our ACR projects, which we have been talking about actually for the last 18 months to two years and that's been out there. The most recent one is the consolidation of three of our smaller business units into our Ralcorp Food Group, just creating a larger center store business and we have communicated that we will be realizing between $28 million and $31 million in savings in our fiscal 2013. So those are really again, the two cost pieces that have been communicated thus far.

Operator

And Ken Goldman with JPMorgan has our next question.

Ken Goldman - JPMorgan

I know we don't want to get into too much detail here, but can you help us a little bit for modelling purposes understand a couple of things. Number one, what should we model in, roughly for the pacing of the cost savings over the next four years? The ones that you called out today from the acquisition? And number two, can you help us understand again for modelling purposes a little bit, will there be additional amortization beyond just what's the sum of in the two companies' P&L's today?

John Gehring

Let me start with I think what are the big pieces that still need to be refined from our standpoint and might provide a little colour, why we are not going to get into too much granular detail. But clearly, the final cost and structure of the financing plan, we are still doing work on the pace of the synergies. We are obviously beginning some very serious work with the Ralcorp team around detailed plans and timetables for integration and the purchase price allocation. And on that point, while I don't have much to offer right now in terms of the pace of synergies, what I would tell you with respect to process price allocation, we would expect there to be likely some significant additional amortization expense driven by the requirement to allocate a fair amount of excess purchase price to amortizable intangible assets.

So I think all of this is work that we certainly are going to be doing and I think as we get beyond close, I certainly have every expectation that we'd be in a position to share a lot more details about these specific steps, but also how we see this affecting our outlook and any impact on our algorithm.

Ken Goldman - JPMorgan

Gary, many companies have tried to marry brands and private label over the years. Most frankly, have given up on that including Ralcorp, with Post because of the different skill sets needed to run those businesses. So can you maybe help us understand, what have you learned from the companies that have tried this in the past? What do you plan to do differently than they did to make this marriage work? And specifically within that, I think you touched on this a little bit, what does it mean to you to apply a CPG model to private label sales and distribution?

Gary Rodkin

Yes Ken, I think the most compelling evidence is that, we've got a $950 million private label business today. We've been running that for years. We've made acquisitions. And we have very, very little overlap between our branded products and our private label products. That's our strategy. So we did not intend to go at a strategy that would have us in both branded and private label for the most part, that is not our strategy.

So, I think the most compelling evidence is, we run the business today, we know how to organize to do that. It's really working backwards from what the customer needs. That comes first. And we've been very successful at that. We've also been successful in integrating our recent private label acquisitions so we think we've got our own very, very good and robust long-term test market for doing that.

In terms of CPG capabilities, what do we mean? A whole host of things that would probably start with innovation. The private label industry, for the most part, has been more emulation oriented and certainly, that is a big piece of the business that will continue. But as customers evolve, they clearly want to drive business with their own store brands and drive loyalty with their own store brands and we've got, again, a not so little test market of our own in the bar business where we have worked with several of our largest customers to create new, not just emulate product, but to create new lines for them. They are in the marketplace now and doing well. So we intend to very much leverage what I would call, best-in-class innovation capabilities and bring that to private label. That would clearly be up near the top of the list.

Other things, like the way we do category management, how we manage our customers, certainly on the supply chain side, procurement, logistics, etcetera. So across the board and the margin management approach that we take, across the board, I would say we've got very strong foundational capabilities that can impact everything from procurement through packaging and that is going to bring to bear, I'd say in an extremely positive way. We expect very positive reaction from our customers when we bring this to them. And in a very, very fragmented industry, we think this will make us unique.

Operator

And we’ll move now to Jonathan Feeney with Janney.

Jonathan Feeney - Janney

I think the one question I had is, when you think about some of the fragmented industry Gary, certainly it's a huge industry and absolutely is fragmented. But many, many parts of that would seem to either not have a barrier to entry, not have significant scale. I mean if you ran a few metrics like that, how many total deals are there, what's the size of the market you think in terms of attractive potential consolidation targets in the future for the combined company are there? I mean is it half of the industry, is it a third of the industry? Just roughly speaking would you say.

Gary Rodkin

Off the top of my head, I would tell you that categories really matter. So that example I just used on Bars is a great example. So the value add and innovation opportunity categories are the ones obviously that would be the highest priority for us and we think there are a lot of them. But I want to turn that over to Kevin, because he is far more knowledgeable about the whole industry. Kevin?

Kevin Hunt

Our calculation is that the US private brand food and beverage business is about $100 billion in total retail sales and that the consolidators, if you will, which would be ourselves and you've got folks in the meat industry, dairy industry, we account for about 20% of that. So that clearly says that there is a lot of opportunity and that it is fragmented. I think to your question, though, there are probably certain areas where it might not be as fertile in terms of a roll-up opportunity, but I would still say in general, there is you know significant opportunity. We made four acquisitions in 2012. It's been a fertile area. But I would absolutely agree with Gary that categories are critical here. And what the dynamics are, what the barriers to entry are, all of those things are extremely important considerations as you think about the acquisitions in this space.

Gary Rodkin

One last thing there, this tiering of good, better, best that you see even in places like (inaudible) in Canada, is really something to think about as we go forward. Again, we see private label going up market. Clearly, there will always be the pure price play. And we will participate in that as we need to but our eyes are set really on looking toward that good, better, best and we've got a very, very disciplined assessment process for the categories that we're going to participate in for M&A.

Operator

And we’ll take a question now from Rob Dickerson with Consumer Edge Research.

Rob Dickerson - Consumer Edge Research

Just couple easy questions, I guess. The first is, I know you said obviously, with the deal that you would be reducing your repurchase activity which makes sense. But should the definitive assumption be that the repurchase activity will be zero or could there be some, depending on what we see in the market?

John Gehring

I don't know that I'd say it's necessarily going to be zero. I'd say it's going to be pretty close to zero. And again, I think we would see this extending probably 18 or 24 months as we really prioritize cash to deleverage the balance sheet and get back to the credit metrics we'd like to operate with over the long term and also to provide us, to get us to a point where we can be appropriately active with M&A to continue our growth.

Operator

And we’ll move now to Chris Growe with Stifel Nicolaus.

Chris Growe - Stifel Nicolaus

I just wanted to ask a couple quick questions. The first one would be, I guess to Gary. With the size of your private label business today, I just want to get a sense of and I think you said this, how important scale is. Theirs is clearly going to be revenue synergies created from the combination of these two companies. I'm sure you can't quantify that. But just to get a sense of before, call it a $1 billion business for you, under scale and disadvantaged, if you will, at retail and now you're going to be, obviously, the largest scale in the industry. To what degree is that going to benefit ConAgra is my question?

Gary Rodkin

Yes. I would say that this is a huge plus for us. We've clearly been successful, but we only participate in a few categories with critical mass. This is going to put us kind of front and center with customers with a very balanced portfolio. So we will now have an extremely important branded portfolio for them, the largest scale with leading positions across many of their private label categories and we'll also be on the commercial and food service side of our business much bigger with people like a McDonald's or a Cisco. So we see this as a major, major step-up in terms of our importance with customers on the private label side. We think there are many benefits to be had from bringing that all together.

Operator

And we’ll take a question now from David Palmer with UBS.

David Palmer - UBS

Gary, you were just touching on this a little bit when you were talking about Cisco and McDonald's. But both of these companies have relatively large food service businesses. I mean specifically, what sort of synergy story would there be with your food service businesses, obviously I think McDonald's is probably the biggest customer for each company, but is there specifics with regard to distribution synergies and then ultimately selling synergies?

Gary Rodkin

Well clearly we've got a very large business, let's say, for instance with McDonald's with Lamb Weston, a very big business. And Ralcorp has a very big business with McDonald's as well. So when you put those two together with such an important, growing global customer like a McDonald's, clearly that is very helpful for us. We've got to learn much more about how to leverage the business. But one area in particular that will be dramatically strengthened is an important day part in breakfast which Ralcorp plays big in, in customers like a McDonald's.

Operator

And we have a question now from Akshay Jagdale (ph) with (inaudible).

Unidentified Analyst

Just two questions regarding your long-term targets. Does this deal enhance your organic EPS growth profile? And if so, why? Because from us following private label companies and we follow both TreeHouse and Ralcorp, organic bottom line growth has been non-existent pretty much, especially in the last couple years. So, that's the first question. And second, how should we think of ROIC? I mean it looks like this deal, $6.8 billion EV is going to be hard to imagine it will be accretive to your 13% to 14% ROIC target. So how should we think of that going forward? Thanks.

John Gehring

First of all, in terms of the impact on our long-term growth, certainly we believe top line and bottom line overtime, this will be accretive to our long-term growth. And fundamentally we believe, while we've got some integration and there is going to be a ramp-up here, fundamentally, we think bottom line will follow top line and we think this adds a nice growth factor for us for the top line.

From an ROIC perspective, certainly as you see with most transactions like this, we will take some kind of hit upfront on our ROIC. But we're really focused on the long term and we do expect that over time, as we complete the integration and we reach full rates of synergies, that we believe that we will see our ROIC move back up into the ranges where we would like to see it. So that will take some time, but we're confident we'll earn back our cost of capital.

Gary Rodkin

Let's make no mistake about this. This is a compelling deal both strategically and financially. This is a great long term play. We would not have the kind of excitement and extremely strong support from our board if it were not the case.

Operator

We’ll move now to Jefferies, Thilo Wrede.

Thilo Wrede - Jefferies

Gary, if understood you correctly, there are no plans to take some of the private label production or manufacturing expertise you get with Ralcorp into your own branded business or vice versa in extending categories on the private label side. Are you leaving synergies or opportunities on the table by not considering selling some of your branded products in the private label world or taking some of the private label products and introducing them under your own brands as well?

Gary Rodkin

Yes. Thilo again, we are not looking to embrace that as a strategy to compete with ourselves. However, there are core capabilities that don't necessarily mean we'd have to compete in the exact category or segment, but that could be applied from potentially the Ralcorp capabilities and platforms into our branded space and vice versa, but not necessarily competing with each other. So there are clearly production, technological capabilities that we can and will look at.

Operator

And Alexia Howard from Sanford Bernstein has our next question.

Alexia Howard - Sanford Bernstein

Can I ask about channel exposure? Gary, I think you alluded to the potential for this deal to bring you more exposure to may be faster growing channels. I think, 18 months ago, you mentioned that the private label developments at Whole Foods and Trader Joe's specifically. As you look at this deal, does it bring you a very different channel mix either at the low end with the dollar stores, club stores and so on or at the higher end amongst those the Whole Foods and Trader Joe's of the world. How does it look to you at this point?

Gary Rodkin

Yes. Alexia, I can tell you, it clearly is a big win for us from a channel standpoint. Two examples I could cite off the top of my head where Ralcorp plays really big are Costco and Trader Joe's, which are both right in the wheelhouse of that growth. So I think you are spot on. This is a big win for us when we combine the companies in terms of our presence at growing channels.

Operator

And we have a question now from Robert Moskow with Credit Suisse.

Unidentified Analyst

It's Rachel in for Rob. So my question's actually also on synergies. Last year, the estimate was about 250 million in three years. And today the estimate looks a little lower. Of course now you have better clarity, because a year ago you didn't have the books and there are some other things going on with individual company cost savings plans, but what else has changed?

John Gehring

I'd say a couple things to keep in mind. First of all, the company, a year ago that we were looking at was a different company. It included the Post business, so it was a larger business and larger base of cost to work with. I think the second thing is that, as Kevin has alluded to and we also have alluded to is that Ralcorp has embarked on their own cost savings initiatives within the last year to drive some cost out of the business. So I think the combination of those two things are very significant. But yet we still think the level of synergies is attractive from a value creation standpoint.

Operator

And we’ll move now to Greg Hessler with Bank of America-Merrill Lynch.

Greg Hessler - Bank of America-Merrill Lynch

So, when I model this out, I'm getting gross leverage a little bit higher than four times which is somewhat high for investment grade. So I really have two questions. One, you mentioned a very specific (inaudible) million equity ratings number. Have you (inaudible) this transaction with the rating agencies? And if so, are you expecting any impact? And then two, what do you think your mix will be between short and long-term debt? And how do you plan to delever over the coming years? Thanks.

John Gehring

First thing, I would comment is, we have worked closely with the rating agencies and we are very confident that the financing structures that we are evaluating and what we will ultimately implement will achieve investment grade rating. Just to clarify the point on equity, at this point we are evaluating various financing structures. Our estimate right now is that we would likely issue up to $350 million of equity. And I think I forgot the last point.

Gary Rodkin

It would be the pace of cash flow deleveraging.

John Gehring

Yes. So, the deleveraging, I would say first of all, as I've alluded to earlier, that is going to be a priority for our cash flows. These are two companies that are combined, we expect to generate good cash flows. And I'd say from a ballpark standpoint, we would probably estimate taking out $1.5 billion to $2 billion of debt over the next two plus years.

Operator

We’ll move now to Priya Ohri-Gupta with Barclays.

Priya Ohri-Gupta - Barclays

I was hoping that you could just elaborate on what sort of credit metrics and specifically ratings you are targeting following sort of the 18 to 24 months after the transaction as you alluded to the fact that you want to get to a point where you can again re-engage and sort of emanate and support the growth profile.

John Gehring

Yes. I guess, generally, what I'd say is, we're certainly targeting, through the deleveraging, we're certainly targeting to get credit metrics over the next two years or so back into really the same neighbourhood as we've been operating for the last several years. I don't want to necessarily promise ratings, because I don't control all of that equation, but certainly to get back into the BBB flat range, where we've historically operated would be a reasonable target or expectation.

Operator

Again, our final question today will come from Todd Duvick with Stifel Nicolaus.

Todd Duvick - Stifel Nicolaus

Maybe just one follow-up question on free cash flow. It looks like your cash flow has been somewhat depressed over the past year and I guess it's largely because of somewhat weak earnings. Can you talk a little bit about what you're doing John, this year to increase your cash flow or if you expect cash flow to increase going forward compared to where it was in 2012, maybe getting…

Gary Rodkin

Yes, Todd I think so first of all, the cash flow number that you're probably looking at from FY12 was not a function of really earnings or working capital. The biggest impact on the operating cash flows, if you're looking at the GAAP financial statements, was really just the impact of a significant pension contribution we made which goes through operating cash flows, but we view that as deleveraging. And I think if you go back and look at our comments from the end of the year, you'll see that we address that. But we would have seen last year's operating cash flows adjusted for that pension item to be in line with the $1.2 billion to $1.4 billion that we've consistently delivered over the last several years.

Operator

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

Chris Klinefelter

Thank you. Well this concludes our conference call. We appreciate your interest in our company and as always, we are available for further discussions via phone. Thank you very much.

Operator

This concludes today's ConAgra Foods to Acquire Ralcorp Holdings Conference Call. Thank you again for attending and have a good day.

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