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ConAgra Foods, Inc. (NYSE:CAG)

February 19, 2013 9:15 am ET

Executives

Gary M. Rodkin - Chief Executive Officer, President, Executive Director and Member of Executive Committee

André J. Hawaux - President of Consumer Foods

Paul T. Maass - President of Commercial-Foods

John F. Gehring - Chief Financial Officer and Executive Vice President

Chris Klinefelter - Vice President of Investor Relations

Analysts

David Driscoll - Citigroup Inc, Research Division

David Palmer - UBS Investment Bank, Research Division

Kenneth Goldman - JP Morgan Chase & Co, Research Division

Akshay S. Jagdale - KeyBanc Capital Markets Inc., Research Division

Unknown Analyst

Okay, good morning, everyone. If we could just find our seats, we'll get started with the next presentation. We've also got charging stations in the back of the room in that corner over there and then, on that side of the room over there, if everybody needs.

Thank you. It's my pleasure to welcome ConAgra Foods back to CAGNY. First off, please join me in thanking ConAgra and their whole team and all of the chefs that they brought down for sponsoring another really great cocktail reception yesterday evening. CAGNY very much appreciates all the support that ConAgra has given to this organization over the years.

As all of you know, ConAgra has some exciting developments this year. With the acquisition of Ralcorp, as well as solid results in its core business. Today, we'll hear from Gary Rodkin, CEO; André Hawaux, President of Consumer Foods; Paul Maass, President of Commercial; and John Gehring, CFO. And I look forward now to turning it over to Gary.

Gary M. Rodkin

Thank you, Andrew [ph]. Good morning. It's always great to be here at CAGNY and we hope that you did have a chance to enjoy our food and reception last night. We were pleased to be able to share some great products from many parts of our portfolio and we certainly, as always, enjoyed catching up with you.

I, of course, need to acknowledge that we will make some forward-looking statements and the various disclaimers are in our SEC filings.

Today, as Andrew mentioned, we'll have André Hawaux, Paul Maass, John Gehring and I discussing the progress on our Recipe for Growth, which serves as our strategic roadmap. And we'll also touch on our near-term financial expectations. As many of you know, our recipe focuses our growth plans in 3 major areas, which I'll touch on in a minute. But the biggest part of our strategic growth at this point, of course, is our recent acquisition of Ralcorp.

We closed that deal on January 29. It's a great deal and a win-win for both companies. This acquisition puts us on a stronger path strategically, as well as financially and we're all very excited about it. With Ralcorp, our annualized sales are approximately $18 billion and we've become a company with a significant scale in the faster-growing private brand arena. We're unique within our peer set with a portfolio now made up of about 45% branded, 30% commercial or foodservice and 25% private brands, giving us significant growth opportunities across many platforms and channels.

Regarding the deal, I'll talk in more detail about that in a minute and John is going to offer a few details on near-term financial expectations. What we ask you to keep in mind is that we are in the very early days of our integration following a fast close. So we don't yet have financial details to share with you about our longer-term financial expectations incorporating Ralcorp.

As I'm sure you can appreciate, this has been a very rapid process, which is great, but we have much more learning to do. Arriving at more financial details will take some time. We plan to offer the longer-term specifics as part of our fiscal fourth quarter earnings release this June.

To be clear, we expect Ralcorp to improve our long-term earnings algorithm. This is a great acquisition that will provide strong financial benefits. And John will fill you in on the near and upside later this morning.

So for today, I'd like to first update you on our Recipe for Growth, which delineates 3 marketplace focus areas for us, as well as 2 elements that are critical for success in today's world: having great people practices and being an outstanding corporate citizen.

I'll start by saying we're very pleased with our progress in culture and citizenship. Our focus on our people is paramount in everything that we do, and we're very pleased with the engagement and energy across ConAgra Foods in relation to delivering our Recipe for Growth.

In a recent survey, which nearly 3/4 of our employees completed, we received very high marks on company direction and strategy and understanding of their roles and achieving it. That creates clarity. The fundamental building block for an aligned workforce will give it their all every day. We are very proud of the kind of engagement.

We're equally as proud of the recognitions we've received recently in regards to our citizenship. For the second year in a row, we were named to the North American Dow Jones Sustainability Index and for the first time named to the World Index. This is a comprehensive measure of our governance, environmental, philanthropic, social and people practices. And this is a tough index to make.

This past year, we've also earned recognition from the Carbon Disclosure Project and made both The Civic 50 and the 100 Best Corporate Citizens list. This recognition provides credibility to our citizenship efforts and sets a very high bar for us aspirationally. A key component of our citizenship is our cause, which is fighting child hunger. We have been a leader in this space for 2 decades. It's a fight that our employees are happy to be in and we're getting more and more consumers involved as well through our Child Hunger Ends Here cause marketing.

In terms of marketplace focus, our strategy for growth begins with our core operations and strategic adjacencies. Keeping our core strong is very important, so we're focusing on adjacent categories and day parts that have more growth potential.

Next, international growth, where we already have critical mass with our potato operations and where we've broadened our retail brands with the acquisition of Del Monte Canada and by taking a majority stake in our India affiliate.

And finally, expansion in private label or private brands, which has increased fourfold, from an annualized net sales perspective with the recent Ralcorp acquisition. First, our core business and strategic adjacencies.

One of the biggest keys to long-term growth in our core business is to leverage our capabilities to become an even stronger partner with our customers. We're approaching this organically and through acquisitions, whether it's building on our frozen potato business's #1 position in North America by going big into sweet potatoes or extending our reach in frozen meals by growing significantly in multi-serve meals and frozen desserts or adding pretzels and pita chips to our snack business, we're building out our existing business in a way that strengthens our core offerings. While clearly smart acquisitions have played a huge role here in the past 18 months, so have world-class innovation and marketing. We believe we have some of the best in the industry. So you'll see from the examples that André Hawaux, President of Consumer Foods, will share. Now I'll turn it over to André.

André J. Hawaux

Thank you, Gary, and good morning to you all. Our best example of building on an already strong core platform is our frozen business. Through adjacencies, both organic and acquired, growth of our frozen business has been strong and we are very pleased with what we've accomplished over the last 5 years.

We are increasing everything from net sales to margin to share. Frozen meals and desserts make up a huge portion of a retailer's business with more than $10 billion annually in these categories in the U.S. alone. We believe with the consumer demand for economical, nutritious, convenient and great tasting food, the frozen food aisles are poised for a growth resurgence, benefiting from innovations like steaming and baked in the microwave technologies that you saw on full display last night.

Our baked from the microwave innovation platform is a great demonstration of our progress and commitment to the frozen category. You've heard us talk before about our successful Marie Callender's Bakes, where we've doubled net sales in fiscal 2013. And we've just recently introduced Healthy Choice baked entrées. They are doing well and I'm happy to say we were just awarded, based on a vote by PARADE magazine 50,000 American shoppers, the 2013 Product of the Year Award in the frozen entrée category.

This shows that our insights, along with our ability to apply innovative technologies to multiple brands on a platform basis, are very effective means of bringing news and driving sales growth in the category.

We purchased Bertolli and P.F. Chang's frozen business last August. The purchase provides us access to tremendous equities that appeal to a high-end demographic, expanding our reach in the frozen aisle. We plan to leverage these brands in combination with our technology platforms, such as baked-from-the-microwave, to deliver new products that we believe rival any prepared meal you would buy.

As an example, we will soon be releasing single-serve and the dual-serve offerings such as manicotti with vodka sauce, which we served last night. We're very proud of how these products taste and there's a lot of upside here. And if you saw last night from the demonstration that the chefs gave, you'll notice that one of the things that they did was they compared, side-by-side, what one of our premium offers was going to be price point-wise to what a local restaurant would charge for what is essentially the same meal. And I hope you saw that in the demonstration because it's quite a value that we'll be offering to consumers.

And while we're talking about the quality of the food, let's not lose sight of how quickly we added breadth to this portfolio. Innovating with speed is always critical, and with our platform technology approach, bringing strong innovation to recently acquired products is a huge advantage. In this case, it allows us to bring news to these recently acquired business within just a few months of having it onboard.

And for that, I have to take a minute to thank Al Bolles and our culinary team in terms of what they're able to do. We showed you a snapshot last night of some of our innovation that we have, but I can assure you that our pipeline is very, very full and you'll see us bring in a lot of innovation in frozen as we continue to do over the last several years. So thanks, Al.

We have additional plans for additional innovation with Bertolli and P.F. Chang's that will expand our frozen reach even further, and you saw that on display last night with Bertolli desserts, desserts like tiramisu, triple chocolate strata and limoncello that you had a chance to try last night. These dessert innovations help us expand across a wide variety of day parts as well as demographics. They went quickly last night and there's a reason for that. They taste fantastic and are truly authentic, made in Italy.

Expanding our presence in frozen desserts has been a key strategy for us and one that has worked very well. 3 years ago, we purchased American Pie, which added Marie Callender's dessert pies to our lineup. We now own the Marie Callender packaged food brand in its entirety, which is important for future expansion. Those assets have helped us build the largest and fastest-growing dessert pie portfolio in the supermarket. We've done that by having truly outstanding desserts and applying a lot of frozen category know-how. Frozen dessert pies are more than $450 million at retail, growing at 5% over the last 2 years, so high-growth category.

Eating occasions and consumers on the move are also impacting the frozen segment and presenting new opportunities. Frozen breakfast sandwiches have become an exciting category with strong net sales growth that has played a part in the growth of frozen breakfast overall. The frozen breakfast category has increased almost 30% over the last 5 years. Now leveraging the capabilities we gained with the purchase of Odom's Tennessee Pride, we are expanding our presence in the fast-growing breakfast category. Building off of Odom's technology and strong regional business base, we are using national brands like Marie Callender's and Banquet to introduce new products and take advantage of that trend. You'll see us get very, very big in breakfast sandwiches in fiscal 2014.

Now last night, I also lost a bet to Al Bolles because he also told me that this highbrow -- I told him that this highbrow crowd would actually not go for Banquet sliders, but based on your reception to Banquet sliders, and one of the things we want to do in rolling out snack platform out, you'll see a lot more Banquet sliders because most of were attacking the wait staff as they were bringing those around last night.

Now Marie Callender's is a stellar brand for us that has shown impressive growth. The source of this growth is organic via great innovation and marketing, as well as acquisitions like the dessert pie business I just spoke about. The net sales growth you see here, including a compound annual growth rate of 19% over the last 3 years, is complemented by share, volume and profit growth as well. Marie Callender's continues to hit on all cylinders. Now with Marie Callender's, one of the reasons for its success has been its consistent messaging based on insights that resonate with our consumers. Let me share with you 2 other purely organic examples of the great work our teams have done, both in the center of the store and in refrigerated categories: Hunt's, with a product point of difference, and Reddi-wip, with expanding usage occasion. Driving growth in the center of the store, where ConAgra Foods and our retail partners have a significant portion of our business is critical to delivering growth. The Hunt's brand, particularly canned tomatoes, is an example of where we have brought point of difference messaging and in-store program activation together, positively impacting the category and growing our share.

The insight on Hunt's is that consumers are really looking for wholesomeness in the package. It's all about natural and fresh taste. Our unique flash steaming process is a compelling point of difference for us. Also in-store, we've partnered with retailers to drive customized meal solution programs, leveraging the insight that a majority of consumers purchase canned tomatoes for a specific recipe or a meal occasion. The combination is working with category and Hunt's consumption trends showing strong upward movement and share gains.

Now let's take a look at a spot here where our Hunt's spokesman, Chef George Duran, surprising consumers with our natural and fresh taste message. Please roll the spot.

[Presentation]

André J. Hawaux

Now Reddi-wip has been a strong brand for us, delivering consistent seasonal growth. The challenge for our brand and sales teams was to leverage our real cream point of difference and expand purchase occasions outside the traditional fall and winter season when the bulk of the volume for that brand was sold. Building on the insight that consumers are really looking for simple and easy dessert solutions no matter what time of the year, our team developed a marketing campaign that works during all the seasons. It had several components: the first one is creating easy and compelling recipes to drive usage, such as fruit parfait. Secondly, secondary placements for Post Foods such as strawberries. Thirdly, partnerships with berry growers such as Naturipe Farms and lastly, cross-branding marketing programs with our own Marie Callender's pies and Swiss Miss Cocoa. We have expanded the way consumers think of and use Reddi-wip. It's working and the results are reflected in our consumption trends. The following spot highlights the use of Reddi-wip for an any-time occasion, one that you wouldn't actually think of. Let's roll the spot, please.

[Presentation]

André J. Hawaux

Okay, let me now turn it over to Paul Maass, our President of the Commercial business to talk about international expansion, another key ingredient in our Recipe for Growth. Thank you.

Paul?

Paul T. Maass

Good morning. Thank you, André. Our largest international presence and growth opportunities lie within our Lamb Weston frozen potato business, which is part of our Commercial Foods segment. We have the largest frozen potato products company in North America and the second largest worldwide, with approximately 1/3 of sales coming from international markets, taking into account our joint ventures.

We serve more than 2,500 restaurant, foodservice and retail customers in 120 countries in 6 continents. In fiscal 2012, Lamb Weston grew international net sales by 12%.

One of our key strategies for growth in this business is to align with the international quick-service restaurant growth, which, as you can see, is expected to increase by a total of 29% in international markets over the next 4 years. Lamb Weston is positioned very well to support this dynamic growth. We believe we can continue to be a leading strategic supplier to the restaurant chains that are present and growing internationally. And we are also leveraging our relationships with customers who are headed to emerging markets imminently.

As a result of the strong QSR growth, worldwide growth should increase by more than 2 billion pounds by 2017. This means that people across the globe will be eating over 25 billion pounds of frozen potato products each year. Now that's a lot of french fries.

So what's the driver behind this growth? With average potato consumption of less than 1 pound per capita in Asia Pacific, Middle East and Africa, and about 2 pounds per capita in Latin America, there is huge potential for increasing consumption in these important markets. As you know, fries and other potato products are loved across the globe. Here in North America, per capita consumption of frozen potato products is 27 pounds, so the other markets have a lot of catching up to do.

The share of proof point on fries sales in emerging markets, one of our casual dining customers that expanded in the Middle East tells us that their french fries sales in that market are about 30% higher than a typical U.S. location. Lamb Weston is positioned to meet customers' emerging market growth demand through our highly efficient, dual sourcing approach. For example, we leveraged low cost shipping lanes from Europe to service the Middle East and Africa, while the U.S. supply is advantaged for shipping to Asia.

In addition to our well-established operations in North America and Europe, local potato sourcing and production will play an important role in the future for these select countries where we expect the most growth. Our business model allows us to consistently supply our customers with cost-efficient, high-quality potato products to support their expansion plans.

Lamb Weston has been developing and expanding opportunities in China and other parts of Asia for more than 25 years. During this time, innovation has been a big area of focus for Lamb Weston and our customers, so we've created an increasing number of potato products specifically for international markets.

Today, we're using consumer and market insights to drive locally relevant innovation and ensure successful new product introductions. For example, asian moonz is a new potato product inspired by popular flavors and seasonings in China, where flavors include roasted onion, Indian style curry and sweet chili. That's just one example of many from around the globe that build on our very successful

[Audio Gap]

International growth prospects overall, both from our Commercial Foods and the Consumer Foods businesses. We chose to highlight Lamb Weston today as it's our biggest internationally, and we look forward to sharing more successes with you as we grow.

Now I'll turn it back over to Gary for comments on our private brand strategy. Gary?

Gary M. Rodkin

Thank you, Paul. And I can tell you, with absolute certainty, I have not met one person anywhere across the globe that doesn't like french fries, so big opportunity. Let me move on to some remarks about private brands, which is a key element of our growth strategy and where we have the most news lately, given our acquisition of Ralcorp.

As you know from our announcement on the transaction, we are excited about the strategic attractiveness of this business. Store brands or private brands have outpaced branded food in sales growth. While there will always be some ups and downs, we expect that outperformance to continue over the long term. The private brand opportunity is quite clear, given customer interests and consumer appreciation of value. This value mindset is here to stay regardless of macroeconomic trends. This is particularly true of basic goods and services.

We have great conviction about long-term private brand growth and know that there's a long runway ahead, particularly in the U.S. The U.S. is far from a mature market when it comes to private brands, and we are extremely well positioned to meet those growing demands from customers and consumers. This is a real differentiator for ConAgra Foods.

A large part of the opportunity for growth is the fact that private brands provide great value and have come a long way in terms of quality and consumer appeal. These are not plain label generics and the reason we have been -- we've started to call them private brands is because that's exactly what they are. They know retailer-centric equities that are carefully managed and run to complement branded products and help grow categories.

Some people may still view private brands as cheap generics, like what you're seeing on the left side of this slide. But that is absolutely not the way we see it. We're focused on high-quality products that retailers can be proud to call their own, products that help differentiate the store's brand equity, products that expand category appeal, products that help grow a customer's top and bottom lines.

We've been building our own private brand offerings for quite some time. Our private brand's footprint was nearly $1 billion before adding Ralcorp. Now adding Ralcorp, we are the largest private brand maker in North America with annualized sales of $4.5 billion.

As a CPG company with a proven track record of managing a strong private brands business, we continue to believe that we're in an advantageous position of having the capabilities to bring this unique product mix to the market in a way that drives accelerated and sustainable profitable growth. We continue to be laser focused on growth and growth opportunities as part of the necessary work to create a company that continually drives shareholder value.

I'm sure many of you have followed Ralcorp and are familiar with this business, so I'll just share a few facts. The retail product segments in which the Ralcorp product line competes are large and important. 70% of those sales are in product segments where we're #1, and in 15% more, we're #2. Those segments total about $40 billion in sales annually at retail. 12 of those product segments exceed more than $1 billion in sales each year. So that's a big presence in meaningful spaces with a lot of upside potential. The business brings leading assets in big product segments, from pasta making to refrigerated dough expertise to more than 100 years of experience in the cereal business.

Another reason this is a great fit is that ConAgra Foods and the Ralcorp portfolios have very little overlap. It made it all the more compelling that we could purchase good private label assets that don't compete with our branded products. So as you can see, Ralcorp brings ConAgra Foods' presence in many large growing areas where we didn't compete. Our relevancy with customers has increased because of our scale, our expertise and our portfolio that spans the grocery aisles. And we're also a big player in foodservice and commercial channels. And since we already have branded products in 97% of American households, I'm confident that we'll be nearly ubiquitous with our household penetration.

When we look at opportunities across our consumer branded and private label portfolios, one big benefit is that we can share and synergize input costs, leveraging our expertise and scale on ingredients. For example, we're one of the largest flour millers in North America and flour is a very big ingredient in the Ralcorp portfolio, leading to significant efficiencies.

We believe in the synergies and the complementary nature of these businesses while keeping a strong appreciation for the differences from a cost structure and marketplace perspective. And having a portfolio with very little overlap between private brands and consumer brands, in terms of the categories in which they compete, makes for the right mix. We're comfortable that these platforms can live together within the same company when managed correctly. And by that, we mean keeping the functions that need to be separate, separate and the functions that can be combined, combined.

It may go without saying, but I want to emphasize this point, that we fully intend to leverage the very strong assets and capabilities that Ralcorp brings. This will help us drive profitable long-term growth for our private brand operations and we have many synergies to explore. Some are traditional cost-based synergies, which John will say more about in a few minutes. And there are some interesting opportunities that will ultimately impact top line growth, which gives a CPG company a lot of opportunity to add value.

That won't happen overnight. And as you may know recent top line trends, even in private brands, have reflected some marketplace challenges, but over time we expect to help our customers grow key private brand categories by leveraging our scale and our CPG capabilities.

So what does that really mean when we say bringing CPG experience to the private brand space? Bringing our innovations, packaging, category shopper insights, shopper marketing. All of these things can help our customers grow in new ways. Transportation, warehousing and supply chain expertise are also areas where there are synergies between consumer and private brands. And adding Ralcorp to our joint business planning will bring a greater sense of top to top strategic partnerships with our key customers.

An example is the work we've done in private brand health and nutrition bars. Health and nutrition bars have propelled overall expansion of the bars category, posting an 8% compounded annual growth rate over the last couple of years. We've helped retailers take advantage of white space and growing consumer demand with strong insights work, innovation and category management expertise. This is a great story for nutrition bars in particular, where our private brand growth has outpaced a strong category. We will look to be a very close partner here with retailers and we see more opportunity ahead with this type of approach across more categories.

And how should we think about top line synergies? Clearly, over time, we'll bring our innovation and category management expertise into our private brand portfolio. And there are also customers where we aim to make our current ConAgra Foods presence combined with the Ralcorp presence to make 1 plus 1 equal 3. One example: a very large quick-serve restaurant chain. There, Ralcorp provides a significant number of the breakfast items, and through our Lamb Weston business, a mainstay particularly on the lunch menu. So while you might not consider french toast and french fries in the same thought, some of our customers do. It's coming together as one large strategic partner with innovation and service capabilities across a wide variety of products that will help us grow faster.

Leveraging our best-in-class innovation skill set, which cuts across a wide swath of product platforms, will certainly be a differentiator as retailers look to take their product offerings up market over time. This will clearly happen in a broader way. Just take a look at Tesco in the U.K., Loblaws in Canada or Trader Joe's in the U.S.

To make the point about upside from serving customers with world-class CPG capabilities in private brands, let me offer you some customer feedback when the deal was announced. They're offering this feedback because they know that we'll bring the capabilities that will help them grow in a very important area of their business. We'll soon be embarking on a round of customer visits to take this dialogue to the next level. We'll be delivering a compelling story intended to help bring a new perspective on the benefits of a large scale, broad-based partner in a very fragmented private label industry. This transformation certainly will not be quick or easy. But again, over the long haul, we are very confident in the strategy being a win-win for both us and our customers.

It's clear to us that the acquisition of Ralcorp, along with the strengthening of our core business through strategic adjacencies and our expanding international footprint, positions us for stronger growth with important customers. We have a unique portfolio in the food industry, and it's one that we believe is incredibly compelling in today's marketplace. The balance of consumer brands, private brands and commercial businesses provides strength in many different sectors and positions us for stronger growth with customers.

We are obviously very committed to accelerated growth, whether it's organic or from acquisitions. We believe that our roadmap, our Recipe for Growth, is the right way to build a great future. Given that we've only been on this path for less than 2 years, we're very pleased with our progress and accelerated growth. I hope that you agree and I hope that you have a clear picture of where we're headed, given our focus, commitment, progress.

And with that, I'll turn it over to John for the financial highlights that I know you're anxious to see. And after that, we'll take your questions. John?

John F. Gehring

Thank you, Gary, and good morning, everyone. It's great to be here, and I'm excited to be able to update you today on our business. While our recently completed acquisition of Ralcorp, I'm sure, is top of mind for many of you, I also want to note that our base business continues to deliver good financial results, and that reflects the operating capabilities that we have built and leveraged over the last several years. We are optimistic about the opportunities ahead of us. And today, I am pleased to update you on some of the key financial aspects of our plans, including some additional details related to our recently completed acquisition of Ralcorp.

So here are the topics that I'll cover today. First, I will discuss the Ralcorp transaction and why it is important strategically and financially. Next, I'll cover our financial priorities. Then, I will address our capital allocation plans, distinguishing between our near-term and long-term focus. Then I'll say a few words about our EPS outlook in the near term, as well as the process that we are undertaking to update our long-term financial outlook to reflect the benefits of the Ralcorp transaction. Before I go any further, I would like to remind you that our reconciliations for Regulation G purposes are included in the Appendix to this presentation.

Let's start with an overview of the Ralcorp transaction. As a reminder, the transaction closed just a few weeks ago on January 29, and while we're obviously excited about owning this business, we are still early on in our learning and integration process. But here are a few headlines about the business.

Ralcorp's annualized net sales approximate $4.3 billion, and it has approximately 10,000 employees. And as you heard from Gary, Ralcorp competes in attractive categories, including cereal, pasta, sauces, frozen baked items and many others, thereby enhancing our presence with our customers across a variety of channels.

To complete the transaction and including transaction costs and the refinancing or exchange of the Ralcorp debt, we deployed approximately $7.5 billion. This was sourced from about $6.2 billion of new debt, approximately $800 million of cash on hand, about $270 million of new equity and an estimated $200 million, which we will source from commercial paper or our revolving credit facility to settle the Ralcorp callable notes later this month.

In today's low interest rate environment, we got very attractive rates on this new debt, which of course contributes to the accretion of the deal. We also eliminated restrictive covenants related to the Ralcorp debt. We have included an updated financial profile of ConAgra Foods in the Appendix.

As Gary mentioned, we believe the acquisition provides us with some great benefits. First, the acquisition is clearly beneficial to our scale. With combined annualized sales of approximately $18 billion, we are now one of the largest packaged food companies in North America. Further, the transaction positions ConAgra Foods as the clear leader in private branded packaged foods, which is an area that has shown strong growth over time.

As Gary noted in his remarks, the transaction also results in a balanced portfolio that provides strength in both the in home and away from home segments, and it enables us to leverage our capabilities to address consumer preferences across the spectrum, from value to premium. We think this portfolio balance is a differentiator for us, and overall, we expect that this will enable us to perform more consistently across economic cycles.

In addition to this strategic fit, we believe the transaction is also financially compelling. It strengthens our long-term growth potential, it is attractive and provides attractive accretion in year 1 on a comparable basis, and it enhances our ability to consistently generate strong cash flows.

The value creation is further enhanced by attractive call synergies, which we believe will reach an annual run rate of $225 million by our year 4 or -- by year 4 or our 2017.

Let's go deeper on cost synergies for a moment. Given the cost savings capabilities that we have built and demonstrated over the past several years, coupled with the expertise of the Ralcorp team, we are confident that we can deliver on our synergy targets. We expect the majority of the call synergies to come from our supply chain, however, a meaningful portion will come from selling, general and administrative costs.

In supply chain, the synergies will come from each of the key components: procurement, manufacturing and logistics. For example, in procurement, we expect to optimize a common supply base where the overlap is very significant. We believe that we can also leverage the relationships and capabilities we have on our commercial platform to drive input cost savings. In manufacturing and logistics, we intend to implement our efficiency and productivity programs, which have helped us deliver strong cost savings year after year.

We also have opportunities to reduce SG&A through the elimination of duplicate costs. And we plan to fully utilize our shared service and other centralized capabilities that can be leveraged efficiently across the larger enterprise. We still have a lot of work to do to combine these organizations. However, we believe our integration efforts over time will result in lower product costs and an SG&A cost structure that will add leverage to our financial results.

While we are still in the early days of our ownership of Ralcorp and are still finalizing the details around the various acquisition accounting impacts, we currently estimate that the acquisition will add approximately $0.05 to our fiscal 2013 comparable earnings per share and approximately $0.25 to our fiscal 2014 comparable earnings per share.

We have put the major assumptions regarding Ralcorp's near-term contribution in a slide in the Appendix to this presentation. This is our current view. It reflects current market conditions, recent performance we've seen in the business and our learnings to date from our early integration efforts. Some of you have asked us about other information sources, such us prior Ralcorp filings, and I would note that those analyses were put together at a different time and for a different purpose and with different assumptions. Therefore, they are not the basis for the current near-term outlook we are providing today, so I would ask you to please refer to the numbers that we are now providing as the basis for our near-term outlook.

As we work through our integration, we will provide additional updates as appropriate. And we have a planning process underway that should allow us to share with you our long term -- our revised long-term financial goals in a few months in connection with our fiscal fourth quarter earnings release.

Now let's cover the financial priorities, which serve as the foundation for our business and performance. And here are the financial priorities that we believe are important to our stakeholders: first, strong earnings and cash flows; second, a healthy balance sheet and strong liquidity, including our commitment to an investment-grade credit rating; and third, a capital allocation approach that focuses on debt repayment for the next 2 to 3 years, while we also continue to pay a strong dividend. Next, I'll cover each of these priorities in a little more detail.

Cash flow has been a central focus for us, and that certainly will continue as cash flow is the fuel for our highest financial priority for the next 2-plus years, debt repayment. And we will therefore continue to focus on the key drivers of cash flow. First, earnings growth, driven by fundamentals in our base business, sales, marketing, innovation, pricing, cost-savings and SG&A discipline. The profit contribution from Ralcorp and our other recent acquisitions is also a key element of our profit growth.

I just mentioned the contribution from Ralcorp this year and next. And it goes without saying that we're excited about our earnings growth with Ralcorp as a part of our portfolio.

Second, working capital efficiency. This has been an area where we have made significant strides over the past several years, and we will continue to drive working capital efficiency and discipline across our new larger company. And finally, a disciplined approach to capital expenditures. We currently expect our capital expenditures to be approximately $650 million per year on a combined basis for the next several years. Importantly, while we will continue to support key growth and cost reduction investments, we will remain very focused on return requirements and financial discipline as we develop and execute our CapEx plans.

So how do we see our cash flow going forward? Let me give you a snapshot. Based on our initial assessment of the Ralcorp acquisition and integration work and our expectations for our base business, we currently expect operating cash flows for the combined operations to be in the range of $1.75 billion annually. And as we have shown here, after funding CapEx and dividend requirements, we expect free cash flow or cash available for debt repayment to be in the range of $650 million to $700 million per year.

In addition to cash flow, we remain focused on 2 related financial priorities: a healthy balance sheet, including an investment-grade credit rating; and liquidity. We have obviously leveraged our balance sheet in support of attractive strategic growth. However, we have not compromised on our commitment to an investment-grade credit rating. As shown here, we are currently split-rated, with all ratings at investment-grade levels.

We also have very good liquidity, and we intend to maintain more than $1 billion of available liquidity from our revolving credit facility. With this short-term credit availability, along with a modest level of cash on hand, we expect that our overall liquidity will be more than sufficient to meet our operating requirements, including our seasonal working capital needs. Also, while we may draw directly on our revolving credit facility, we do expect to be able to access commercial paper markets, which will be a slightly less expensive option. And lastly, we have very manageable debt maturities. So when it comes to our balance sheet and liquidity, we will continue to prioritize our investment-grade rating, supported by aggressive debt repayment plans, and we have plenty of liquidity to support our business.

Our capital allocation priority through fiscal year 2015 will be the repayment of $1.5 billion of debt. We will maintain our current dividend rate at $1 per share as we delever, and we expect to significantly reduce our share repurchases during this time as well. And while we plan to constrain our acquisition activity in the near term as we repay debt, we will continue to prudently support the right investments for our business, including investments to support innovation, product capability and our integration and cost savings initiatives.

As you can see here, while our near-term priorities have necessarily been modified, the elements of our balanced capital approach remain unchanged for the long term. I also want to be clear that while we will aggressively repay debt for 2 years or so, we expect to continue reducing debt after that point, just at a more modest rate. This will allow us to pursue other aspects of long-term capital allocation, growth through M&A, top-tier dividend and share repurchases.

Onto our outlook. We now expect our fiscal year 2013 fully diluted earnings per share adjusted for items impacting comparability to be approximately $2.15. This updated guidance reflects about $0.05 per share of benefit from owning Ralcorp for about 4 months this fiscal year and the base business continues to deliver strong profit growth. And this is even after we have significantly increased our marketing investments this fiscal year. So our expectations for our fiscal 2013 earnings from our base business have increased modestly since our second quarter earnings release. This reflects the impact of continued good fundamentals in both of our segments and some tax benefits due in part to the recently enacted tax law changes.

Overall, we're very pleased with the financial performance and the strong earnings growth from our fiscal 2012 comparable base. And regarding fiscal 2014 and to reiterate a point made earlier, we currently expect the Ralcorp transaction to benefit comparable fiscal 2014 EPS by about $0.25. Pending the completion of our fiscal 2014 planning process and further learning and analysis from our Ralcorp integration, we do expect to further refine this fiscal 2014 estimate over the next few months.

With respect to our long-term expectations, our previously stated goals were 3% for annual sales growth and 6% to 8% for annual -- for EPS growth adjusted for items impacting comparability. While we are confident that the Ralcorp transaction will favorably impact our performance, we are not in a position today to update our long-term outlook. As you know, we're integrating 2 large companies, and this takes time, particularly given that one of them was a roll-up that had only recently begun its own integration.

Our fiscal 2014 planning process will address the overall growth profile of both companies, the pace of synergies over the next several years, as well as other opportunities and challenges from our Ralcorp integration. Because of the complexity of the planning process, it will take us a few months before we can share with you what we expect over the long term. So we plan to share our revised long-term financial goals with our fiscal fourth quarter earnings release this summer.

Let me summarize a few key takeaways. First, the Ralcorp transaction will strengthen our business model and has potential to create strong value for our stakeholders. Second, with the addition of Ralcorp and continued strong performance from our base business, we now expect our fiscal year 2013 earnings per share adjusted for items impacting comparability to be approximately $2.15. Next, we are very focused on cash flow, and we have targeted at least $1.5 billion of debt reduction by the end of fiscal year 2015. And our financial priorities remain unchanged: good earnings and cash flows, a strong balance sheet and liquidity position, and high return capital allocation. And finally, we expect to provide our estimate for our fiscal 2014 earnings and our updated long-term algorithm in connection with our fiscal fourth quarter earnings release. In closing, we're excited about the progress that we've made over the past several years and even more so about the opportunities ahead of us.

At this point, let me turn it back over to Andrew for the Q&A session. Thank you for your time and interest in ConAgra Foods. Andrew [ph]?

Question-and-Answer Session

Unknown Analyst

First off, thanks for the extra detail on that slide in the Appendix with the drivers around accretion. That was actually very helpful. The biggest places of difference there, perhaps in some of the drivers relative to maybe where some forecast were, were what seems to be a much more conservative viewpoint around current contributions from core Ralcorp offset by less significant incremental amortization expense. So I guess the question is, how much of that current view on sort of Ralcorp contribution around EBIT is just again it's early days, conservatism with the businesses that a lot of the spaces have been somewhat challenged recently, versus anything that you kind of really see right in your early days that you know this is going to be a challenged sort of situation?

André J. Hawaux

Yes, I'll take the first part of that, and Gary can add if he likes. I would say it really goes back to what I said. I think it's early days. That would be the first thing. We did close the transaction very fast. Admittedly, there is some softness in some of the grocery categories right now, but I would say our estimate is really based upon what we're seeing in the business currently. I don't think it does anything to contradict our premise going into this transaction about the strategic value of what we're doing here, and so we're still very bullish on the long-term value of this transaction.

Gary M. Rodkin

Yes, Andrew, I would just add that in any major transformation, you have to assume there will be some short-term disruptions, whether that's employees. We now have 10,000 employees that are wondering what's going to happen for them. We've only been in there for 12 days. Customers who clearly want to know what's going to happen when these 2 companies combine, and competitors that want to seize the moment. So understanding those challenges, building that into our assumptions, our assumptions now that we're under the covers for 12 days, that's really what it's about. It was a very, as John said, a very fast close. Usually you'd have several months more of learning; we're catching up on that learning right now.

Chris Klinefelter

A question from David Driscoll. Right behind you.

David Driscoll - Citigroup Inc, Research Division

I wanted to ask a little bit about the core operations of the business prior to Ralcorp. And just to understand, Gary, that the last couple of years, you've commented, especially last year, how tough the consumer environment was, how the inflationary pressures, I think, were particularly acute in damaging the volumes for your operations. You didn't make a specific mention in the F '14 guidance. There was only the $0.25 number for Ralcorp. But can you comment on what you see in U.S. foods and just the outlook here relative to where we've been? I mean, I think the outlook is pretty positive, but we'd like to hear that from you.

Gary M. Rodkin

Yes, let me let André start, and I'll editorialize.

André J. Hawaux

Okay. I would say that, as you said, David, we took a lot of pricing in fiscal '12, and some of that -- some of the effects that we're seeing in, obviously, in our portfolio in fiscal '13, I would say that one of the things that we like, we like what we see in terms of sequentially quarter in quarter out, we have been getting better, both on a consumption basis and also volume basis. It's obviously not, for me, for my sake, it's not going as fast as I would like in terms of coming out of that. But again, next year, we're going to comment on our next year algorithm probably in the fourth quarter on our core business. We see a lot of positive things. You saw a lot of the innovation that we're bringing to bear. So we continue to believe that the algorithm we laid out for our consumer -- core consumer business is pretty much spot on, but we'll get more details for you in the fourth quarter earnings release.

Gary M. Rodkin

Yes, the only thing I would add is that while the economy still is challenging, the Consumer Foods group is still driving very good margin improvement and profitability. So we're very pleased with the financial results.

Chris Klinefelter

Dave Palmer?

David Palmer - UBS Investment Bank, Research Division

I'm wondering about areas of reinvestment. We just had a big trial last night as some of your foods that compete against restaurants who spend a ton of money advertising their products. Frozen is not exactly been a strategic imperative for many of the companies participating in that aisle. For you, it will be. Is that a big area of reinvestment going forward?

Gary M. Rodkin

Yes, I hope that many of you had a chance to see the Bertolli and the P.F. Chang's new products that we're bringing out. We're extremely excited about those. And the way I look at that, David, is we have great technology, great innovation platforms, great products. We didn't have the brand equities that could really handle in the right way, really bringing out great Italian food and great Asian food. That was the real intent behind the acquisition from Unilever. So, yes, you're going to see us really drive those businesses hard. And André?

André J. Hawaux

Yes, I'd say, David, I think you saw it yesterday, but there's even -- as I talked earlier, there's even more. I think we're going to cover the waterfront from the morning -- from the minute you wake up in the morning to when you go to bed at night relative to sort of breakfast single-serve, multi-serve, desserts, snacking, we're going to get into a big way as people continue to snack, what seems to be an all-day event these days. So I think we're going to see our frozen portfolio play across all those things. And we believe we have the brands now across both economy and premium and mainstream to play in all those parts. We're very excited about frozen.

Chris Klinefelter

Brian [ph]?

Unknown Analyst

Thanks, Chris. Gary, I think the 2 questions I think that investors have about the post-Ralcorp ConAgra are integration, and second, the ability to make hold on to the profitability in private label. So if you could talk a little bit about the integration you have ahead of you, maybe in contrast to what you've done since you started at ConAgra Foods, because it was a pretty big integration. And then second, just why you are confident that once you've improved the profitability of that business, that you're actually going to be able to hold on to the profit, to not have to give it back to the retailer?

Gary M. Rodkin

Yes. From an integration standpoint, we're very confident. As many of you may remember, ConAgra Foods was a company built by so many acquisitions that our job, certainly over my 7.5 years, has been to integrate and turn it from more of a holding company into an operating company, and that's involved on a larger scale, basically what Ralcorp was starting to do in the last year. And now, that will be our accountability. So we've done it on a very large scale, so we have a lot of those muscles built, those skills, a lot of people with experience. And from an integration standpoint, over the last 15 months or so, those acquisitions we've made, we've used a very new disciplined integration process that now, on a larger scale, we will bring to bear, which gives us great confidence. We are very well resourced from an integration team standpoint. We pulled a lot of the best people out of our businesses and put them in this team, many of them full time. So it's well resourced, and we've got a lot of skills already built into that integration arena, which are very, very important in a major transformation like this. In terms of the profitability long term on private brands, short term, we've got to get through some of those challenges, but the long term is really all about leveraging scale and consumer packaged goods capabilities. When we say scale, we mean things like procurement, where we will now purchase our ingredients, and there is a huge overlap between what we buy as ConAgra Foods and what Ralcorp bought. When you buy as an $18 billion company, that's pretty obvious. When you've got an $18 billion company's distribution footprint and can deliver products, the logistics scale is clearly going to bring us big benefits versus other many smaller competitors. And then when you take the CPG capabilities like the innovation that you know that we've got, like the category management expertise, fact based selling with analytics, et cetera, all the things that we do as a branded company and all those foundational capabilities we've built, when we bring that to bear over the long term, as we sell this story into our customers, there's going to be a big win for customers to partner with a big broad-based private label company that's got those skill sets, and that's what gives us the long-term confidence. In the short term, we'll deliver that meaningful accretion that you've seen because we know how to take costs out, we know how to get the plugs into the right sockets, we know how to do those things, and that will give us the short-term bridge.

Chris Klinefelter

Okay. Ken?

Kenneth Goldman - JP Morgan Chase & Co, Research Division

I know you're not going to give a specific number, but just quickly running through fiscal '14, you started with a $2.15 base for '13, right? You add $0.25; that gets you to $2.40. But that -- just to make sure, that does not include any debt pay down effects, right? And it doesn't include any organic EBIT growth from ConAgra or Ralcorp, is that correct?

Gary M. Rodkin

John?

John F. Gehring

Well, it's hard to argue with what you said.

Kenneth Goldman - JP Morgan Chase & Co, Research Division

Okay. So basically I'm just curious, is it unreasonable to think that a number like -- and again, I don't expect you to give a specific answer, but something like $2.50, would that be -- just to throw a number out there, just to make it up. Would that be completely...

John F. Gehring

It's kind of like when did you stop beating your wife? But the -- I'm just kidding. I guess what I'd say is I can't argue with the arithmetic you just did. What I would say is that we do have a lot of planning to do. Our planning is going to take into account consumer trends, inflation, cost savings, acquisitions, brand investments. Capital allocation is going to change for us, because in the past, some of our algorithm included capital allocation benefits that obviously, given our debt repayments, is going to be a little bit different. So I think that's -- your math is not flawed, but I guess I'll just ask you to give us some time to get through the rest of our planning.

Gary M. Rodkin

But nice try, Ken. Why don't we do one more very quick one here in the room, and then we'll go to the break out.

Chris Klinefelter

Akshay?

Akshay S. Jagdale - KeyBanc Capital Markets Inc., Research Division

Gary, so when I think of value creation opportunities from this acquisition, I think of 3 things: cost synergies, organic growth improvement, and also maybe this as an M&A platform. You've, I think, clearly demonstrated that cost synergies is something which is a core competency for the company. Can you just talk about organic growth improvement and why that's not a leap of faith here, given the history of the 2 companies and the fact that really nobody in the food space has done private label and branded well together? And then just secondly, is this an M&A platform still going forward?

Gary M. Rodkin

Let me comment on your last piece first. Clearly, as John has stated, our intent over the next 18 to 24 months, deleverage. And we will always look through the lens of our Recipe for Growth, but that's our top balance sheet priority for the next 18 to 24 months. In terms of the longer term, can we get growth? First, why can these 2 branded and private brands exist together? One, we've already been doing that with a billion-dollar business for quite some time, so we know how to keep them separate but together where they need to be, and there's minimal overlap between brands and private brands, very few exceptions to that. And again, very integrated, disciplined integration process to ensure that, that's the case. Over the long haul, we've got customers who see this as a very high priority. We've got consumers who have tried private brands, accepted them, repeated and continued to ratchet the share up over time. We'll continue to go up as we've demonstrated in other markets. So we know that there's organic tailwinds in this sector. And the game changer is really about us again bringing that scale and those CPG capabilities to a very fragmented industry. This is an industry that is made up primarily of small companies that do not have the kind of skill sets, we talked about all the kind of frontline skill sets. But even something like food safety where we bring our food safety infrastructure and practices. That's going to become more and more important as customers recognize that this is their own brand they're talking about. It's one thing for us as branded manufacturers, it's another when it's their own name on it. So even things like that add in to the picture of CPG capabilities and scale, and that's what gives us confidence we can grow that business long term.

Chris Klinefelter

I think we're out of time.

Unknown Analyst

Yes. Gary, ConAgra, thank you very much again for your presentation and for the reception last night.

Gary M. Rodkin

Thank you.

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Source: ConAgra Foods, Inc. Presents at 2013 Consumer Analyst Group of New York Conference, Feb-19-2013 09:15 AM
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