ConAgra Foods F2Q08 (Qtr End 11/30/2007) Earnings Call Transcript

ConAgra Foods, (CAG)

F2Q08 Earnings Call

December 20, 2007 11:00 am ET

Executives

Gary H. Rodkin – CEO

Andre J. Hawaux – CFO

Christopher W. Klinefelter – V.P. Investor Relations

Dean Hollis – President, Consumer Operations

Greg Heckman – President, Commercial Operations

Analysts

David Driscoll - Citi Investment Research

Eric Serotta - Merrill Lynch

Ken Goldman - Bear Stearns

Christine McCracken - Cleveland Research

Robert Moskow - Credit Suisse

Eric Katzman - Deutsche Bank

Andrew Lazar - Lehman Brothers

Pablo Zuanic - J.P. Morgan

Jim Lane - TRI Asset Management

Jeff Kanter – UBS

Presentation

Operator

Good morning and welcome to today’s ConAgra Foods second quarter earnings conference call. (Operator Instructions) At this time I’d 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, this is Gary Rodkin and I’m here with Andre Hawaux our CFO and Chris Klinefelter our V.P. of Investor Relations. I’m going to start with a few words about the EPS we just posted and the main drivers of the performance. After that Andre will discuss more specifics about financial matters and then we’ll take your questions. Dean Hollis, President of Consumer Operations and Greg Heckman, President of Commercial Operations will join us for that portion of the call.

Before we get started Chris will say a few words about housekeeping matters.

Chris Klinefelter

Good morning. During today’s remarks we will make some forward-looking statements and while we’re making those statements in good faith and our confident about our company’s direction, we do not have any guarantee about the results we will achieve so if you would like to learn more about the risks and factors that could influence and affect our business, I will refer you to the documents we filed with the SEC which include cautionary language. Also we will be discussing some non-GAAP financial measures during the call today and the reconciliations of those measures for Regulation G compliance can be found on our website atwww.investorconagrafoods.com under the Financial Reports and Filings link and in choosing non-GAAP reconciliations. Now I’ll turn it back over to Gary.

Gary Rodkin

Thanks Chris. We just released EPS of $0.50 for the quarter which includes $0.03 of costs from the recent pot pie recall. That’s a very strong quarterly EPS, certainly higher than what we had originally expected. However, the source of the earnings growth was different from what we had originally planned. In a nutshell, our Commercial operations meaning our Food and Ingredient segment and our Trading and Merchandising segment posted absolutely outstanding performance. The comparable operating profit numbers for those segments were far better than what we had planned. Most importantly the over delivery from those operations more than offset the margin pressures in our largest segment, consumer food. It is allowing us to take our full year fiscal 2008 EPS expectations up.

While there was plenty of progress in Consumer Foods for important brands overall the performance for that business is not where it needs to be. I am not satisfied with it but I am satisfied with the way we are going to address it in the back half of the year. You know from our previous comments that our priorities for the Consumer Food segment are to grow the bottom line through healthy top line performance. That involves appropriate pricing actions; volume growth through innovation, better marketing and more focused selling and of course improving the efficiency of our product supply operations. Those are the cornerstones of our agenda for this segment, to achieve its potential. I’ll touch on all of those in my discussion of this segment’s quarterly performance and our near term outlook.

Consumer Foods posted a decent top line performance this quarter, unit volumes and sales were up 3% on a comparable basis. A pretty solid number especially given some significant distractions. As most of you know, we’re very focused on more affective marketing and meaningful innovation. Our brand performance this quarter shows we’re making progress. A number of priority investment brands including Chef Boyardee, Egg Beaters, Healthy Choice, Hebrew National, Marie Callender’s, PAM, Reddi-wip, Slim Jim, Snack Pack and others continue to post solid growth validating our assessment of their opportunity.

Demand for Healthy Choice Café Steamers has been extremely strong, certainly more than we forecast. We’re adding more capacity as we speak and with current trends we expect annual sales of that product line to be well north of $100 million as well look into fiscal ’09 and beyond. That’s a huge success, we’re very excited about it and I congratulate our team on finding a sweet spot with consumers in this important platform and technology.

Now a few words about pricing. We did take some pricing in Q1 and even more in Q2, the obvious question is why don’t we have more benefit from pricing in Q2? Well we took pricing up just as we said we’d do, we also had some aggressive trade promotion spending that offset most of it and negatively weighed on the price mix spread. That trade promotion spending was done to protect trade commitments to customers for some heavily promoted categories. Overall the quarter’s level of trade spend was too high but it was done for a reason. I want to be fully transparent on this, brutally candid; it was designed to keep customer relationships healthy in light of customer service shortfalls resulting from our two recalls in the past year, as well as changes we were making in our manufacturing network. I am confident the dynamics going forward will be different and I’ll talk more about that in a moment.

Regarding mix, the fact that our Enabler brands which on average have a lower price per case grew 5% while our Priority brands grew about 2.5% creates a negative sales mix. As we go forward our plans are firmly in place to be aggressive on our pricing actions and more disciplined on our trade spending because what really counts is net realized price for the overall portfolio. Our net pricing will start to improve in Q3 and will improve significantly in Q4 and into fiscal ’09. Believe me, I’ve spend considerable time with our operating people these past few months, getting into granular detail on their pricing actions. I’m convinced our execution will be far better than what we’ve seen to date. This is part of our continuing evolution toward becoming a more finely tuned operating company which I consider as my number one personal priority. We’re still building muscles and we expect the evidence to be clear as we get closer to year-end.

Moving on to Consumer Foods profits, the real issue is inflation. Our cost of goods sold increased by almost $100 million. Let me emphasize, that’s inflation of more than 8% and while we did generate meaningful cost savings in the range of $60 million, that’s still leaves a big gap. Another important point is the production and startup inefficiencies we discussed in the first quarter which negatively impacted us in the range of $30 million then, were no where near as significant this quarter nor do we believe they will be significant in the back half of the year. Those production inefficiencies stemmed from taking on too many transformational supply chain projects simultaneously. We spread our resources too thinly.

These same issues are relevant to our customer service metrics. We missed some sales due to our service shortfalls. That’s also relevant to where our sales growth was only okay this quarter as opposed to very good like we saw in Q1. I think it’s important to note that our service issues were concentrated in a few key manufacturing areas rather than any issue with our overall systems or logistics. In other words, we’re well on the way to resolution of those hiccups and importantly there’s no systemic issue.

I’ll move on to our Food and Ingredient segment. Comparable sales were up double digits and comparable profits up more than 40%. Lamb Weston benefited during the quarter from continued momentum, appropriate pricing actions as well as strong export volumes and good response to their appetizer innovations. As usual they continued the exemplary and efficiencies in customer service. Lamb Weston is our single biggest brand and we certainly consider it one of our most important core businesses and we look for continuing high impact results. Also in the Food and Ingredient segment, our milling operations are dealing with much higher input costs which they have largely passed on as higher prices during the quarter. They’re also very focused on expanding their value-added product lines, like Ultra Grain and [Susta] Grain and running very efficient operations.

So I congratulate the entire Food and Ingredients team on a stellar performance for the quarter and more broadly I’d like to recognize them as a model of collaboration in their approach to new business and customer service opportunities. They do a great job with an outstanding product and service portfolio and a strong understanding of our customer service needs. One recent example of this is our work with McDonald’s to develop the new McSkillet Burrito, a breakfast burrito that includes several of our ingredients; Lamb Weston potatoes, Gilroy Foods controlled moisture vegetables and Spicetec seasonings. This is a major new national breakfast item for McDonald’s, supported by a national ad campaign and this product demonstrates our ability to leverage our portfolio and reputation for strong customer service to find new avenues for growth.

Our Trading and Merchandising operation posted another very, very strong quarter. Profits there were almost 4X last year’s dollar amounts. The results speak for themselves. We did very well in fertilizer and agricultural merchandising during the quarter. Our folks have capitalized on [near] and demand opportunities and market volatility. Energy also did well during the quarter but not quite up to last year’s levels. Given that this is a Trading and Merchandising operation, and that each quarter presents a new set of opportunities and a different set of positions, it’s difficult to offer predictions for this business. Therefore we don’t plan for repeats of quarters like these, which is why our guidance assumes more conservative levels of profits in the back half of the year.

Our International operations showed some traction with pricing and good results in key categories like popcorn and canned pasta and we look forward to developing more momentum as time goes on.

Let me switch to a few broader topics. Most of you know we are very excited about our innovation pipeline. When I joined the company a little over two years ago, the new product pipeline was pretty empty. We have been very focused on building that pipeline and making our plans for gradual introductions into the marketplace. We had a round of product introductions late summer and will have another mid winter, some of which we’ll discuss at CAGNY.

Another item I’d like to touch on is senior leadership. As many of you know who follow us closely during the quarter we had two announcements about senior team members. The first is Dean Hollis, currently President and COO of Consumer Foods and International who will lead the company this summer as he searches for a CEO job. Dean has spent 20 years at ConAgra Foods making a huge contribution and wants to lead a company so he has made his desires public and is beginning his search. I appreciate his openness and his commitment to a smooth transition. Dean wanted to do this in a way that minimized disruption for all involved, so he has agreed to help transition for six more months.

Another significant senior team announcement was that [King Powel] who headed our IT and Product Supply Operations is leaving the company to go back to his former employer. We appreciate King’s contributions while he was here. We’ve split his job into two separate functions; one is the information systems, which will now be lead by [Garrett Chetay] our new Chief Information Officer, a very strong veteran of ConAgra Foods is going on ten years with us and has been a key leader in our very successful general ledger SAP conversion process. Garrett will report in to Andre Hawaux, our CFO.

We’ve also promoted Greg Smith formerly Senior Vice President of Product Supply to now run the entire Product Supply organization and report directly to me. Greg’s been with us for six years across several senior roles and developed a strong background in Consumer Products operations even before he joined us in 2001. Greg has had [inaudible] responsibility for our Grocery business in the past and has been a very valuable senior leader of the Product Supply team. I have full confidence in Greg and am certain we won’t miss a beat.

Before I turn it over to Andre I’ll close by saying that we’ve taken our full year’s diluted EPS expectations up. We now expect to be slightly above $1.55 excluding the pot pie recall costs and the other items impacting comparability which is obviously an increase from the $1.48 or so we were originally planning on the same basis. The Consumer Foods progress that we’re planning for is now more concentrated in the fourth quarter and into the first part of ’09. That’s a little later than we thought originally and it mostly has to do with the execution of our pricing actions. We continue to be convinced that there are substantial earnings growth opportunities in better brand management and more efficient operations and that’ll be apparent in the numbers going forward. While we can’t control inflation, we can control execution and that’s exactly what we’re focused on and where I’m rolling up my sleeves and spending a significant amount of my own time to ensure we deliver our commitments. Now I’ll turn it over to Andre.

Andre Hawaux

Thanks very much Gary and good morning everyone. I will hit on what I consider to be some important highlights. The main areas I will touch on are operating trends, earnings guidance and capital items.

With respect to operating trends a $0.50 quarter including $0.03 of recall costs is very strong. I congratulate our Food and Ingredients and our Trading and Merchandising teams on their outstanding results. The operating profit performance for those businesses was excellent. It defined our quarter and provided us the ability to take the year up.

Our Consumer Food segment also had some bright spots with important brands and sizeable cost savings initiatives. The production inefficiencies we saw earlier in the year improved this quarter. All that is certainly good, however to reiterate Gary’s points, we need to be more aggressive on pricing. More aggressive price increases are planned for the balance of the fiscal year, most significantly in our fourth quarter. Inflation in Consumer Foods was slightly north of 8%, that’s more severe than we had expected when we put our 2008 plans together and while we have a robust agenda of cost savings, it cannot offset 8% inflation. That’s simply too steep a hill to climb.

And while I’m on the topic of cost savings I would like to go out of my way to say that we had $60 million of costs savings this quarter and that’s pretty good fuel. In a normal inflationary environment, that would be a net positive. This quarter was obviously different seeing as we had about $100 million of inflation which drove our profit shortfall in that segment.

Now moving on to SG&A. As you’ve heard us say before SG&A expense reduction remains an important opportunity for the company. In this context I’m not talking about advertising and promotion but the other components of SG&A. This quarter overall SG&A at our operating segments as well as at corporate, trended higher on a comparable basis reflecting several factors but in no particular order they were the following. Investments and systems and processes as we strengthen and advance continuous quality improvement initiative and continue to install our SAP suite of systems. Some negative impact on 4X derivatives we hold at corporate which is only a timing issue and will reverse in quarters three and four. And then incentive accruals expense related to the Trading and Merchandising performance you saw in the quarter. Overhead SG&A expense reduction remains a key area of focus for us. It is one of my top priorities as well as pricing and our back half will show significant deceleration in that component of our SG&A.

Moving on to earnings guidance, our current view is that EPS is excluding items impacting comparability will be slightly above $1.55. Now given our full year guidance, you can get a sense of what we are expecting in the back half. Our Q1 was $0.34 excluding items impacting comparability, our Q2 was $0.53 excluding items impacting comparability; that’s a subtotal of $0.87. So given that the full year is expected to be slightly above $1.55 on the same basis, then we’re thinking the back half altogether is something close to $0.70 excluding items impacting comparability. That’s a little less than current consensus. As an aside, we see the third quarter as having slightly more EPS than the fourth quarter.

Building on comments I made during the Q1 call we expect our Consumer Food segment to show margin improvement in the back half of the fiscal year. I don’t expect margin improvement for Consumer Foods in Q3, it will likely be in Q4 and as we enter fiscal 2009. And while we expect to be at a much better run rate for Q4, I don’t expect it to make Consumer Foods fiscal 2008 full-year profit results ahead of or equal to last year’s normalized operating profit dollars.

Another point I’d like to make is that as most of you know, we have gone into a fair amount of specificity in the past on our cost savings goals by year, by source, et cetera. I want to say clearly and definitively that we have lots of productivity to work with, plenty of runway to advance our goals, but the world has changed a fair amount since we articulated those goals. We are finding that some of what we used to think as fixed opportunities may in deed be overshadowed by variable opportunities which change our plans for plant closures. We are seeing our top line grow faster than we thought which begs the issue of the role of sales and mix in our algorithm versus the role of cost savings and we are seeing inflation at more than twice what we thought last year at CAGNY when we shared our goals. Because of the impact of inflation and pricing our margin percentage we need to instead focus on dollar goals. We are very comfortable with our longer term EPS goals but the source of the EPS growth may end up being different, specifically meaning the contributions of our top line versus the contribution of cost savings so we need to avoid specifics and granularity on cost goals that we establish under very different circumstances.

Over time we know that we can narrow our margin percentage gap with our peer group and that goal is still relevant, but inflation and pricing movements in the market slow progress on that metric.

Now moving on to the balance sheet and focusing on working capital. All working capital position increased significantly compared with last year. Our Trading and Merchandising operations require working capital to pursue opportunities and as you can see from the quarter’s results, there have been several profitable opportunities for them. Combine that with the inflation-driven cost increase for many of our inventory components and you get significantly higher working capital, some of which was funded by commercial paper in this quarter. Its normal for us to use a fair amount of working capital early in our year, typically in Q1 and Q2. That’s a function of our business mix and taking concentrated deliveries of items like potatoes, tomatoes, wheat and garlic and storing them after the harvest season. But our overall working capital used this quarter was higher than normal due to cost inflation and any opportunities for our Trading and Merchandising segment. Over time working capital levels will come down.

To repeat a point I’ve made with many of you in the past, we wouldn’t let our Trading and Merchandising group utilize the capital if they hadn’t demonstrated an excellent track record of providing strong returns on the capital put to work within strict risk controlled parameters. Our interest expense was $54 million this quarter, higher than last year because of the short term debt used to finance our working capital requirements. CapEx increased this quarter to $111 million from $66 million last year. That increase relates to our plant deficiency and quality initiatives and some capacity expansion. Our current thinking is that the year will now show approximately $475 million of CapEx which is slightly higher than thought earlier driven by innovation and quality investments.

Our dividends were $88 million, slightly below last year’s amount due to the impact of our share repurchase program. Our tax rate projection for the year is between 34% and 35%. On another note, we received authorization from our Board to purchase another $500 million of our stock in the future. We’ll act on that as market conditions and operating cash flow allow. Given our working capital used this quarter, free cash flow did not allow for share repurchases. We’ll update you on this in the customary quarterly discussions we have.

Before I conclude, I’ll mention that we passed an important milestone this quarter when we converted our General Ledger to SAP and updated to the newest version of Order to Cash in SAP. That transition went very, very well and I thank all of our team for their efforts. As you know from Gary’s remarks earlier, I know have responsibility for IT. I have an outstanding team handling it led by our new CIO, [Garrett Chetay] and I look forward to discussing additional progress in converting SAP into our plant network which begins in earnest in February.

With that I’ll conclude my remarks, wish you a warm holiday season. Thank you for your interest in ConAgra Foods and now I’ll turn it over to the Operator for questions and answers.

Question-and-Answer Session

Operator

Our first question comes from David Driscoll – Citi Investment Research

David Driscoll – Citi Investment Research

Thanks a lot, good morning everyone. Certainly congratulations on the quarter. Andre you made some prepared comments on cost savings and the plant closures and I think that there’s going to be a lot of questions that we’re going to get today on this, can we get a little further into it. Were you really trying to tell us that you want to back away from your targeted monetary goals for cost savings and if you’re really saying that, I don’t understand the rationale for why.

Andre Hawaux

Well I’ll start the answer and I think maybe get some support from Chris, I think what I’m trying to say is we have a long run rate on cost and a long run rate on productivity at ConAgra Foods. That’s not changing, but I think what we got ourselves into a little bit of trouble in a different environment is the fact that we got into fixed and variable components and corporate components et cetera, et cetera, and that gives us therefore no flexibility to do what’s right. So I think we have a very long run rate. I think productivity is still going to be one of our key drivers of our algorithm at ConAgra Foods but I do not want to keep getting trapped into this fixed and variable issue as we go forward.

David Driscoll – Citi Investment Research

If we just simplify it then from our view on the outside you do whatever it is that you think is the right answer, but can you say that the aggregate between fixed and variable, however it ultimately determines I don’t know that I care, I just care that the aggregate dollar number actually turns out to be somewhere in the range of the prior expectations. Is that still true?

Chris Klinefelter

Morning David, I’m going to start with that. Just to echo Andre’s point, we do have a lot of productivity to work with. You’ll remember these figures in 2007 we generated about $275 million of cost savings to our cost of goods sold through the programs that you’ve heard us talk about. Fixed cost efforts weren’t really a big piece of that, this is really we’re talking about variable, if you look at the run rate this year we’ve gotten $55 million in the first quarter and another $60 million in the second, that puts you at a year’s run rate of $225 million so those comparisons are what they are. Like I said, we have a lot of fuel to work with, but referencing the things that we’ve gone into in the past, probably isn’t helpful given that circumstances have changed.

Gary Rodkin

And Dave, just to pile on one last comment, we are not backing off our commitment that we’re going to get our margins up to the comparable peer group average over time in Consumer Foods so that stays constant as well as our commitment to the algorithm of 8% to 10%.

David Driscoll – Citi Investment Research

I hope I have time for one more question, Gary I just wanted to come and ask you a question here on the [Gold Store] initiative, I notice four categories that showed up on sales declines within your additional disclosure, Kid Cuisine, Manwich, Orville and Pemmican, can you talk to us – I’m kind of surprised to see really almost any category from Gold Store showing sales declines, what are your thoughts on what’s driving this.

Gary Rodkin

Well I would tell you there are many other categories, Gold Store initiative is doing extremely well. There are a couple of particular issues, for instance on Manwich, that’s just pure timing issue. We do have some issues that we’re dealing through on our Pemmican business but that’s not really one of our Priority brands. I think the most important one is popcorn and there we have been dealing with a one consumer issue on diacetyl and I don’t want to go into a lot of detail on that David, but what I can tell you is that we have now removed the diacetyl flavoring from all of our popcorn and that the packaging, the marketing and the P.R. will all commence very shortly and we’re confident that we’re going to gradually win back sales in this category, which is important to us because we’ve got a 40+ share. So I’d say net net Gold Store doing extremely well and maybe even more importantly a number of our Priority brands did show consistent growth this quarter.

David Driscoll – Citi Investment Research

Operator

We go now to the offices of Merrill Lynch and Eric Serotta.

Eric Serotta – Merrill Lynch

Morning, I wanted to follow-up on Dave’s question a little bit, Gary you commented that you’re not backing off on your commitment of getting to consumer peer group operating margin over time, if I remember correctly the commitment was something in excess of something like 250 basis points of consumer operating margin expansion from I think it was end of fiscal ’07 to fiscal 2010, are you backing away from that commitment now saying it’s doable but it won’t be over the same time period?

Chris Klinefelter

Let me start with that Eric, the 250 basis points was the commitment from supply chains, that was the primary ingredient to the overall operating margin expansion which was targeted to go from where we projected ’07 at around 16 to be 18 to 20 by the end of 2010. That’s what it would take for us to get to the peer group margins. Now in an environment like what we’re seeing now, pricing and costs change the percentage margin structures. So we need to take some time to see how that plays out, but to Gary’s point, we are committed to narrowing that gap over time.

Gary Rodkin

I think it’s also really important to remember this is an industry issue, the inflation that we’ve got and we will be right in there with the peer group. We will take the appropriate action just like they will.

Operator

We now go to Ken Goldman – Bear Stearns.

Ken Goldman – Bear Stearns

Good morning, I’m wondering it looks like a lot of your high expectations for the fourth quarter and for next year are built on pricing, but I’m wondering how much elasticity you’re factoring in there? I mean we didn’t see volumes exactly shoot through the roof this quarter, even though your price gaps are probably a little wider than you want and even though trade promotion is probably higher than you want.

I’m wondering why, Gary, you were very optimistic about the turnaround for Consumer Foods inthe fourth quarter and next year? What beyond the pricing is giving you such high hopes?

Gary Rodkin

Well first of all, on pricing, of course we always need to keep our eyes open and watch the price gaps and competitive movement but given the continued high level of inflation and so much news and noise about the escalating input costs across almost allthe food commodities and materials and energy it’s a very, very different environment when we present our pricing actions.

Everybody, all competitors are under pressure including private label so this makes us less nervous, much less nervous about passing on some significant pricing. It’s just hard to argue with that logic.

But again back to your question, we have really three basic pieces that I would say are important to be positive about, why we think we will really start to generate some momentum. That’s much more effective marketing; we’re already seeing the effects of that. Innovation, and clearly we’ve demonstrated already this year a couple of examples being our Café Steamers and our Paninis and much more focused execution across our entire operation whether that’s focused selling or in our supply chain where we’ll be lapping some of the hiccups that we brought on ourselves by trying to do too much too quickly.

I think when I put that all together, it gives mea high degree of confidence that we will start to seethe Consumer Foods business move inthe right direction starting in the back half and continuing into F09.

Ken Goldman – Bear Stearns

Okay and then just one more question; the cash generated by Trading and Merchandising, how do you prioritize use of that? Is it exclusively to go back into Consumer Foods? And if so, is that more for marketing or more for R&D? I am just wondering how you think about that?

Gary Rodkin

Well, I think clearly what we’ve said inthe past, Ken, is we will look at the highest ROI return projects and we have those that come up through the consumer side of the business, through marketing and innovation excellence. And then I would say that there is also, we have been finding and you can seethe results of that, we have been finding a lot of opportunities to expand our Food and Ingredients business, led by one of our True Diamond brands, and that would be Lamb Weston. We would look and prioritize our investments from over delivery in that space against the highest ROI project that this corporation has to bring forward.

Ken Goldman - Bear Stearns

And right now, what is that?

Gary Rodkin

Well, there are a couple of things. We would look at innovation in terms of what we are seeing go forward. I did say Lamb Weston as well; we’ve got some things that we are doing both in the potato space and then the appetizer space there. I think we will always look at -- we’ve said this before -- that share repurchase is also a lens in which we take a strong look what the ROI is on that.

Operator

Your next question comes from Christine McCracken - Cleveland Research.

Christine McCracken - Cleveland Research

Relative to your plant closures and your plans for the future, you did have obviously some management changes relative to supply chain over the past year. When we look at your progress in terms of how that process has proceeded here over the last year, relative to that is it that you had the wrong plans from the beginning or is it just a function that the market has actually changed relative to your needs for the plant? Did you have the right plans, did you maybe move too quickly to redo your entire supply chain and plant system or is it that as you pull back the covers, you actually found more opportunity with different structures? Maybe just provide a little color on that?

Gary Rodkin

Christine, I think that’s a very fair question and I would answer it, two basic buckets and we’ve talked about both before. The first is we truly did take on too much at once. We got ahead of the headlights, ahead of our own headlights with too many significant transformation projects on the board simultaneously and basically found when they reached a certain point that we had spread our resources to thinly. We clearly have gone back, rescoped and rephased and re-resourced those projects and we are now starting to make progress on each one of those.

The other big issue, unfortunately inthe space of nine months we had two recalls and that became a major distraction for us. It’s tough to rebuild across the organization and I have to be honest with you, that it takes a lot of resources; it’s like student body left, student body right when you have got issues like this.

When we put that all together, I can tell you that that’s behind us and we are now moving forward. We have got much better resource plans in place and I am very, very confident that we are going to start to get on the path of productivity that we talked about. These distractions, it’s been a bit tough over the past months, but we now seea light atthe end of the tunnel.

Christine McCracken - Cleveland Research

Now you have gone through a management change there, you are inthe process of making a couple of additional management changes. That takes time I would assume to settle in too; I mean, granted you are moving some people internally. Is it that you don’t expect any disruption from all these management changes? Did you maybe have the wrong guys by bringing in outside people? How do you look at your current management base, your senior managers and are you comfortable with the people you have in place now, or should we expect more turnover?

Gary Rodkin

I can tell you Christine, I am extremely comfortable and as it pertains to product supply, Greg Smith, we are very fortunate to be able to so smoothly transition. Greg is extremely on top of virtually all of the issues having been a very senior player in the product supply organization and we truly won’t miss a beat. Greg clearly is someone who has delivered outstanding results in his last role, particularly in transportation and warehousing where in large part he was responsible for some of the significant hundreds of basis points of margin improvement that we put on the board.

So we are very fortunate, Greg has already hit the ground running, really basically no transition time, so we are very comfortable there. And then across the board, I can tell you as we reiterate again, one of the reasons I have as much confidence in our future is because of the senior management team I’ve got.

Operator

Your next question comes from Robert Moskow – Credit Suisse.

Robert Moskow – Credit Suisse

I won’t take credit for this question, because it came from a very smart client of mine. You are providing your traders with more capital and therefore, you’re taking on more risk but at the same time, you’re also saying that you expect your trading business to normalize.

I don’t profess to understand the trading business as well as others, but if you’re providing them with more capital, does that mean that you’re also expecting higher returns going forward from those traders? Should we expect higher returns going forward from those traders?

Andre J. Hawaux

Eric, let me answer that in a couple of ways. First as we have always said, we plan very conservatively. So we don’t have a crystal ball and look to replicate these terrific earnings, but the market will dictate what happens.

Second, we have extremely strong controls in place on this business. So, we are not rolling the dice shooting for the moon. We clearly have control mechanisms from a VAR, value at risk, standpoint daily, weekly, monthly, quarterly and the control mechanisms go right up through Andre, our CFO.

I can tell you this is a business that has done exceedingly well in this environment, and I have got Greg Heckman right here with me, maybe he can give a little more color.

Greg Heckman

Yeah, I’ll probably just put a finer point on Andre’s comment that you referred to about using additional working capital in this quarter. I think André’s point was, you saw higher working capital, you also saw the returns for that. So that is a decision that we can make very much inthe short-term based on opportunity. So that will go into our planning.

There are absolutely higher prices across the board which is part of it, but we also saw increased volume inthe inventory, inthe put through, in our fertilizer and in our grain areas, in our physical distribution businesses. So, that’s really what we are talking to and we will size the working capital as well as the risk capital to ensure we get appropriate risk adjusted returns.

Andre J. Hawaux

I would just end by saying we expect attractive returns, but the capital will vary up and down based on the opportunities. So, it really isn’t about a desire to take on more risk, it’s a desire to earn more money for the company.

Robert Moskow – Credit Suisse

Well, let me ask you about fertilizer. What kind of assets do you have in fertilizer merchandising? I mean, do you have warehouses, do you have access to ports, do you have just excellent business connections, and you can setup trades around the world? What do you have?

Gary Rodkin

We are one of the leading importers of liquid and dry fertilizers into North America, we are one of the largest sourcers of basic fertilizer components. We have one of the best wholesale distribution systems here inNorth America which is a huge market and growing with the food and fuel convergence, as well as what we’ve seen going on with acreages and yields.

So we have a very good distribution business, a very good position, and customer suppliers as well as people on the consuming side that are customers that we’re helping connect the value chain for them.

Robert Moskow – Credit Suisse

Now, the UAT business that you guys sold several years ago just got sold again for maybe three or four times the original value. Do you think that your assets in fertilizer are worth three or four times more than they were?

Andre J. Hawaux

These are very different businesses. Remember, UAT is primarily a retail, they’re in the seed business selling the technology there, they’re inthe chemical, and they’re in the retail fertilizer. We have a wholesale commodity fertilizer distribution business so it’s a very strong business, you really can’t compare the two.

Operator

Your next question comes from Eric Katzman - Deutsche Bank.

Eric Katzman - Deutsche Bank

I think the comments that you made and the outlook on the consumer business are industrywide and they are logical and it make sense. But, the overwhelming questions that I get actually revolve around the trading group, somewhat of a follow up on Rob’s questioning.

How do you suggest we value that business with the understanding that you are being cautious and logically conservative as to what goes forward> I don’t want to point you into some of the parts analysis, but how do we kind of capitalize the value that’s being created out of that business?

Chris Klinefelter

I don’t know that we’re ina position to craft some type of dialog or external valuation of that business. That would be beyond the scope of this discussion. But what I will say is that, obviously that business create earnings fuel that is as Andre discussed earlier, it is real money, it can be used for either innovation or A&P investments, it can also be used to buyback stock. So, that’s about the extent of the comments I can offer on that right now.

Eric Katzman - Deutsche Bank

What percentage of that business would you say really acts as an internal hedge on what you use inthe other parts of the business as opposed to being let’s saya little bit more on the risky side? Can you say that?

Chris Klinefelter

Let me start with one and I hope I am answering your question. When you seethe results for what we print externally for the segment, those are proprietary activities. They may be trading the way you are thinking of it, they may be merchandising the way you are thinking of it, there may be service revenues that we have with other providers who need help with procurement and we can play a logistics or service role.

When we are doing things that require or that involve hedges for thecore operations, the benefit of those activities are reflected in the segment results themselves. So there is not a need to take the results proper from trading and merchandise and then re-segment them. But, however, before I end it, I want to say that the intellectual capital that we have, the expertise to advise on that certainly is sitting inthe trade group and they are a very valuable resource.

Operator

Your next question comes from Eric Serotta - Merrill Lynch.

Eric Serotta - Merrill Lynch

I want to circle back on the comments, Gary, that you made about some strained or temporarily strained trade relationships as a result of some of the hiccups you had earlier inthe quarter. What gives you the confidence in your being able to get back to where you were before these two recalls and these other customer service issues by the end of this year?

Gary Rodkin

Well, I’m highly confident, one, because I’m very much on a regular basis in contact with our sales team who’s on the front side of this with their customers as well as on customer calls may itself. What it really boils down to is improved service and we are already on that path, we’ve made dramatic improvements here inthe last month or two, that’s what really counts. Can we deliver what we have promised, and we have corrected those situations.

So, I see that really as a temporary blip. I think they appreciate the innovation that we’re bringing, I think they appreciate the insights, the Gold Store initiatives, and now it’s getting back to doing business the right way. So that’s really what gives us confidence and I think it’s bearing out inthe marketplace and we can already see that here in December.

Eric Serotta - Merrill Lynch

I hate to beat a dead horse in terms of the trading and merchandising operations, but there does seem to be this disconnect between the continued very strong results that you are having, your statements that you’re really not taking on significantly more risk and yet your expectations for it to return to normalized levels of profitability over time.

They just don’t seem to logically add up that if you are taking on more risk you would expect higher returns over time. I’m just wondering whether there is anything you could give in terms of additional disclosure as to capital employed in that business on a quarter-to-quarter basis, some measure of risk, like value at risk, I know it all certainly has its problems associate with a simple VAR calculation.

But is there any additional disclosure that you could give us that would help us measure the additional risk or the level of risk that you are taking versus the returns you are generating and the returns implied in your future guidance?

Gary Rodkin

Eric, I do understand that this is a bit of a different kind of business. However, I would tell you unequivocally that we’re taking on no more risk and I know that’s hard to conceptualize, but really it’s much more about the upside with a very controlled downside.

We are not changing our VAR limits. Those are looked at on a very, very granular basis every single day, every single hour basically and really we started at zero each quarter and itall depends on the inflation and the volatility. We expect that to level off over time and we expect the trading profits to potentially level off over time, but I think the most important thing is as hard as it is to explain, is that we plan conservatively because we don’t have a crystal ball. So we are just being conservative in that. When the upside comes we’ll take it, but we are really very, very comfortable with the level of controls that we have in that business to limit the downside.

Operator

Your next question comes from Andrew Lazar - Lehman Brothers.

Andrew Lazar - Lehman Brothers

Just a quick clarification, I want to make sure I understand the commentary earlier on, I think from Andre, between the fixed and variable cost opportunity. Was the point there that you’ve seen the top line opportunities better than you had initially anticipated which impacts perhaps the number or type of facilities that you maybe had originally thought you would close, but there were different opportunities therefore on the variable side?

Gary Rodkin

Well, I think clearly one of the things that was said in that was also towards the end of my prepared statements, I mentioned that we have to evaluate first as what we talked about at CAGNY, how the top line because of our strong innovation and some of the pricing and the cost savings will play out.

But, the items around fixed and variable had a lot to do with some of the work that actually Greg Smith had done previously in his transportation and logistics role where we are getting a lot of variable savings through freight and things like that and that’s starting to look a little different and therefore we look at our footprint potentially different because of what we’ve been able to do through the freight side.

I think that was more inline with where I was going there.

Andrew Lazar - Lehman Brothers

I am curious on some of the new items and getting back to the consumer side for a minute. How hasthe incrementality been for a lot of these new items? Because we only geta certain look atthe data that we get monthly and we could argue how good or not that really is, but a lot of that hasn’t looked great for the US portfolio overall yet I think you’ve pointed to a whole bunch of areas within this that that had performed really well.

So, is there an incrementality issue here or hasit really been just specific businesses like you mentioned earlier Gary, popcorn that wasn’t where you wanted it to be, that’s kind of holding back the overall? In other words, priority brand volume obviously or sales obviously decelerated from last quarter. I am trying to get a sense if everything is going really well with new items, what caused the deceleration?

Dean Hollis

First of all, we did grow about 3% volume and we’ve got a number of our key priority brands that are growing, brands like Healthy Choice and Marie Callender’s and PAM, Egg Beaters, and so on. So we’ve got a number of brands growing in the right direction. We do have a significant amount of incrementality I would sayin Q2 we might estimate somewhere in the neighborhood of $50 million and that’s really suppressed a bit by our allocation on Café Steamers. That business is on fire, and again well over forecast. We are building the inventory and about to be able to go off of that allocation.

But I would tell you that we are holding ourselves to that incrementality standard -- both margins and volumes -- and I am confident in that pipeline.

I think the thing to recognize in Q2 that kept the adjusted volumes at only 3% were two big pieces: one with the popcorn I talked about and we have the plans in place to gradually build that back and the other was a very seasonal business, Swiss Miss Cocoa. We had a very warm fall. I can tell you we’ve made it all back and more already on that business in December.

Gary Rodkin

Andrew, one point I just want to make and I apologize, but just to be clear on my comments, let’s not lose sight of the fact that this organization we’ve talked about closure of approximately of about 12 plants, we are still going to close and have closed or have cited about ten to be closed. So we are not leaving that, we are not departing from that task as well, I just want to make sure people understand that we have closed about ten plants.

Andrew Lazar - Lehman Brothers

Last quick thing is, I am just curious -- this is more industrywide I think, I might just be completely naïve in how this all works -- but given we don’t know where input cost inflation is going to go and the industry as a whole has been playing catch up with respect to pricing because I don’t think anybody thought we would be where we are today. Is there a way you and the industry can think about, why wouldn’t folks price ahead of where they thought things might be in this environment which is very volatile?

If you have to bring some of that back through promotional spending and such you can do so, but at least the industry would be starting to try and get ahead of it rather than always planning catch up. I know you’ve commented it just doesn’t work that way, but I am just curious on your thoughts there?

Gary Rodkin

Andrew, I would not say that’s a naïve comment, it’s a very logical question. I can tell you unequivocally I am not happy with our lack of price realization inthe first half of this year. So let’s make no bones about that. I have gotten very directly involved with our consumer units inthe past few months and I can tell you clearly that our pricing execution will be much different and clearly evident to you starting in Q3 it will be much more aggressive, it will be much more forward-looking. Clearly ithas to be based on input costs, otherwise we have a very difficult story to tell with our customers but we are going to do a far better job than we have inthe past, and next time we talk I think you will seethe numbers.

Operator

Your next question comes from Pablo Zuanic - JP Morgan.

Pablo Zuanic - JP Morgan

Why are corporate expenses up so much, year-on-year?

Gary, when we talk about pricing and we look across the portfolio, just give us an idea in terms of which type of product types you are having a better time getting pricing through? I mean what lines are you not being able to increase pricing? Or is it really just an issue across the portfolio?

Gary Rodkin

Let me start on the pricing. Did you mention frozen, Pablo?

Pablo Zuanic - JP Morgan

Frozen is in your portfolio, I was trying to understand where is that you are getting pricing and where is that it’s lagging so we can track, I mean we want to anticipate what’s going to happen, right? So, what should we be looking at or is it really just an issue across the portfolio?

Andre J. Hawaux

I can tell you some categories off the top of my head where we are getting pricing; clearly in frozen. Now, frozen is made up of a lot of different pieces but it’s clearly evident in Healthy Choice, it’s clearly evident in Marie Callender’s, we got some issues on banquet and our bulk poultry business, but Kid Cuisine as well. So, across the frozen portfolio, it’s very evident. In Egg Beaters, it’s very clear. In PAM, it’s very clear. So, right off the top of my head, I can tell you for certain we’ve seen the pricing there. You will seeit across more of our brands and categories as we get into Q3 and it will be much more evident as we get into Q4.

Let me answer the SG&A question that you had, Pablo. As I said in my prepared remarks, we made three key areas of investments in this quarter. Quality and supply chain, and we strongly believe that those investments will improve our service levels which we talked about as being critical for us and driving our top line.

The other piece was system investments which are critical to providing the dashboards that our operators need to drive this business, and that’s around theSAP investment. The other one was a timing issue around a foreign exchange derivative charge we took and that will actually turnaround in Q3 and Q4.

The last piece I told you which was around the trading and merchandising incentives given the strong quarter and the strong half year that they had. So, those are the drivers. As I said, we will see that turn itself around inthe back half of this year, our growth in SG&A.

Pablo Zuanic - JP Morgan

It is great that you have a person in charge of trading and merchandising there and great that you are answering questions on the FD disclosure, when you report on your access [indiscernible] moves up the market is not ready for that and it still goes up.

I mean, today, you are not getting credit for that and perhaps with your disclosure, you will get. So, I guess my question is, just give us a sense inthe EBIT this quarter how much was it really trading, how much was it logistical services, storage, just give us a sense there. Within trading, how much fertilizers, energy grains, whatever you can provide there would be useful.

Gary, when I look atthe scanner data and we know that it has its limitations, in general most companies will report sales growth 1 to 3 points above this kind of data. Inthe first quarter, you guys were about 7 points above and this last quarter you were above 5 points above. So, I am wondering, is ConAgra doing something better than people at Wal-Mart, C-stores and other channels or is it that you are just starting from a very low base?

Gary Rodkin

Sure, Pablo. I will answer the second one and then I am going to turn it over to Greg on the trading. I would tell you that we do have a pretty significant opportunity that we are capitalizing on outside of the measured channels. Those business channels are doing extremely well and we believe that will continue.

Greg, do you want to take the trading issue?

Greg Heckman

Sure. With the widespread inflation that you’ve seen across agriculture, energy and in fertilizer which kind of links between the two for us, I mean we saw good performance really across our entire portfolio. If you think about the absolute price change and the price volatility and the acreage increases, I mean, we saw volume increases and we see needs for our customers on the supply and the consuming side to manage their risk and that was good for the portfolio overall.

We saw the biggest increase of course in our physical businesses of grain and fertilizer and our feed ingredients. But, we also saw itin the balance of the portfolio as well. Energy was the only part of the portfolio that was not up year over year, but it still had very strong results. So, it is very balanced performance across a very diversified portfolio.

Operator

Your next question comes from Jim Lane - TRI Asset Management.

Jim Lane - TRI Asset Management

First, it’s clear that management has done a much better job than predecessors at creating stability in the earning stream. The portfolio of earning stream has been much more consistent than if we looked back three or four years.

But, I guess when we look atthe successes this year and the mix of earnings, it’s ironic that earnings estimates are higher than they were atthe beginning of the year, but the stock price is lower. I was wondering if you could speak to maybe management’s and the board’s urgency with regard to making hard decisions? Does perhaps the company need to be much, much larger in order to create shareholder value given how much things have admittedly changed in the marketplace? Or perhaps is there more value creation potential if trading and merchandising are part of another entity or perhaps a separate entity?

Gary Rodkin

Well, Jim, I won’t comment on that last speculation. But, what I will tell you is that there are no big acquisitions planned and I think that’s prudent for us at this time clearly because you need to have a very, very solid foundation. We don’t want to do something until we clearly have our own blocking and tackling and house in order. We have made lots of progress. We still have a ways to go to be that really finely tuned operating company. That’s really where we are at today. So, we are still in the early stages.

I would also tell you that it’s clear to us we don’t want to walk away from it. We know that we’ve got some work to do that resides in the consumer foods business. Those plans arein place now. We will start to see improvement in the back half of this year and clearly into next year. I don’t want to disregard the contributions that we are getting from the trading and merchandising group. That’s clear.

Maybe even more importantly, the one that we just don’t talk about enough is this quarter our $1 billion worth of Food and Ingredient business which has performed exceedingly well over the last few years on a consistent basis and in particular our Lamb Weston business is just an absolute rock solid outstanding performing business, top line, bottom line, momentum, return on invested capital. Any way you look atit -- innovation, customer service -- that is such a terrific business and that whole food ingredients portfolio has performed extremely well. That has also helped us to have that consistency of earnings.

So, we’ve got two of the three pieces working extremely well, we got the plans in place, the execution is going to berock solid as we go forward on consumer, we’ve got a lot of good things happening in terms of building our foundation. Our systems are getting better with SAP, our store shelves are looking better, we are continuing to make progress on all those fronts. So, I think that’s really what the story is.

Jim Lane - TRI Asset Management

My question is in the context of the positive and the negative of the year and more in light of the fact that that capital markets haven’t rewarded the company or the stock for that increased stability.

A follow-on question to what other people have asked. On the questions regarding pricing and costs, I was wondering if you could fill us ina little more on what haschanged internally at ConAgra such that there is strong creditability to the comments regarding a more accurate pricing initiatives with regards to inflation?

Because while everyone seems to bea bit behind the curve, I do think we area bit further behind the curve with regards to our product portfolio. So, what granularly is being done atthe company different today than say was done six months ago such that we are not surprised in another six months? Thank you.

Gary Rodkin

Jim, you are talking specific to pricing?

Jim Lane - TRI Asset Management

Correct.

Gary Rodkin

Specific to pricing, I can tell you that one thing that’s different is our wiring is far better. These are muscles that we’ve had to build. We learned a bit the hard way as the inflation just roared on us. We got a bit of a late start, but I can tell you clearly that we’re inthe mode now where we are going to makeup for that year as we getin the back half.

Clearly, another piece is my direct involvement. It is clearly on my radar screen as a top priority, and I mean, ata granular level. I think those two things, the awareness of the organization, the wiring between the different pieces, say between procurement, the operating groups, and the selling organization, it’s just stamped on everybody’s forehead now as a top priority and the proof will be inthe pudding. As I’ve said, we will see some evidence of that in Q3, and we will see much more of that in Q4.

Operator

Returning to Citi Investment Research, David Driscoll.

David Driscoll - Citi Investment Research

Two question for you guys. The first one Gary is on Banquet. Given the problem that you had on the pot pie business there, do you think that those negative issues with consumers on the recall, did it carry over into other aspects of that brand just noting that is the single largest frozen brand you have? So, I think there should be probably a great deal of sensitivity to how that brand performs under a negative scenario like a salmonella recall?

Gary Rodkin

Actually, no rub off whatsoever. Clearly, that pulled our numbers for Banquet down inthe quarter, and you can see that inthe scanner data. But we have some excellent plans in place on Banquet and thecore business, thecore components of the business are performing extremely well and we’ve got 100% of our distribution back on pot pies already which says something about the customers’ thoughts about the Banquet portfolio. Everything basically is back on the shelf or will be in very short order.

David Driscoll - Citi Investment Research

That’s helpful. Next question, Andre, is on commodity hedging. Can you talk to us about how you’ve hedged the consumer foods business? I want to make a guess here that says that given how fast this rate of inflation is moving that you really didn’t have much inthe way of commodity hedges in place for that business. Is that accurate and/or what’s the percentage you have hedged for the balance of the year?

Andre J. Hawaux

David, well, I’ll say what I said last quarter. We don’t comment publicly on our hedging strategy in our organization.

David Driscoll - Citi Investment Research

Nothing, zero comments whatsoever?

Andre J. Hawaux

Correct.

Operator

Your next question comes from Ken Goldman of Bear Stearns.

Ken Goldman - Bear Stearns

Marketing and R&D, how do you see that? Is it up significantly in the back half of the year? Tied to that, you mentioned that share repurchase is an option right now. I am wondering really why, given that a lot of investors and even yourself seem to want to increase R&D and marketing over the long term. Why would you not put that cash back toward those long-term investment drivers rather than give it back to shareholders right now?

Gary Rodkin

Ken, I can’t promise you that you will see increased spending on A&P. I think we are atthe right levels. What I can tell you, is it is much more effective and efficient than it’s been inthe past. We’ve taken a lot of non-working dollars out. Clearly, that’s a very good thing. The return on investment mentality that we have against our marketing efforts is a very different approach for us and you also have to take a look when I talk about the level of investment, last year in Q4 we made huge jumps in how much we spent on A&P, and that was because we had the opportunity to do so, some of that afforded by the trading business. We are not planning on that. So, the numbers I think are going to be what the numbers are.

We feel very very good about the marketing efforts and even better about our innovation. Again, it’s about the effectiveness and I can tell you, clearly, I can’t open the [inaudible] on all of the innovations that we have got inthe pipeline. But, it is extremely robust, and it will be up to us to introduce them in a measured enough way that we make sure that the execution is perfect and flawless.

Andre J. Hawaux

Your question on share repurchase, the way I’d answer that is I think we have to Gary’s point in our algorithm in the back half of the year, we have all of the things that he has mentioned on innovation, and effective marketing spending, our plans are already there. So, we do believe that our shares where they are currently priced today offer us a very attractive return on investment if we were to go out and get some. So, that’s where we are at.

Gary Rodkin

We will always balance against the long-term opportunities we have internally and we are never going to shortchange when we have got strong potential internally.

Operator

Your next question comes from Christine McCracken - Cleveland Research.

Christine McCracken - Cleveland Research

Just a quick follow up on your fertilizer and ag businesses. If you look at the fertilizer markets as an example, they are just on fire right now. You mentioned that in your comments. What’s to say that they won’t continue to outperform? I mean clearly, you have to balance your costs versus demand, but looking ahead at this coming year and where commodity prices are specifically, I mean you should have one of the biggest crops – barring any unforeseen weather-related events -- that we seen ina long time, particularly, probably the demand for fertilizer given this type of commodity environment is going to be massive. Why wouldn’t you forecast ongoing, strong performance from that group?

Greg Heckman

I would just say we absolutely take into account not only all of the external factors, but as well as the internal factors when we put that forecast together. I think the way you want to think about it, you look inthe portfolio, you’ve got good diversification across ag, energy and fertilizer and we look at what we believe those base earnings can be while not counting on the opportunistic-type earnings that portfolio will allow us. So I think that’s really how you got to think about it.

Operator

Moving back to Robert Moskow, Credit Suisse.

Robert Moskow – Credit Suisse

Andre, you said that in wave one, you are almost complete closing down plants. I always thought that wave two would have another round of closures of plants because you guys have said that your manufacturing footprint was too big. Are you saying anything now about wave two, has anything changed regarding your thoughts on wave two?

Andre J. Hawaux

We haven’t said, we didn’t say that and we are not saying anything now relative to wave two. I think one of the things we are doing is reassessing that fixed versus variable element and I think Greg, having being inthe role inthe transportation side is now stepping into the broader supply chain role. We are really reevaluating what we need to do and with innovation coming and different innovation on different platforms, I think it’s important for us to relook at our network and determine where we need to be. So we have not announced anything in wave two and we don’t plan to anytime shortly.

Gary Rodkin

And it’s really all about total delivery costs. So we are going take a look, Greg’s charge is to look across the whole footprint and deliver the savings, but it’s across total delivered cost, total end cost.

Operator

Your next question comes from Eric Katzman of Deutsche Bank.

Eric Katzman - Deutsche Bank

Thanks for taking the follow up. Gary, I guess at CAGNY last year you took the growth rates up on expectations longer term from 7 to 9 to 8 to 10. If I am understanding it correctly, your message today is that the company, given the inflation environment, needs to look at dollar profits and dollar sales and dollar margin as opposed to percentages.

If the trading group is let’s sayat a normalized rate and you get a few percentage points from share repo given your cash flow and balance sheet strength, does that imply that you need to geta 4% to 5% sales growth from everything else food-related and an equal percentage of EBIT growth? Is that how we should think about it?

Gary Rodkin

Eric, I would tell you that we are still committed to the 8% to 10% so that is most important and it is likely that we will probably take our top line number up; I don’t want to commit to an exact number on that. Right now we will revisit at CAGNY, but we are on the right track.

Operator

From UBS, Jeff Kanter.

Jeff Kanter - UBS

Greg, I would like to get your thoughts on this. How does your team think about grain trading and merchandizing in light of this energy bill? Clearly investors seeit as a money machine in a different world. I was wondering if you think about this in kind of the same way, that we are ina different world and it’s not a bad world to be in from grain trading and merchandising?

Greg Heckman

I guess I would agree with you that things have definitely changed with the convergence of food and fuel and it’s changed on the breadth and amounts of inflation that is affecting us and hence the volatility. So we do think that we will see this commodity cycle for a while.

We are also seeing a global growth which is also contributing to that. So it’s a little bit of a perfect storm. I think that’s why you do hear all the consumer products companies as well talking about the depth and breadth of inflation across all of the ag, energy transportation, packaging. It is why they are talking about inflation or pricing, because it truly is a different day.

Jeff Kanter - UBS

So taking that, if I could just build on that and ask Gary a question, how do you look as everybody looks at your consumer foods result in isolation, but your EBIT is and your cash flows are what your cash flows are; clearly you have flexibility to take these cash flows from this new world that Greg is living in to reinvest behind Consumer Food.

So when you say 8% inflation, I mean, that excludes this natural hedge sodo you feel like you have flexibility that a lot of other packed foods companies don’t have to reinvest behind the business? How do you kind of think about it just from a top down perspective?

Gary Rodkin

I do think about it that way Jeff. However, given the volatility it’s hard to pin Greg down on exactly what he is going to deliver next quarter. So we really have to play it by ear. I think a really good example is last year in Q4 as I talked about a little while ago where we saw the opportunity. It was very clear and we are able to act quickly and make some very good investments in our consumer business.

But we always have to remember that we are going to spend the money on an ROI basis, not just because we have a lot of money, we have to have good places to put that money, but clearly we do believe that with the occasional upsize provided by trading that we do have some opportunities to reinvest inthe other parts of our business.

Operator

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

Chris Klinefelter

Just as a reminder, this conference is being recorded and will be archived on the web as detailed in our news release. As always, we are available for discussion. We thank you very much for your interest in our company and Happy Holidays.

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