Gary Rodkin - CEO John Gehring - CFO Chris Klinefelter - VP, IR André Hawaux - President, Consumer Foods Paul Maass - President, Commercial Foods Segment

David Palmer - UBS Bryan Spillane - Bank of America David Driscoll - Citi Investment Research Ann Gurkin - Davenport Eric Serotta - Wells Fargo Securities Terry Bivens - JPMorgan Eric Katzman - Deutsche Bank Chris Growe - Stifel Nicolaus Jackie - Morgan Stanley Robert Moskow - Credit Suisse Robert Dickerson - Consumer Edge Research

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.

Thank you. Good morning. Welcome to the call and thanks for joining us. I'm Gary Rodkin and I'm here with John Gehring, our CFO; and Chris Klinefelter, VP of Investor Relations. This morning we'll talk about the strategic operating and financial aspects of the quarter, and then take your questions. But before we get started, Chris will say a few words about housekeeping matters.

Good morning. During today's remarks, we will make some forward-looking statements. And while we're making those statements in good faith and are confident about our company's direction, we do not have any guarantee about the results that we will achieve. So if you'd like to learn more about the risks and factors that could influence and affect our business, I'll refer you to the documents we filed with the SEC, which include cautionary language. Also, we'll be discussing some non-GAAP financial measures during the call today, and the reconciliations of those measures to the most directly comparable measures for Regulation G compliance can be found in either the earnings press release, our Q&A, or on our website at the Financial Reports and Filings link, and then choosing Non-GAAP Reconciliations. Now I'll turn it back over to Gary.

Thanks Chris. As you can see from the release, EPS was $0.45 as reported, and on a comparable basis. The environment in our second quarter remained challenging on a number of fronts: tough retail categories, high inflation, and weaker than planned response to promotions. In our commercial operations, we again had lower profits than planned in our potato business, which was impacted by last year's unusually poor quality crop. Overall, the second quarter challenges were more severe than we expected, but I want to be clear that we're confident in our ability to deliver much better year-over-year results in our second half for several reasons. I'll talk about those in a minute. Looking forward to the next year or two, there's some challenges that will be with us for a while, but because of the strength of our foundation, and our proven capabilities, we're confident in our ability to manage through it. Moving on to a quick highlight of the segments, consumer foods sales dollars were up about 1% as reported, organic unit volumes were up 1%, and market share increased. Our largest business, frozen, posted a very good organic top line. Acquisitions net of divestitures added about 3% sales. Price mix was unfavorable by 3%, reflecting promotions that were not as effective given tough category and overall difficult competitive conditions. Consumers are shopping from lists, making more quick trips to the store instead of stocking up as much, and being as value-conscious as we've ever seen. So we did not get the lift on the promotions that we would normally expect to see, and that negatively impacted price mix and profitability. We've learned from this, and we have insights and strategies that we believe will help us better address the new shopping behavior. To be specific, some of our brands are often stock-up products. Shoppers have reduced their pantry inventories, and are shifting a bit more to a just-in-time mode. In response, and in collaboration with retailers, we're looking at downsizing some of our club store packs and we're also considering some changes to our merchandising multiples. We clearly understand that consumers are being more discriminating in their spending choices. We're working through how to take advantage of that in our communications. This means you'll see and hear us be more direct about our functional benefits in our marketing. One element of this will be expanding our frame of reference on some of our products. For example, we've begun a drive-time radio campaign on Marie Callender's meals as a great alternative to stopping for takeout on the way home. We believe we have upside potential in more clearly articulating the real value of the food within our portfolio in a way that really resonates with consumers. Segment operating profit was down 13% on a comparable basis due to the impact of promotions on price mix and inflation and other product cost increases that in aggregate were greater than the cost savings. To be clear, our consumer foods cost savings are on track. We should exceed our $275 million goal this year. Our expectations all along have been to generate slightly higher savings in the back half compared to the first half. Given the size of the inflation we're experiencing, and which we expect to continue, cost savings cannot fully offset it, which is why pricing actions are necessary. I'll say more about that shortly. Moving on to commercial foods, sales were up 3%. Lamb Weston volumes increased. We think we're past the worst of the restaurant trends as we're seeing slight improvement. Flour milling sales dollars increased due to higher wheat costs, which are passed through. Operating profits on a comparable basis for commercial foods were down 16%, largely due to selling and processing last year's high-cost, low-quality crop at Lamb Weston. Also, our sweet potato plant started operating this quarter, and whenever you bring a new plant online there are some startup costs. Flour milling profits were good and on track with our plans for the quarter, but below very strong amounts a year ago. Looking ahead, we believe that our second half will show much better year-over-year results. That's been our plan all along. We're expecting the macro challenges to still be with us. Our confidence is based on improvements already underway. We're looking forward to second half improvement because, one, we have net pricing actions in process. We believe this is necessary and appropriate given significant cost pressures. Two, our second half supply chain cost savings will be strong, slightly higher than the savings generated in the first half, reflecting the flow of projects and timing of savings throughout the year. Three, SG&A costs will be lower, due to lower incentives and our strong focus on overhead cost controls. Four, profit and sales contributions from new products already in the market, as well as acquired businesses, are expected to accelerate. And five, Lamb Weston is now processing a new, higher quality potato crop. Again, we have easier comparisons in the back half given last year's very strong first half, and we expect to benefit from ongoing share repurchases that John will say more about. With that overview, I'd like to offer some thoughts on each of those, starting with pricing. We're taking net pricing actions, some in list price, some in merchandising, given the sharp increase in commodity costs such as proteins, oils, grains, and packaging. This is an industry-wide issue, and we know we're not alone in experiencing margin pressures. Some categories, of course, are increasing more than others, for instance, products with protein, like frozen meals. We're well aware of the potential tradeoff we're making with some very modest risk to volume. This is a tradeoff we're willing to make because it's the right business decision. We simply cannot have deflationary, or even flat, pricing in light of significant and accelerating input cost inflation. That would not be a successful strategy for anyone, and even after pricing actions, our products will continue to deliver outstanding value for every dollar spent. We recently announced price increases in cooking oil, table spreads, and some snacks businesses. Though some have been announced, some are happening right now, and more are to come. Another important aspect to the back half is cost savings. Our strong cost savings engines will provide fuel in the second half of the year as we planned, which will help us better offset inflation but probably will not offset all of it. We're confident that we'll deliver in excess of $275 million in consumer supply chain savings this fiscal year, and we always expected this year's savings to be slightly more concentrated in the back half of the year due to the flow and timing of projects. While the bulk of our cost savings are in cost of goods sold, I don't want to ignore the important focus going on in terms of SG&A efficiency. We continue to drive a zero overhead growth culture. In addition, there is a favorable EPS swing due to the change in incentives because we truly do pay for performance. Last year paid out above target. This year will pay out below target. Let me now turn to new product innovation, acquisitions, and brand performance. Keep in mind we have some great innovation in the market. We expect these products to start hitting their full potential in the back half and make more contributions as time goes on. Specifically, I'm talking about Healthy Choice Lunch Steamers, Marie Callender's Signature Bakes, and Banquet dessert pies. We have other innovations slated for the back half of the year, particularly in multi-serve meals and in snacks, and all together we expect the profit contribution from these activities to be stronger in our second half of the year. Despite a tough economy, innovation continues to drive volume, sales, and profits. Our frozen business had another good quarter of share, net sales, and volume growth. While we have innovation in many categories, frozen is one category where we can really see the positive impact of fewer, bigger, better innovations and smart acquisitions. Healthy Choice dollar share was up almost a full point for the 13 weeks ending November 28 versus a year ago. The new Healthy Choice steaming entrees are off to a good start after being launched in the first half, and we expect to see continued growth in the Café Steamer line with the launch of four new Healthy Choice Asian flavors. We're restaging the current all-natural entrees into the steaming entrée format for an even fresher delivery, and finally, we've had a very successful launch of Healthy Choice in Canada, where we entered the frozen segment this year with our steamer products. We're looking forward to doing more with our frozen portfolio in Canada. We recently expanded Banquet, the ultimate in strong value branding, into a new category for us, frozen desserts, via the launch of Banquet fruit pies. Since then, we've seen strong growth added to the Banquet franchise that's adding both net sales and gross margin to the Banquet business. We intend to continue expanding the franchise to new occasions and day parts, with further innovation to capture more of the grocery dollars of the Banquet consumer. Marie Callender's is one of our strongest, fastest growing major brands. We're winning in single-serve, expanding our share of multi-serve, and are growing in adjacent categories as well. This is one of our fastest-growing big brands, with organic sales posting a CAGR of 7% over the last five years. And with our recent acquisition of the Marie Callender's pie business, we expect this to accelerate to even stronger results. As you know, we acquired the Marie Callender's dessert pie business earlier this year, and that acquisition is helping us pick up profitable volume and share in the frozen dessert category. This is a sizable business, which posted strong year-over-year growth in the heavy Thanksgiving season. Our new Marie Callender's Signature Bakes are also doing well, steadily picking up share and driving our strategy of growth in the frozen multi-serve category. Marie Callender's single-serve meals are continuing their strong performance to increase in share, volume, and net sales during the quarter behind new marketing and the launch of Marie Callender's Fresh Flavor Steamers. In fact, base volume is up over 10% for the quarter. Our success is not just in frozen, however. Our Slim Jim business is recovering well, with significant gains in distribution and share approaching historical levels. Sales for Slim Jim were up 11% for the quarter. We took the opportunity during our manufacturing disruption to pair the Slim Jim SKUs to those that are the most profitable and we're doing more volume with less complexity. Looking ahead, in the new calendar year, we have exciting new Slim Jim innovation to keep the momentum going. Another big win for us is our nutrition, fruit, and snack bar business. This is a category where we play the leading role in store brands. As you know, we've added to this platform with our recent Elan acquisition. This category has been a great one for us, and we've had a strong rate of organic sales growth over the last few years. We have excellent customer relationships and significant expansion opportunities thanks to our innovation capabilities and supply chain excellence. The last major operating point I'll make has to do with processing a higher quality potato crop. Lamb Weston finished processing and selling products made from last year's poor-quality potato crop during the second quarter. We're now past the old crop and into the new, higher quality one. Profits improved at Lamb Weston as the second quarter progressed, reflecting the fact that we'd begun processing the new crop. By quarter end, the operating efficiencies were reaching the planned run rate, and based on that trajectory, we're very pleased with the outlook for the second half. It's also encouraging that this is occurring when we're seeing restaurant traffic start to turn around. We seem to be past the worst of it, which bodes well for the Lamb Weston business. We began running our sweet potato plant in Louisiana during the second quarter. This is one of the first new food plants in the country to incorporate best-in-class manufacturing technologies with LEED standards for environmentally sustainable construction. LEED stands for Leadership in Energy and Environmental Design. The plant's sustainable design will help us conserve resources, cut waste, use less energy, and reduce our carbon footprint. Sweet potato fries clearly have momentum, and are generating a lot of buzz in the food and mainstream media. That's due to the combination of great taste and a healthy halo. Americans' per-capita consumption of sweet potatoes is up 21% annually between 2004 and 2009. As you can tell, we're very excited about capitalizing on the opportunities in the sweet potato market now that our state-of-the-art plant is up and running. Wrapping up, we have several important factors that should result in a better second half, despite a continuing tough environment: net pricing underway in consumer foods and at Lamb Weston, strong supply chain savings, lower SG&A, the benefit of products introduced in the first half and the recent acquisitions that are gradually contributing more, and finally the new potato crop, which will provide a substantial swing in profitability for Lamb Weston in the second half. We've already put this tough first half behind us, and are committed to delivering a stronger second half. As we've previously communicated, for the full fiscal year we expect yearly EPS growth to show a low single-digit rate over the comparable $1.74 we earned in fiscal 2010. Looking out over the next couple of years, we're all clearly facing challenging economic conditions for some time to come, but here at ConAgra foods, we're confident that our stronger foundation, the value we deliver to consumers and customers, the capabilities we can leverage, and our organizational agility will serve us well and allow us to improve on this year's performance. We have a much stronger infrastructure to leverage great sales, marketing, innovation, customer service, and supply chain capabilities. They give us confidence in our ability to generate sustainable, profitable growth as we look ahead Thank you, and now I'll turn it over to John.

Thank you Gary, and good morning everyone. I'm going to touch on four topics this morning. I'll begin by addressing the $554 million of proceeds we received from the repayment of the payment in kind notes receivable, or PIK notes, related to the sale of our trading and merchandising business in June of 2008. Then I'll comment on our second quarter performance, including comparability matters. Next, I'll move on to cash flow, capital, and balance sheet items, and finally I'll share some comments on our updated outlook for fiscal 2011. Let me start by walking you through the various aspects of the PIK note repayment. On December 6, subsequent to quarter-end, we received $554 million from the early repayment of the remaining PIK notes associated with the sale of our trading and merchandising operations in June of 2008. We received payment in full for all outstanding principal and accrued interest. Overall, the repayment represents a terrific outcome for a very successful divestiture transaction. In the third quarter, we will record a pre-tax gain of approximately $25 million, or $0.04 per share, associated with this early repayment. With respect to the use of the $554 million of proceeds, our board has increased our share repurchase authorization by the amount of the proceeds, such that our total open authorization is now approximately $750 million. We will forego approximately $40 million of interest income during the balance of 2011, and we expect that this lower interest income net of the benefit of planned share repurchases will negatively impact our full-year comparable earnings by approximately $0.03 to $0.04 per share. We do not expect any material earnings dilution beyond fiscal 2011. To clarify, we expect the earnings dilution to be limited to the current year, and this is driven by timing. We missed out on interest income immediately, but the benefit of our planned share repurchases lagged by several months. Now, I'll provide some comments on our second quarter performance. For the quarter, we reported net sales of $3.2 billion, up 2%, driven principally by volume gains in both segments. We reported fully diluted earnings per share from continuing operations of $0.45 versus $0.53 in the year-ago period. Adjusting for items impacting comparability, fully diluted earnings per share from continuing operations was $0.45, or 12% lower than the $0.51 from continuing operations in the prior year. Next, I'll highlight a few key metrics for our consumer food segment. First, consumer foods net sales were $2.1 billion, up 1%. Base volume improvements and contributions from acquired businesses were partially offset by negative pricing and mix. New businesses net of divested businesses contributed approximately $53 million of net sales. And, for this quarter, foreign exchange had an immaterial impact on net sales. Inflation and other changes to our cost base for the consumer foods business outpaced cost savings in the quarter. Our consumer foods supply chain cost reduction efforts continue to yield good results, and we delivered cost savings of approximately $80 million in the quarter. Further, we expect our programs to deliver in excess of $275 million for the year, which should help us battle higher inflation. On marketing, consumer foods advertising and promotion expense for the quarter was $99 million, down approximately $11 million from the prior year. For the full year, we expect A&P to be down about 7% from the prior year as we shift the marketing mix in the current environment to focus more on trade and promotional activity. We also continue to prioritize investments behind our key brands and innovation initiatives and raise the bar on impact and return requirements for all marketing investment. Turning now to commercial foods, net sales were $1.1 billion, up 3%. The increase was driven principally by stronger volumes across the segment. Overall, segment operating profit was down 16%. The decline was due principally to selling and processing last year's high-cost, low-quality potato crop at Lamb Weston, and to start-up costs at our new sweet potato plant in Delhi, Louisiana. Our mills business and other commercial units continue to perform well, although their operating profit was down slightly versus a very strong year-ago period. For the total company, our core selling, general, and administrative expenses - which exclude items such as advertising and promotion incentives, commissions, royalties, and comparability items - were in line with our zero overhead growth goal for the quarter. We continue to challenge our team to control costs and to achieve high ROI on incremental G&A investment. Corporate expenses for the quarter on a comparable basis were $88 million versus $100 million in the year-ago period. The reduction is driven by lower incentives. The tax rate for the quarter was 34%, and we also expect the full-year rate to be in the range of 34%. Overall, the net impact of comparability items in the quarter was immaterial. Now, let's turn to cash flow, capital, and balance sheet items. First, we closed the quarter with $545 million of cash on hand and no outstanding commercial paper borrowing. As a reminder, this cash balance does not include the PIK note proceeds received subsequent to the quarter end. Over the past couple of years, cash flow has been an area where the company's focus and consistent execution has really paid dividends, literally. On operating cash flow, we expect to deliver in the range of $1.2 billion of cash flows from operating activities for the year, a very healthy amount by anyone's standards, and that is despite some earnings pressure and approximately $110 million of discretionary pension plan contribution that we made during the first quarter. On working capital, through the first two quarters we have executed well on our working capital initiatives. While year-to-date working capital has been a use of cash, due principally to the seasonality related to crop-based inventories, for the full year we expect that working capital improvements in our base business will generate in the range of $100 million of cash flow from continuing operations. Next, on capital expenditures, for the quarter we had capital expenditures of $82 million versus $123 million in the prior year. For the full year we expect cap ex to be approximately $500 million, down slightly from our previous estimate. And, as we've said before, the mix of our capital expenditures continues to shift away from infrastructure into more innovation. Net interest expense was $34 million in the second quarter, versus $41 million in the prior year. Interest income from the PIK notes associated with the sale of our trading and merchandising operations was $19 million in the current quarter and $20 million in the year-ago period. Dividends for the quarter increased to $88 million from $84 million in the prior year. Now let me update you on some capital allocation matters. First, during the quarter we repaid approximately $250 million of 7.875% notes that matured on September 15, 2010. Also during the second quarter, we acquired approximately 4.6 million shares for about $100 million under the $500 million share repurchase program that our board authorized during the third quarter of fiscal 2010. As I noted previously, with the additional board authorization related to the receipt of the PIK note proceeds, and considering the shares repurchased in the second quarter, our total open authorization is now approximately $750 million. In addition to share repurchases, we also remained focused on growth and profit enhancement investment, including new product introduction and capacity expansions such as our new sweet potato facility in Delhi, Louisiana. We also continue to pursue growth opportunities through acquisitions. We're very confident in our operating capabilities and our ability to add to the portfolio where there is a strategic fit and a good financial return. As we've previously noted, we look for acquisitions that drive growth in categories that align with our core competencies, help us leverage our existing infrastructure, and therefore enhance our efforts to optimize our portfolio. Now I'd like to share some comments on our updated fiscal 2011 outlook. As Gary mentioned, we expect fiscal 2011 diluted earnings per share, adjusted for items impacting comparability, to grow at a rate in the low single digits from our 2010 base of $1.74 per share. Our updated 2011 earnings estimate reflects revenue growth in the low single digits; full-year cost savings in excess of $275 million in our consumer foods business; a continued focus on selling, general, and administrative cost controls and lower incentives; and an expected effective tax rate for continuing operations in the range of 34% for the full year. Overall, for the reasons Gary detailed in his comments, we expect year-over-year EPS growth in the second half of the fiscal year, and given the timing of both pricing actions and expected share repurchases throughout the balance of the year, we do expect earnings to increase from Q3 to Q4, with growth in each quarter. That concludes my remarks. I want to thank you for your interest in ConAgra foods. Gary and I, along with André Hawaux and Paul Maass, our new president of the commercial foods segment, will be happy to take your questions. I will now turn it back over to the operator for our Q&A session.

Thank you. Now we'd like to get to an important part of today's call, taking your questions. [Operator Instructions.] And it looks like our first question today comes from David Palmer with UBS. David Palmer - UBS: Two related questions. You mentioned that net pricing actions would result in some sort of a modest by acceptable volume hit. What sort of net pricing and volume reaction should we be thinking about, if you can give us some rough brackets? And then also, somewhat related to that, are you seeing signs in the marketplace today from some of these actions that are giving you comfort that this is only a modest volume hit? And then focusing on the frozen entrees area, it seems that that is one area where promotions continue and it looks like promotion effectiveness is almost alarmingly too high. In other words, it's encouraging folks to keep the promotion pedal to the metal. Do you see it that way in that particular category? Thanks.

Well, David, that's a lot of questions, and I'll deal with the first part of it and then I'll turn it over to Andre to finish up. I would tell you that the key word here is "modest," so we are not looking at huge downward movement in our volume. We're being very smart with our pricing architecture and our strategies, but we are believing it is critically important to take net pricing actions, both in our list price in some products and our merchandising strategies in others given the intense commodity inflation. So we are willing to make that tradeoff, but we are being very judicious. You won't see major spikes up or down, either on pricing or on volume, but when it comes to making that tradeoff, we are willing to do so. Andre, want to fill in some more?

Yeah, I think the second part of your question was, as we've announced some of these increases, what have we seen to either give us comfort to the modest number that Gary mentioned, and I think so far based on what we're seeing in both the consumption [uptake] in syndicated channels we would say that the right word is modest. We haven't seen significant declines in our volume. I would say, though, that not all that pricing is through, and as you well know there's still timing that needs to happen for some of the merchandising to sort of flow through. The third part of your question was around frozen, and I will tell you a couple of things on frozen. One is that category historically, and I believe in the future, will continue to be a very promoted category. It is one where on average one of the major companies has something going on every week. I don't believe that's going to change. That's the nature of that category. What I do think we are going to do, based on some of the inflation that we're seeing, is we are going to continue to try to maintain the same level of frequency but the depth is something that we're going to have to come off of. So we're not going to be able to maintain the kind of depth of promotion, and therefore depth of pricing, that we've seen in the past because of the inflation. So the goal for us is to maintain the quality of merchandising that we do get, certainly at higher price points.

We'll take a question now from Bryan Spillane with Bank of America. Bryan Spillane - Bank of America: Two questions. One, just in terms of SG&A in the back half of the year, will advertising and marketing expenses be up or down in the back half of the year? What I'm trying to get at is are you going to try to support price increases with more advertising? How should we think about that?

Our A&P dollars in the back half are actually down a bit. Not a lot, but down slightly. What I would tell you is that in the first half of the year, despite the fact our A&P dollars being down due to the vehicle media mix efficiencies, our impressions actually were up. So we are, again, willing to make a bit of this tradeoff. However, I would tell you that we're going to see net pricing increases so you're going to see it plus versus a year ago. We're not looking to subsidize with A&P cut.

I would just add, to echo Gary's thoughts, our focus really has been around the news and the innovation and then really getting consumers to understand that change in terms of point of reference. So, as Gary alluded to earlier, the whole "time to savor" radio campaign we're doing with Marie Callender about the choices you have as a consumer to make. And so that's where our emphasis is. So we're putting good, solid dollars behind those programs. Bryan Spillane - Bank of America: And then just unrelated but just maybe John could talk a little about in terms of share repurchase, what would cause you to consider maybe doing a more structured transaction like an ASR in terms of getting the share repurchases done sooner?

Well, what I'd tell you is we're going to evaluate all our options. We are very confident that we can deploy the proceeds from the PIK notes pretty quickly. We expect that to happen over the balance of the year and we're confident that the options available to us will enable us to do that as quickly as possible.

We'll take a question now from Citi Investment Research and David Driscoll. David Driscoll - Citi Investment Research: A couple of questions. The first one, just going on to the commercial side, Gary I'm not sure if in the quarter the higher potato costs were a negative variance relative to your guidance last quarter. It sounds like it was, meaning to say that you knew the potato crop was going to be a difficult one, but it was even more difficult than you thought. Can you talk about that a little bit? And then on the consumer side, can you guys - I don't think you said this, but can you just give us a magnitude as to what you expect to achieve in terms of net price increases in the back half of the year?

I would tell you that the potato crop issue was more focused on yield, meaning the manufacturing efficiencies, and as it came out of storage being in tougher conditions than we expected it to be, and that was a primary issue that hit us harder than we thought it would in Q2. Fortunately, as we worked our way through the quarter as the new crop has started to come in, we are already seeing a significant turnaround. So that's behind us. And on the net pricing front, I would tell you, again, we're not looking at major spikes, but we will see, particularly as we get deeper into the second half, by the fourth quarter, we will see net sales increase versus a year ago. And that will be driven by the net pricing actions that we've talked about. David Driscoll - Citi Investment Research: One of the first points in your press release is how difficult the environment is, and you believe that you've taken this into account adequately in the back half of the year? Because a lot of folks are a little nervous after two guidance reductions that you're being maybe too optimistic given the fact that it's an environmental issue. How do you think about that?

Well, I certainly think about it a lot. We all do. I think the most important point is to understand that this is not a ConAgra issue alone. We believe all of our competitors, all of our customers, are suffering from the same issues of pricing down and commodity costs significantly up, and that is not a sustainable strategy for anybody. So we do believe that we will see more rationality in the marketplace come the second half. We also have, as you know, easier overlaps, because last year's first half was stronger than the second half. So when I put that all together, again we believe this is the right, the appropriate, strategy. We've taken the tradeoff of, as I said, modest volume impact potentially into account and are comfortable and confident that this is the right way to go.

We'll move now to Ann Gurkin with Davenport. Ann Gurkin - Davenport: I wanted to ask you a little more detail. You talked about shoppers' just-in-time purchase intentions and how you view your level of promotions' effectiveness in this kind of environment. Do you see that shopping experience continuing in the back half? Can you just flesh that out a little bit?

Let me take some of that. So as Gary mentioned in his prepared remarks, we see total supermarket trips over the last 13 weeks down about 2%. The biggest impact there has been this pantry stock-up occasion that is actually down 5% in terms of total trips. What we do see increasing are what we call quick trips. So those are quick trips that are typically significantly fewer items, and smaller dollar range. So basis that, we see that trend potentially continuing and what we're doing now is trying to make sure that we tie in a lot of our merchandising toward that quick trip mindset. So as Gary mentioned, we're taking a look very strongly at our multiple pricing and a lot of other merchandising vehicles that we currently use today in our arsenal and looking to make slight adjustments to that basis what we see the consumer patterns being. Ann Gurkin - Davenport: And that's going into effect right now or for the second half?

Yeah, I think we've got some merchandising things that are on the calendar that we're not going to take off, obviously, that have been planned months in advance, and we're going to continue those, but yes, absolutely, as our brand teams and our sales teams put together their plans into the new calendar year we're looking at all those elements.

We'll hear now from Eric Serotta with Wells Fargo Securities. Eric Serotta - Wells Fargo Securities: Gary, I'm wondering whether you could help me square away your comments that you made on the solid organic top line growth that you saw in your frozen portfolio with some of the commentary in the Q&A document showing that Banquet was down on a year-on-year basis in terms of sales and Healthy was down flat. And I guess as a follow up to that, I'm hoping that you could address whether you would perhaps need any further reverse engineering in pricing or in the Banquet product line like you had last time around in order to keep to that $1 or so promoted price point.

I don't have the numbers at my fingertips, but I believe between Health Choice and Banquet that was around flat or close to flat. The big pluses were on Marie Callender's, so the net of the portfolio was a clear plus. And what was the second part? Eric Serotta - Wells Fargo Securities: Last time around, when you had a much greater degree of price of commodity inflation you had a major restage of Banquet in which you kind of reverse engineered the product. Any risk that you won't be able to keep to $1 or so promoted price point this time around given the inflation in protein, packaging, oils, and other inputs?

On Banquet in particular, it's become a way of life for that business, and we've looked out pretty far and are not intending to break that price point. We believe we've got the right margin structure, the right work underway, and the right mix so that we will continue to deliver great value on that product line. Eric Serotta - Wells Fargo Securities: Okay, and lastly you talked about the consumer reduction in stock-up trips and the changes in your merchandising mix reducing some of the multiples, 10 for 10s or 5 for 5s. It seems like some of those shopping behaviors have changed over not just the past quarter but the past six or nine months or so. I'm wondering just if you could give some color as to why it's taken so long to make some of the changes. Is it the commitments that you've made to retailers? Just wondering why you haven't been a little bit more nimble in reacting to and changing some of those pricings and merchandising strategies.

I think it's a very good question. I think in some cases, I want to just be clear for those on the call, that not every brand doesn't respond to 10 for 10. There are places when, as we go through and dissect our portfolio, where that merchandising strategy actually does, believe it or not, still make sense with respect to some brands. We have a lot of brands in our portfolio and going through all of those systemically to determine which ones, based on our analysis on lift, will still work. And then, yes, you're absolutely accurate that we have some trade commitments and some merchandising commitments out there that we just unwind as they go through. So look to see a lot more change as we come out of that into the next part of the calendar year or the back half of our fiscal year.

And we'll take a question now from JP Morgan and Terry Bivens. Terry Bivens - JPMorgan: Just kind of a broader question on frozen, Gary maybe for you. We were looking at some of the Cannondale results. It's now - they have a different name. But if you look at the way Nestle is rated, it's not as good as it was and there's some thought that perhaps the retailers expected Nestle to invest more of these synergies from the pizza business to kind of drive the frozen category, which has clearly not performed well of late. What's your view on that? What do you think's likely to come down the pike next year as we look to the entire frozen case?

Well, Terry, I believe that it's innovation and marketing that drive this category, and that's where we've focused our energies and that's what we'll continue to do. It's still a very very large category and you're right, it has gone through a bit of softness as we've entered this economic challenge, but we believe the same dynamics are going to drive this business, and that's what we're going to keep doing.

We'll take a question now from Eric Katzman with Deutsche Bank. Eric Katzman - Deutsche Bank: I guess a couple of questions. First, getting back to Dave Driscoll's question on the potato crop, is there something with this - and I know you've mentioned this in the past, so it isn't really news, but I'm just trying to understand given that obviously Heinz and Frito Lay have very big exposures to the potato crop, but they don't seem to be having an issue with it. Is it something with just where you buy it and your suppliers that's the problem?

What I would tell you, and I'm not real sure what Heinz's model is, so I'm not going to comment on that. But what I can tell you about our business, and I really would reiterate what Gary was saying, there were two main drivers that were worse than we had anticipated, and one I would just define as shrink. The product didn't store well and as we came to the end of the crop we had probably more shrink loss than what we anticipated. And the second is really around manufacturing capabilities and inefficiencies caused by the poor quality. And the good news is we are through it. We're 100% transitioned to the new crop, and that does help build our confidence and optimism as we look forward.

And I would also tell you that our primary market, food service, which is the big majority of our business, we've got a different set of competitors than the ones that you mentioned. Those are somewhat different dynamics than the retail side. Eric Katzman - Deutsche Bank: Okay. Understood. And then maybe this is more a question for Cagney, but I think you're still out there with kind of an 8-10% long-term growth target and we're all aware of what's going on within the industry. Were your cautious comments about some of the longer-term challenges at the moment? Should we kind of go towards the low end of that target at this point in terms of thinking about where you think the business is capable of growing in the coming years?

As we've shared before, our long-term target is 8-10% as you mentioned, and today there's no change or news on that. But just so that you and everybody else understands our planning cycle, shortly after the new year we'll be rolling up our strategic plans that cover the next few years, and that will allow us to discuss those plans and the expectations with Cagney. And that's a process we have every year. Eric Katzman - Deutsche Bank: Okay. Like I said, I thought it would be more of a Cagney discussion anyway. And then just last one if I could. It seems as if there's kind of like a bifurcated consumer. The high end's doing seemingly pretty well. The low end is struggling. But despite that, it seems like a lot of your products are geared towards the lower to maybe low-middle income consumer and at the end of the day people have to eat. Are you kind of surprised that the volume performance of your portfolio overall isn't a bit stronger? Is it that the competitors are just being so promotional? It just strikes me as a surprise given some of your brands that it isn't more of a choice to make - your brand versus a private label alternative or something like that.

You know, unemployment obviously hits the consumer very hard and we probably are more mid-market oriented. I think there's been a bit of a shock to the system. There will be an equilibrium that we reach at some point, whether it's this stock-up pantry inventory or however you want to look at it. We do believe that even after taking some net pricing actions that we will have a portfolio that continues to deliver outstanding value for the dollar, and it's up to us to make sure that we get full credit for it with the consumer and the customer and you're going to see us do more of that. So we do believe that we've got a portfolio that will play well in a tough environment, and I think you'll see that from us as we go forward.

We'll hear now from Chris Growe with Stifel Nicolaus. Chris Growe - Stifel Nicolaus: I just wanted to ask first about cost inflation, I guess to get a sense of how you to expect it to trend for the year. I don't recall you guys giving a formal estimate. But maybe you could talk about an estimate if you can or also to the degree to which you're hedged for the year?

I think for the balance of the year we see our total inflation probably being in the range of 5-6%. We do have a lot of coverage on the commodities where we can take hedges. Obviously some of our inputs are not hedgeable, but a pretty large percentage of our buy for the balance of the year we have covered. Chris Growe - Stifel Nicolaus: Okay, and I think that would imply that in the second half the level of inflation would pick up a little bit from the first half. I guess I'm trying to understand if the gap versus cost savings is going to be any different in the second half of the year. So even though your cost savings are picking up, do you have more inflation as well that can kind of offset that?

We expect the gap between inflation and cost savings to get a little bit tighter, but the inflation's still going to be a formidable challenge up against the cost savings.

And of course that's why we're taking the net pricing to more than make up for that little gap. Chris Growe - Stifel Nicolaus: Sure, okay. And then my final question was on promotion and just trying to understand, after the first quarter you're going to remain promotional for the year. I know John, you mentioned that your promotional spending still would be up for the year. You were going to shift some advertising to promotion. Yet you also want to take pricing. I'm just trying to put all of that together and say, is promotional spending net-net going to be down in the second half of the year, however you measure that?

You know, it's not really an either-or. It's an and. Again, our net pricing is a combination of list price and merchandising strategies, so we are all about the balancing act. And we believe we've got it right given our insights, our merchandising strategies, our pricing architecture. So it's all about the balance. Chris Growe - Stifel Nicolaus: And for a couple quarters now you've had what seems to be - and this goes for all the companies - pretty weak lift from promotion. Would you characterize the second quarter the same way?

Yeah, I'd say that again, it's not one-size-fits-all, because there's some areas where we actually saw promotion effectiveness okay, but I think by and large, overall on the portfolio, yeah, we did not see the level of lift that we're accustomed to with the same kind of merchandising activity year-over-year. And that gets back to what the consumer's doing in terms of less stocking up.

We'll take a question now from Morgan Stanley and Vincent Andrews. Jackie - Morgan Stanley: Hi, this is Jackie [inaudible] in for Vincent. Just wondering if you could comment in terms of the incentive compensation tailwinds how we should be thinking about the magnitude of that this year? You called out this morning that lower incentive comp is obviously going to be a tailwind for fiscal 2011. So just wondering how we can be thinking about the magnitude of that tailwind from an EPS perspective.

I'm really not in a position to get into specifics. I guess from a macro level I think it's important for people to remember that last year we outperformed our targets for the year so we were paying higher incentives this year. Obviously we're in a position to be below our targets. I don't want to get into specific dollars, but it will be a significant, sizable difference. Jackie - Morgan Stanley: Okay, thank you. And if I could just ask one followup on Banquet, are there any sort of channel-specific trends that you're seeing, perhaps in how measured versus non-measured channels are performing there?

No, I think across the board, certainly on the volume side for Banquet, we've been very pleased across the board, so no difference necessarily between what I'd call measured channels and IRI type things and non-measured channels. The performance of that business is very well, and we've been very pleasantly surprised with how strong our fruit pie business has been as well.

We'll take a question now from Robert Moskow with Credit Suisse. Robert Moskow - Credit Suisse: Two questions. For Andre, I was a little unclear. These changes you're making to your promoted price point strategy, do you feel like you were leading or following in that category. And I ask that because it is highly competitive and it matters what your competitors do there in response. And then second, when I look at the portfolio split up between convenient meals like frozen, Chef Boyardee, and maybe even like Manwich, and then a lot of the portfolio was kind of like enhancers for cooking at home. And I look at your core consumer and there must be a lot of unemployment, a lot of food stamps, and I'm just wondering if you're seeing maybe more strength in enhancers that are used to cook meals for the whole family and maybe relatively more weakness in convenient meals that are served just one person at a time.

So just for clarification, your first question was around specifically on things that we're doing in frozen, is that correct? Robert Moskow - Credit Suisse: Right. Are you leading in your decisions to go from 10 for 10 in certain areas to something -

I don't know exactly what my competitive set is doing account by account, but I can tell you there that we are in fact on frozen leading in terms of changing that promotion depth. Our frequency is staying where we want it to be, but we'll be taking the depth off the promotion there. And I've got to believe, from my perspective, as I look at our input costs there around things such as proteins that Gary alluded to before, that that is actually the smart thing and the prudent thing to do in that space. The second part of your question was around as we look at our pillars, what we define as our pillars, between convenient meals frozen, and convenient meals shelf-stable, and things like meal enhancers, would you look at the consumer eating at home more, using more ingredient type things to cook, and while that's true, and we've seen a drop-off, and seen some correlation between unemployment and what's happening to single-serve meals frozen and single-serve convenient meals shelf-stable, we've not seen the commensurate pick up again in the meal enhancer business. Part of that, I think, on the dollar side, is the fact that there's very little to no inflation, actually a little bit less in tomato, so that meal-enhancer business for us is really anchored by Hunt's tomatoes. We're seeing decent velocity in that Hunt's continues to gain share, but we're just not seeing the dollars move through as we initially thought in that space. And a lot of that gets back to, I think, that stock-up occasion and we're also seeing pretty heavy competitive responses in pasta sauce, which, again, is a pretty big category for us as well, where we see some of the mid-tier players playing at a fairly high value. Robert Moskow - Credit Suisse: Right. You think that your competitors in the protein-based frozen meals will probably do the same things that you're going to do. What if they don't?

I think our strategy is the one - I believe it's prudent based on, as we look at our financial algorithm going forward the balance of the year and beyond as we see inflation, and I really can't comment on what our competitors are going to do or not do.

And I would also mention that our customers would benefit from some turnaround in the pricing in this large category as well. We've heard that and what's happening in the category from a pricing standpoint today is not a healthy thing for anybody.

We'll hear now from Robert Dickerson with Consumer Edge Research. Robert Dickerson - Consumer Edge Research: I just had a question around the cash on the balance sheet and capital allocation direction for the next couple quarters, probably it sounds like Q1 of fiscal 2012. But you said earlier today I guess there's about $750 million left in the share repurchase authorization, plus it looks like there was a little bit of bump in your short-term maturities on the debt. I know at year-end you had $260 [million]. Looks like now you're around $350 [million]. And I know this is simplistic, but if I just combine the $750 [million] and the $350 [million], I'm at around $1.2 billion in cash from ops. So I was kind of curious if you could just kind of walk through how you are thinking about that actual $1 billion plus it sounds like you could still have at the end of the year on the balance sheet. Is most of that really just going to the share repo and then the paydown of the short-term debt, or is there potential to potentially term that debt a little bit longer, or what?

Let me see if I can take that in a couple of pieces. First of all, I think as I commented in my original comments and I think in some responses to questions, the $554 million from the PIK note proceeds, we do expect to deploy that in a share repurchase program, and we would expect at this point to be able to execute that over the final two quarters of our fiscal year, which ends in May. We have about $200 million of additional authorization, which I commented on. Again, we will look for opportunities to deploy that over the next several quarters. The $350 million of debt maturities you referenced, I believe that comes due in the fall of calendar 2011, and again at this point I don't know that we've fully committed to whether we'll refinance that or pay it off. The one thing I would want to remind you of is that we are also looking at other growth opportunities from a capital allocation standpoint and we'd like to be able to retain some flexibility to be able to execute on those opportunities as we see them come available. Robert Dickerson - Consumer Edge Research: Okay great. And then I'm just curious as to as we look forward and we think about an increase in capacity and cap ex spend more toward the growth side, is it fair to think or assume that any of that would potentially be going to private label? Obviously your snack bar business has done well. Some could argue that snack bars has taken some share away from other simple meal categories. Would you expect that your cap ex would be tilted more next year or this year to private label capacity relative to last year, or no?

I don't know that I can look that far ahead. Obviously, our bar business has done well. We have put a significant amount of capital behind that. I think as we move forward we're going to look at any and all opportunities through the same lens and those that create the most value for our shareholders, whether they're in private label or somewhere else, will be the ones where the dollars go.

And we have a question now from David Driscoll with Citigroup. David Driscoll - Citi Investment Research: Gary, I just wanted to come back to you with more of a big-picture question. Since 2010 seems to be characterized as a year where we got off to a good start in the first quarter and then things started to fall apart across the grocery store with pretty much category after category getting promotional to a much greater extent than the commodity environment otherwise suggested they should have. Everybody said that they haven't seen the volumes. What's your opinion as to what catalyzed this? What caused this whole sector to kind of go wrong? And then how does it all get back on track and what are your retail partners saying to you about the events of 2010 and looking into 2011?

You know, it will be purely my conjecture, but I really do believe, as we got into 2010, that the consumer settled into what they see as a long-term economic malaise if you will, versus it being just like a normal, fairly short-term recession and snap-back. So I think people started to truly change their behaviors. We've talked about things like the stock-up being less, more just-in-time inventory. We had customers, retailers responding to this by trying to drive foot traffic with more and more deeper discounting. And I think everything reaches a point of equilibrium. The good thing is people have to eat, and I don't think people are consuming fewer calories than they have historically. So some of it's just about getting past the worst of it, which I think you're going to start to see. And then part of it is at some point everybody has to be more rational in understanding when your costs are up as much as they are you cannot sustain those kinds of margin pressures, whether you're a retailer or a manufacture for the long-term health of your business. So when you put all of those things together, I think we'll hopefully look back at 2010 and say the worst is behind us.

And there are no further questions. Mr. Klinefelter, I'll hand the conference back to you for final remarks or closing comments. Chris Klinefelter Thank you. This concludes our conference call. And just as a reminder, this conference is being recorded and will be archived on the web as detailed in our news release. And as always, we are available for discussions. Thank you very much for your interest in ConAgra Foods, and happy holidays.