Good morning, and welcome to today's ConAgra Foods first 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.

Good morning. Welcome to the call and thanks for joining us. This is Gary Rodkin and I'm here with André Hawaux, President of Consumer Foods; John Gehring, our CFO; and Chris Klinefelter, our VP of Investor Relations. Over the next few minutes, André, John and I will provide our views about the strategic operating and financial aspects of the quarter, but before we get started, Chris will say a few words about housekeeping matters.

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 under the Financial Reports and Filings link, and then choosing Non-GAAP Reconciliations. Now I'll turn it back over to Gary.

As you can see from the release, comparable EPS was $0.34. We revised yearly EPS growth expectations to 5% to 7% and we raised our dividend 15%. Consumer Food sales were down 2% and operating profit was down 14% as reported. And Commercial Foods segment profits were also down. That's up a quarter, but not reflective of our current expectations for the full fiscal year or beyond. It goes without saying that we are not pleased with the quarter's EPS. We have already implemented course-correcting actions to improve the overall year, and you'll hear about those actions over the next few minutes. I want to use our time this morning to give you a deeper insight into our first quarter, and more clarity on our outlook for the rest of the year. I'll get into some specifics as will John, and I've asked André to share some of his perspective on the consumer business as well. As I indicated, Q1 was definitely tougher than we planned for. The degree and depth of promotional activity was greater than expected, and inflation outpaced cost savings. And while we knew we would have some carryover profitability issues in Lamb Weston due to last year's poor potato crop and the soft restaurant industry, those costs were more than expected. Given that we have been implementing changes to course-correct and deliver good EPS growth this year, the actions we've taken and will continue to take give us confidence in our ability to improve results in the second half of the year and beyond. This is a stronger ConAgra Foods, and because of that fact, we are very confident we have the foundation including robust innovation, marketing that resonates productivity, and the brands to generate solid earnings growth this year. Let's talk more about this quarter,…

I'm going to touch on five topics this morning. I'll begin with our first quarter performance. Next, I'll address comparability matters. And then comment on portfolio changes. Then, onto cash flow, capital and balance sheet items. And finally, I'll share some comments on our updated outlook for Fiscal 2011. Starting with our first quarter performance, for the quarter we reported net sales of $2.8 billion, down 2% driven by softness in the Consumer segment and the impact of lower wheat prices in our flour milling operations. We reported fully diluted earnings per share from continuing operations of $0.32 versus $0.37 in the year ago period. Adjusting for items impact in comparability fully diluted earnings per share from continuing operations were $0.34. While Gary and André have addressed the Consumer segment results in some detail, I would like to touch on a few key metrics. First Consumer Food net sales were $1.8 billion down 2%. Inflation for our Consumer Food business in the quarter was up from prior year slightly over 5%, and a bit more than our expectations. Our Consumer Food supply chain cost reduction efforts continue to yield good results, and we delivered cost savings of approximately $60 million in the quarter. And we expect our programs to deliver in the range of $275 million for the year consistent with our previous estimates. Overall, Consumer Foods gross margin percentage was down about one point due to pricing pressure and inflation. On Marketing, Consumer Foods advertising and promotion expense for the quarter was $88 million down $7 million from the prior year. The decrease potentially reflects timing differences versus the prior year. For the full year we expect A&P to be inline with prior year as we continue to prioritize investment behind our key brand, and our innovation and initiatives.…

Thanks, John. I just want to close with a couple of key points. Make no mistake about it, I am disappointed in our performance in Q1 and we have already and will continue to make adjustments. But I am confident in our outlook based on the strong foundation we've built and our ability to operate in this environment. To start, the year gets progressively better because we're lapping easier comparables. We have greater SG&A and productivity savings coming and because we'll have a commercial profit issue behind us. More importantly though I'm confident in the quarters and years ahead, because our brands and fundamentals are sound and our efficiencies and cost savings keep getting better and better. We have the wherewithal and the ability to adjust to changing marketplace dynamics. And we will always do what we believe is in the best for the long-term health of ConAgra Foods. Thanks for joining us and I'll turn it back to the operator for Q&A.

(Operator Instructions) And our first question comes from Bank of America, Bryan Spillane.

Just a couple of questions. First, just so I'm clear, what was different in the first quarter relative to what your expectations were going in? How much of it was that your cost inflation was higher than you thought, and how much of it is, if I'm hearing it right, that the price points that you had on your merchandizing at least in some products just weren't low enough relative to where your competitors were?

I would say I'm going to comment on the first part and then ask Gary to comment on the second piece. Clearly in the first quarter, I'd say two things on the cost side that were probably worse than our expectations, one would be inflation, was probably just north of 5%. And I think when we came into the year, we're looking at that number being more in the range of 4%. And then also I would tell you that the crop issue in Lamb Weston, the quality of that crop deteriorated probably even further and faster than we had anticipated. We knew we had a problem, but the crop did not hold even as well as we though as we ran out the rest of it. I'll turn it back to Gary for the comments on pricing.

Yes, Bryan, I'd say the good consumer behavior is a little bit further in a more cherry picking and more, or I should say, lower inventory or less stock up behavior. So it really was a more challenging Q1 from a consumer standpoint than we had anticipated. Customers are really driving food traffic with aggressive discounting, sometimes extremely low prices for major brand names. This is not how we want to do business, but sometimes your hand is forced to sustain the game. A good example is our frozen business where there were more and deeper deals this summer than we've seen in the last two years. When deals are layered on top of more deals, the ultimate effectiveness is going to be reduced, particularly when the consumers as I said are not stocking up as much. Though net-net, we spent more than we planned to, and didn't get as much for it, but we do believe this is going to abate in the next few months for two key reasons, one, that the commodity costs like proteins and grains, which impact margins will bring more rationality. And two, this consumer pantry deloading is going to bottom out as consumers work through their own inventory pipelines. Bryan Spillane - Bank of America/Merrill Lynch: So Gary, when you talk about adjusting your merchandizing I guess for the balance of the year, is it that you're going to promote somehow differently than you did in the first quarter? I'm just trying to get a sense for what's going to change in the back of the year, what you're doing that's going to be different in the back of the year. André Hawaux: Let me try and touch on that. I think those are several things that we're looking at right now, some of which as Gary mentioned we've already put into place. But couple of things; one is, we need to look at what's working and not working relative to this notion of multiples. You see multiples a lot. You see given are out there, and given that you see consumer behavior being different relative to stock up and cherry picking, we have to take a look at that. We see some movement right now to where people are going to single price points as opposed to multiples, and if not, they're certainly reducing their ten for tens to maybe five for fives and things like that. So we have to take a look at that to see what ultimately benefits the list. We also have to take a look at some frequency in some of the categories. And then we need to take a look at certain key price points and what still makes sense in the new environment.

Our next question is from David Driscoll with Citi Investment Research.

Couple of questions. The first one is, the quarter I think was light by about a about a nickel. Your full year guidance is down by a nickel. Is it correct to say that the remaining three quarters are unchanged, and if so, why? Just conceptually it seems as if the promotional intensity is still quite high. So can you just kind of reconcile the factors?

David, your math is about right. I wouldn't project quarter-by-quarter. We've talked about the growth coming in the second half, but the basic math is right and we do believe there are a number of things that give us a high degree of confidence in the back half. We talked about the Lamb Weston issue. As we already know, that's going to improve the new crop and the sweet potatoes come on board. We are seeing signs in our consumer foods that the volume is gradually improving, and we'll get the benefit of the recent new product launches and there's more to come in the back half. We've got our acquisitions. The recent acquisition, the American Pie, clearly the math is much better on our cost savings which are stronger later in the year, which will more than offset inflation in the back half. We talked about our SG&A coming down in the back half, and you clearly know that the comparables are much easier in the back half. So when we put that all together, it gives us a very high degree of confidence in what our guidance is.

I just have one other question on Consumer Foods. In the press release, Gary you said "unit market share has improved". However, Consumer Foods volume was down 3%. So what was the comparable volume figure for your categories, and how do you explain such weak growth overall?

It's really about this stocking up kind of behavior where consumers are going to a bit more, I'd say, call it 'just in time inventory'. So they are deloading their pantries and their refrigerators and not buying as much each trip. So clearly, there is an adjustment taking place. André, maybe more specifics? André Hawaux: Well, I think two things David. Just to make sure we're talking apples-to-apples here, on the one matter you're talking about our share performance. Some of our categories were significantly down, and we gained share in them because we were down less than the categories if you will. The other piece that you referenced also is our volume. That we also shared in the release also includes what we actually shipped. So there are two different numbers, one is share, and that's consumption and what consumer offtake is, and the other is our volume shipment. But the largest piece of the gain in share piece was driven by the fact that a lot of our categories are down and we were not down as much in some of those categories and we did pick up share.

We'll move now to Andrew Lazar with Barclays Capital.

In speaking about your revised top line growth of about 2% for the full year in consumer, that clearly implies a pretty big recovery at over 3% for the balance of the year going forward. So I'm just trying to get a sense of your visibility to that how realistic that is in the current environment. And then when you think about changes in your promotional strategy, and given categories, how much of your merchandising activity at this stage is really all kind of locked in for a good six months or so, and how realistic is it that you can actually change these things, as you talked about course-correcting kind of intra-quarter?

Andrew, I'd tell you, we are already seeing signs of improvement, certainly in our shipments over the last six or eight weeks, and also in some of our all outlet consumption. So we're starting to see signs of bending that trend. You know that obviously lower and lower prices are not good for us, and they're not good for compotators, and they're not good for retailers. What we really need to do is define this price value as much more than just lower prices. We believe that we've got a portfolio that can resonate with a broader group of consumers, particularly in this kind of environment, brands that can meet the needs of shoppers that may not currently be buying our products or buying as much. And it's up to us to make that connection with more direct functional benefits for our packaging, our advertising, our in-store merchandising, targeted innovation, and that's what we are really doing is, is talking about working on, and not just talking about doing it, bringing the inherent value in our products to life in a more meaningful way. Obviously, merchandising is a part of that. André, you want to comment on that? André Hawaux: I'll make another comment too Andrew, just to build on what Gary said. I think your math is correct. I don't believe we have to do, from my perspective anything heroic in the back half of the year relative to volume. I think a lot of the new items and the innovation that I talked about which really takes hold now, Q2 and beyond, the acquisitions that we've added on really help us get there. So again, we're not expecting our portfolio in this environment to do anything heroic volumetrically. So I think that's number one. Number two, on the merchandising question, there are elements obviously of our promotional planners and calendars that are locked in with customers. I'd say at the beginning in any quarter, I'd say about 60% to 65% is locked in. But I kid you not, there's still a lot of discussion that goes on between ourselves and customers during the quarter as we come up to events, everything from price points to feature and display to what kind of things that you going to get as a result of the price that you are providing. So there's still a lot of room and a lot of latitude with respect to a lot of our customers and our plans in any given quarter when we start that quarter. Obviously as you get further in, you get further locked in.

Gary, in your comments around the more recent trends around shipments and a little bit around all out consumption for your key categories, is it going too far to suggest that that's something you are starting to see a little bit more broadly in the overall food group at this stage, or is that more common around your key categories at this stage?

I think we see it a bit overall. We see it more clearly, as obviously we've got more insight into our numbers. But we do see a bit of that in the overall data.

Andrew, I'd just say, we're seeing stronger volume consumption in our category, specifically with our business. And we're also starting to see dollars turn a little bit more favorable than we have seen over the last 13 weeks.

Andrew, I'd just say, we're seeing stronger volume consumption in our category, specifically with our business. And we're also starting to see dollars turn a little bit more favorable than we have seen over the last 13 weeks.

We'll hear now from JPMorgan and Terry Bivens.

My question is kind of the spending counterpart to what Andrew just asked. I don't pretend to analyze every category you guys have, but if you look for example at your biggest one, Frozen, it looks like you've really backed off on promotion at a time when the competitors seemed to have really stepped it up. And when you have gone on deal, you've been less aggressive, so the lifts aren't there. So I guess what I am trying to understand is the pacing of your promotional and merchandising support in the second half. Why wouldn't it require a much stronger outlay I guess is the real question?

I think, Q1, obviously our merchandising was not as great as our competition. We saw much more than we had in the last several years from one of the biggest players. We have made some adjustments. We have chosen not to go incredibly deep but in a bit more measured way. But we think between the innovation, the marketing and some adjustment in our merchandising that we will have a good year in Frozen.

If you look at total distribution by companies, you guys are clearly a leader. Where is that coming from and when can we expect to perhaps see a better company wide effect from that stronger distribution?

I'd think a couple of areas there. Terry, I imagine you're looking at total distribution across all channels. But again, the innovation specifically in Frozen, where with respect to our steaming platform, the things you're seeing with both are on Healthy and Marie Callender. And actually we've had good distribution additions to Banquet as well, including things like food pipe, et cetera, et cetera. So we feel very good about what we're doing. I think that was the lion's share of your question. I don't know if I caught all of it.

We'll take a question now from Eric Katzman with Deutsche Bank.

I guess a couple of questions. Maybe Gary, a little broader, on the dividend increase. I was kind of surprised at such a big increase. I guess your cash flow is down because of the pension contribution, but maybe you could kind of go into like what investors should expect from a return to shareholders' allocation going forward? Is this kind of a signal that dividends may be more of a priority than repurchase?

Eric I would tell you that first, our cash position is very strong. We clearly had a huge jump up last year, but this year will continue to be a very, very good cash position for ConAgra Foods. We have always committed to having a top tier dividend, and we believe that what we have done is consistent with that and we think it expresses the confidence that we've got in our future. And our payout ratio is competitive. So we looked hard at this and believe it's the right thing to do from an overall shareholder return standpoint. John?

I think you captured most of it, Gary. Certainly, I would say this doesn't really represent any change in our basic capital allocation approach. I think we've talked about having a top tier dividend. I think we've talked about also looking at growth investments, but also understanding that that share repurchase is a part of the equation. So I think generally there is no real change in the balance there. I would echo one of the things Gary said about what we try to focus on. Our dividend policy is our payout ratio, and bluntly, I think our payout ratio was lagging some of the earnings growth we had over the last couple of years. And we think this increase kind of gets it back in line to where we thought it should be.

And then on a completely different issue, with the grain milling, I guess I was kind of surprised given the run up in weed that pricing was down there. And so maybe you could talk a little bit about that and then what we should expect from that business' influence on sales given the weak cost up? Are you positioned okay given all the volatility in wheat of late?

Let me try and give you a couple of different perspectives on that. A lot of the volatility you saw in wheat is in the future prices going way up. Year-over-year, you had a decline in this quarter. And for the balance of the year, there won't be that a particularly big influence on the topline one way or the other. As far as the volatility, keep in mind that we are not in this to speculate. The volatility is good for our business, because in essence it brings customers to us who are ready to commit to longer-term purchases. That in essence gives us more time to buy the wheat that we are going to make their flour with. And that's good news for us. The near end volatility doesn't really impact our current results except to the extent that we can buy grain more intelligently for those long-term commitments. So it's a good news for us and we are well positioned.

In looking at the second half, I know you can't talk to the consumer and lot of the things that you are doing. But is it pretty critical that the new products that you are putting into the market kind of win with the consumer to the extent that those I assume are going to be not just volume drivers, but also a mix shift positive? I guess that's what we should look for in terms of consumer meeting its recovery in the next couple of quarters?

Yes, I would tell you that a basic principle we've got is that the innovation is both top and bottomline accretive. So we keep the bar pretty high on that, and that is what we've got in our expectations.

And we'll hear a question now from Chris Growe with Stifel Nicolaus.

I just had a couple of questions for you. The first one would be you re-rated guidance at the end of July, and you've also talked about what seems to be certain improving trends in the last six to eight weeks. I just want to put those two together. Was it still that the topline trends were improving a bit and maybe volumes for promotion were still heavy? Can you put this together for me, Gary?

Yes, I would tell you that what we are not going to do is burn the furniture to make our numbers. So we are keeping the balance of the short-term challenges and the long-term perspective. And therefore we really don't believe that we can really make up the debit that we've created in Q1. Yes, we are seeing the topline start to improve. There is still in a way a significant challenge ahead of us in terms of the way we balance our trade spend. But as the second half approaches, we do believe that there will be moderation in that and we will clearly benefit from both the top and bottomline in the second half.

Within your Consumer Foods division, the negative 1% price mix, is there some price increases in there as well? I don't look at the negative one as a terribly bad promotional environment. But is it just that it's bad in certain categories or is there some pricing a mix offsetting some of the aggressive promotion that you are seeing? André Hawaux: There was a little bit of positive mix. There were some categories that were down further than the 1%. We have broad portfolio placed across a very wide slot of the consumer landscape. So I'd say the unbalanced, we netted out about 1%. There were some that were deeper and some other that were in a better shape.

The last question I had for you was, in your Consumer Foods division and sort of the cost savings versus inflation in the first quarter, that was a negative spread where the inflation was more. Do you have hedges on the rest of the year that gives you a little confidence that the cost inflation will be a little lower, plus you'll have a little bit more on the way cost savings are more back half loaded? Is that the way to kind of look at the breakdown? André Hawaux: Yes, that's pretty fair. Certainly as years goes on, we'd lock in a lot more of our commodity needs. So we've got more positions on substantial amount for the back part of the year. So I think your assessment is pretty clear there.

We take a question now from Morgan Stanley in Vincent Andrews.

In the years past, when there was inflation, you had to do some work around bank to maintain the $1 price point. Is there anything right now going on in your portfolio that you are concentrating on or focused on that really needs to get done?

Vincent, there absolutely is. There is very significant opportunity for us, and we have started to capture that, but there is a lot more to come. So you are right on the mark.

But I guess you're looking at it more from reward perspective and may be I'll ask it the other way. Is there any risk that there is any pricing you need to take anywhere in the portfolio, you follow what I'm saying?

Obviously the opportunity arose to take pricing with costs going up, we'd certainly be there. But right now we are not planning for that in this environment.

So the answer is that you are comfortable. You can read it on any products to take cost out, to maintain the price plans, is that clear?

That is what we are planning to do and we are confident, yes.

And then my last question would just be, it's clear there is a consumer deload going on not just in your category, but pretty much across the store? So maybe twofold, do you really think innovation is what will unlock that deload? I would argue it's probably more macro factors that need to improve from a consumer perspective. And then secondly, is there any risk from a customer perspective that they're going to make adjustments relative to what the consumers done from a deload perspective.

I think its like anything else. Any kind of organization with inventory, there does come a point where it kind of bottoms out and it kind of self adjusts. And we think we are starting to reach that point. And we've got pretty good insight into this; has been draining their pantries, their freezers, their refrigerators. And there will come a point where that kind of bottom's out. So, I'm not saying that we're going to go back to huge stock up purchases. But, we think that delta will change.

We'll take a question now from Robert Moskow with Credit Suisse.

I got a couple of questions. The first one is, gross margin adjusted is down I think about a 140 basis points year-over-year. And I think a lot of it has to do with volume leverage because your volume is down quite a bit. Since you are assuming that volume's going to improve by the back half of the year, can you give us a sense of how that might help your gross margin in terms of comparisons or is it still going to be a very tough gross margin comparisons year-over-year? And then secondly, its the first I've heard about the cost savings being back half loaded. Was that always the plan or is there something new in terms of the pace of the savings as we flow through?

Let me take the second one first. I don't think we've had any substantial change in flow of our cost savings from the beginning of the year. I think the first quarter was planned to be our lightest quarter. And it certainly picks up and is more even over the balance of the three quarters that the balance of the year, although there is still some waiting towards the back half. And your gross margin question, I am not sure I followed it all.

John, I'll take that. Robert, I think it is mostly about the comparables. So the first half was a lot tougher in terms of the improvement that we made on the margins a year ago. Things will flatten out. Margins will improve more in the back half. And part of that obviously is the cost savings versus inflation as well. So a lot of it is just almost mechanical, the math that we've built into our plan. So that's why we'll see it improve in the back half.

Maybe, John, you could think of it this way, your gross margin is down year-over-year. Do you have a sense of how much that is due to operational leverage from declining volume?

I don't think lot of it is due to that. I think it's more of the inflation and cost savings spread. And one of the reasons I say that is we don't have a big penalty in terms of absorption. That may be ultimately where your question gets at. We're not seeing a big issue there. So I really think it's more of the inflation and cost savings related.

And we'll move now to Alexia Howard with Sanford Bernstein.

Can I ask a question about the pace of innovation? Where are you now in terms of percentage of sales of new products? Do you anticipate that that's going to step up during the course of fiscal '11? You had a lot of new product launches in fiscal '10 that were very platform-based, very broad. Do you anticipate that the new products launches this year are going to be similar in scale and scope? André Hawaux: Let me take the first one. Your first question about the percentage of our sales coming from innovation, I think we measure it correctly in terms of year-on-year innovation. It's about 5%. And as we take a look at your second question on platform innovation, I think we've said it multiple times we're not going to be the ones that are the most prolific with number of SKUs. We're going to look for sticky innovation, and that's all platform-based. So the things that you've seen for instance relative to steaming and frozen are things that we're continuing to do now that will bring a net offering to lunch steamers. The things you're seeing us do with our Trade technology with respect to Marie Callender base, you can see that application is going to go into other platforms as well or other things we do in Frozen, they are very much platform-based, very broad. And again, as Gary has said, we look for that high batting average for our innovation.

And we'll take a follow-up question now from David Driscoll with Citi Investment Research.

Two questions. Gary, I believe ConAgra is the first company to report a quarter with inflation higher than cost savings. So really, can you give us any comments about either what you've announced to the trade already regarding price increases or what you're just hearing generally within the category that you compete in on this topic?

David, we have not talked to the trade about pricing. I don't think they are in an extremely receptive mood to be looking to raise prices at this point. Obviously, we will be opportunistic, but we don't think it's prudent for us to plan on that in this environment. And therefore, all the things we're doing from a productivity standpoint are really the way. Both productivity and mix are the way that we are choosing to deal with this, at least in the near term.

And there are no further questions Mr. Klinefelter, so I'll hand the conference back to you for final remarks.

This concludes our conference call. And just as a reminder, this conference is being recorded and it 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.

This concludes today's ConAgra Foods first quarter earnings conference call. Thank you again for attending, and have a great day.