Good morning, and welcome to today's ConAgra Foods Fourth Quarter Earnings Conference Call. This program is being recorded. My name is Jessica Morgan, and I'll be your conference facilitator. [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 our fourth quarter earnings call. Thanks for joining us today. 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 fiscal 2012 fourth quarter performance and our outlook for fiscal 2013. And then we'll open up the call for your questions. At that point, André Hawaux, President of Consumer Foods; and Paul Maass, President of Commercial Foods, will join us. Before we get started, Chris has a few opening remarks.

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 file 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, the question-and-answer document, or on our website under the Financial Reports and Filings link and then choosing Non-GAAP Reconciliations. For Regulation G purposes, I will clarify that we reported a loss of $0.21 per share for the fiscal fourth quarter. The loss is due to the year-end expense associated with the pension accounting change. After adjusting for items impacting comparability, fiscal fourth quarter earnings per share was $0.51, that's an increase of 9% over comparable year-ago amounts. I'll also remind our listeners that the associated question-and-answer document, which is filed as an Exhibit on our Form 8-K and on our website has commentary explanatory details and financial tables intended to clarify the pension accounting change discussed in today's release. This will assist with any changes to historical models. I will touch on this topic very briefly now and let John offer more detail in his comments. And then we'll also refer you to the supplemental information for help with financial models and other housekeeping related aspects. In a nutshell, we adopted changes in pension accounting to provide a clearer picture of the underlying operating results of our business. These…

Thanks, Chris. As you can see from the release, EPS on a comparable basis was $0.51 for the fourth quarter. That's up 9% year-over-year. The $0.51 of comparable earnings includes a $0.02 benefit from our pension change, as Chris touched on and as described in the release. We posted comparable year-over-year EPS growth for our fiscal fourth quarter as we planned, and we showed full year EPS growth also. Our EPS base for fiscal 2012 is $1.84 adjusted for items impacting comparability, that's with the pension noise out of it, and we expect to grow 6% to 8% on top of that in fiscal 2013, adjusted for items impacting comparability. Now I'd like to share a few more details on our fiscal fourth quarter results for both our Consumer Foods and our Commercial Foods segments. For the last quarter of fiscal 2012, we grew comparable operating profit in Consumer Foods, a significant sequential improvement. This was an important milestone, and we're glad to have turned the corner in terms of year-over-year profit comparisons. As we've talked before, the commodity inflation during the first 3 quarters of the fiscal year was very high, at 11%, and it moderated to 6% in the fiscal fourth quarter. A combination of our prior pricing actions, along with the productivity improvements have helped us fight the inflation headwinds. Contribution from our acquisitions this fiscal year also played a role in fourth quarter results, but our base business showed an increase in profitability in the fourth quarter, even without the benefit of acquisitions. The big challenge continues to be shopper behavior and its impact on industry volumes. Specifically, shoppers continue to be extremely value-conscious with their choices at the grocery store. You've heard from us and others that shoppers are sticking to a list, expecting significant…

Thank you, Gary, and good morning, everyone. I'm going to touch on 5 topics this morning. I'll begin with our pension accounting change so that I can ground everyone on a few key elements, including the financial statement impacts. Second, I'll discuss our fourth quarter performance highlights. Next, I'll address comparability matters, and then onto cash flow, capital and balance sheet items, including some details on our recent acquisition activity. And finally, I will provide some comments on our outlook for fiscal 2013. So let me start with the accounting change around pensions. While we've included some detailed information in the release materials, and Chris has also shared some of the mechanics with you, I would like to cover a few key points here. First, our objective. Our objective in making the change is simply put, to provide better transparency to the financial performance of our core business operations. Our prior methodology has resulted in significant impacts to our earnings that reflect neither our underlying performance, nor the cash flow realities with respect to the pension. Next, as Chris noted, the change has 2 significant impacts on our financial statements. First, during the past 2 years we have had, and from time to time going forward we may have, fourth quarter actuarial or mark-to-market losses or gains that we will treat as comparability items. Second, we have removed from our financial statements the amortization of actuarial losses and potentially gains, and we believe that the elimination of this amortization under the new method will improve transparency. Under the new method, our normalized pension expense is comprised principally of 3 components: service cost, interest cost on the pension liability, offset by the investment returns on our pension assets. I would also note that while we considered various options to address the…

[Operator Instructions] And our first question will come from Jason English with Goldman Sachs.

Lots of questions. I think I'll leave a few to the people who are going to come after me and get into a couple of detailed things here. Gross margins in the Consumer Foods segment, were they up, down or flat this quarter? André J. Hawaux: Jason this is André. They were up this quarter.

So the decline was primarily driven by Commercial Foods in aggregate? Is that just a factor of the milling stuff you talked about?

Jason, this is Chris. For – you're talking about for the total company, our fourth quarter margins were up slightly year-over-year, all segments included. So if you got a different number, we'll be glad to talk about it offline.

Yes, we do have a different number, so I will circle back offline to try to get some of the adjustments corrected on that one. And last question. Your acquisitions, are they margin accretive to your Commercial Food business or are they diluting the margins right now?

Jason, it's Chris. I believe you mean the Consumer Foods.

Consumer Foods, yes.

Yes, we would expect them certainly to be accretive to our profits.

But to margins?

Yes, they will be margins over time. I don't have the details here sitting in terms of the pieces that fell under the quarter. But over time, that's the objective.

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

Wanted to go back, Gary, onto the organic growth in Consumer Foods. So it seems like just from the guidance, it's very limited organic growth in the Consumer Foods in F '13. Can you spend a little bit more time and talk about why? And I did hear, I guess, at the end part of the script a fairly large increase in advertising. Is that the #1 factor to call out here for the organic growth rate being -- it's got to be embedded in the guidance at maybe 1% of EPS growth, something like that?

Well, David, in Consumer, we clearly have talked about how volume will be modestly down this year, but it will improve as the year goes on and we overlap the pricing. Obviously, we've talked an awful lot about shopper behavior across the industry buying less units, exacerbated by the significant price increases taken this year. And in our case, we singled out Banquet moving over $1, impacting volume to the tune of about 40% of our volume drop this year. But those moves, those pricing moves, are the right thing holistically certainly from an overall financial standpoint. We're going to overlap those pricing actions as we get through the year, and eventually we'll also start to hopefully see consumers flatten out in terms of their behavior on what kind of inventory they're carrying and how they're managing their leftovers. That's going to flatten out over time. But we're planning realistically and we're very, very confident in the algorithm. The margins will improve this year in Consumer because we clearly are going to have less severe inflation. We're moving more towards pull versus push. And that's why you see us committing to a realistic increase in our marketing dollars. But overall, we feel very good about our Consumer Foods business. We will see some modest growth on the organic business side, and we will get a good boost from our acquisitions.

Well, 2 quick follow-ups. On the pace of volume declines, can you talk a little bit about March, April, May, and then what you've seen in June so far? Is it consistently negative or are you seeing a trend that's maybe suggesting improvement? André J. Hawaux: Yes, David, this is André. I would say that to your question, in terms of what we saw in the fourth quarter, I think I'll just repeat what Gary mentioned. Again, the lion's share of that volume decline was in a brand we took pricing actions on that's very, very sensitive, and that was Banquet. In terms of consumer consumption, as we read the Scan data as well as the All Outlet data, I would say we've seen a slight improvement. But to Gary's point, the consumer sentiment is still where it is. We are not seeing unit consumption growth rates yet across all channels of our business. So I would say it's still kind of the environment that Gary discussed.

If I could take a final question. And just on this promotional spending or advertising and promotional spending increase, I assume by promotion, that's consumer promotion, not trade promotion. And the 10% increase, can you just describe a little bit the logic behind such a large increase? André J. Hawaux: Well, a couple things, David. This is André again. I would say what we're talking about here is we have a lot of innovation that we're bringing to market in fiscal year '13. That is going to require some of the products that Gary articulated. That's going to require, we believe, some consumer promotion. We also feel very good about some of our brands where we've taken pricing this year, and we've continued to gain share because we have a consumer preferred product. And we want to continue to make those investments. They'll be choiceful, they'll be in big categories where we can make a difference. They'll also span some of the new items, new types of marketing such as digital and other things that we're really pushing really hard on.

Yes. And the final point I would add, again, as we are trying to shift away from being more push-oriented toward more pull. So the total dollars, it's buckets that change, it's not really total increased spend.

We'll move now to Bank of America's Bryan Spillane.

Just a couple of questions. First, one of the great strengths, and I think probably underappreciated sometimes by the market, is the balance sheet flexibility that you have. And you demonstrated it with acquisitions, which are going to benefit this year. On share repurchases, can you just talk a little bit about what drove your decision to repurchase as much stock as you did in the quarter? I'm glad that you did it, but just I'm trying to get a better understanding of what drives the decision-making there in terms of when you decide to go forward and buy back stock.

Well, Bryan, this is John. First of all, I don't think we're -- none of this is kind of episodic or short-term thinking. I think if you look at the full year, we purchased about $360 million of shares. The timing really, in some ways was a function of how much we had done previously, and I think as you recall, in some of the previous quarters, we were focusing a lot of our cash and investment in the M&A markets. And I'd say another factor is while on a net basis, we do buy back a significant positive in terms of shares, we also look at the amount of option exercises we have during the year that puts some excess cash to us and we wanted to redeploy some of that back. So I think some of it was just getting back to where we expect it to be on a full year basis. And we saw the opportunity in the fourth quarter to do that.

Are there any additional share repurchases embedded in your guidance expectations for this year, for fiscal '13?

Yes, I'm not going to get into specific expectations about share repurchase. What I would say is that if you look at just total capital allocation as we look at our algorithm every year, we do expect there to be a few cents of lift from capital allocation. That may come in the form of acquisitions. It may also come in the form of share repurchases or a combination thereof.

Okay. And then on cost inflation for fiscal '13, I might have missed it. Did you give a cost inflation? Did you put a number on what you're expecting commodity inflation to be for fiscal '13?

Yes. This is John. I think I would say in the range of 5%, maybe 4% to 6% as we sit here today. Obviously, the markets are still moving around, so I don't want to get too precise in my prediction. But clearly, it's in a range that while we'd always like it to be lower, we feel that, that's a range that our business can operate much better at than double digits.

And then just a rough idea of how much of that is locked in and how much could move around?

I don't think we go into those kinds of details. Suffice it to say, we have a fairly proactive procurement capability, and we're looking probably every day, every week where the markets are moving and how to hedge our positions.

Okay. Okay, great. And then Gary, just one last one, if I could sneak it in. Just, Gary, as you look into fiscal '13, you've got your plan and your guidance. Is your business plan for this year based on an expectation that the industry environment stays the same, gets worse or improves?

I would say to be realistic or conservative, it's pretty much staying the same. Our plan is really based on 3 key factors. That's the moderating inflation we'll see in consumer, so we'll get the margin improvement there. It's the continued traction that we have on the Lamb Weston business. And it's the benefit of having the acquisitions that we did in fiscal '12 for all of the full year in fiscal '13. So when we put those 3 together, we feel very confident in our algorithm.

We'll hear now from Thilo Wrede with Jefferies. Scott Andrew Mushkin - Jefferies & Company, Inc., Research Division: It's Scott Mushkin sitting in for Thilo as he's over in Europe right now. A couple questions I want to follow up on. To Dave Driscoll's point about volumes lately, any hints that Banquet is starting to see their volume trends get a little bit better? And I guess what I'm getting at here is that we've seen gas prices come down. I was wondering if the consumers, I think you said it's maybe slightly better. But any hints that the kind of the lower end of the consumer's feeling a little bit better? André J. Hawaux: Scott, this is André. No, we haven't seen that. I would say that our expectations and the way we built the models and the way we built our algorithm for next year, as Gary touched on, we see us obviously lapping that pricing sometime in the back half of next year or fiscal '13, I should say. So that's when we believe that the consumer will see some improvement in that business. That's pretty much been -- it's pretty much followed what our model said. So no, I have not seen any improvement. Scott Andrew Mushkin - Jefferies & Company, Inc., Research Division: Okay. Perfect. And then I know you -- and to Brian's question, you said you're expecting about 4% to 6% cost inflation. Is that going to cause need for further pricing actions or no? André J. Hawaux: A couple things, Scott. We obviously, as John mentioned, we look at the commodity markets every day, and we'll be -- we have built a whole lot more pricing muscle in this organization as a result of the work we've done around Customer Connect. So…

We have a very clear strategy and a lot of discipline around our M&A strategy. And it's got to be opportunities that come up, that fit strategically, leverage the kind of capabilities we have, very importantly, offer us growth from a category standpoint and will be top and bottom line accretive over time. So if those opportunities come up, we're ready to leverage the balance sheet again.

Yes. And this is John. Just to add on to that. It's not about size; it's about the opportunities and the returns we can get. So I'd say we're somewhat agnostic to size. There's obviously practical limits, but it's really about the things Gary talked about.

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

I guess just the first question is, and hopefully I'm doing the numbers right here, but the implied guidance off of the $1.84 new adjusted EPS implies $1.85, I guess, to $1.89 for '13. If we back out the $0.08 from the $1.84, we get to $1.76. So the question I have is, in the release you said you'd expect basically half of that -- half of the $0.13 upside coming from acquisitions. But if we use the old number, the $1.76, that's still implying 11% to 13% percent growth for the year. So would you still expect out of that 11% to 13% growth that half of that would be coming from acquisitions? Or am I just not thinking about this the right way?

Rob, this is Chris. I think the clearest thing to do is just to say our base is what our base is. It's $1.84, and that's how we've crafted our comments. So when you look at the implied growth off of that, that's what we were discussing in terms of the estimate of roughly half. But again, that is an estimate of roughly. We're not trying to draw it precisely to the $0.01 of exactly half.

Okay, fine, and then a follow-up to that. Within your Consumer Foods segment, when you said the $240 million in cost savings inherent in that, are there cost savings from the acquisitions or are we not seeing too many cost synergies from the deals you've already done?

All right. This is John, and I'll -- yes, there are -- we do expect to drive costs and capture synergies when go through these deals. I'd say all the deals have some level of synergies whether it be SG&A or whether it be supply chain matters. I'd also note that when we do these deals, there are -- from time to time, we also make decisions to the front end to address in those businesses further. So I'd say it's -- we certainly would expect to have some synergies out of those deals.

Eric Katzman with Deutsche Bank has our next question.

Most of my, I guess, operating questions have been answered, so I want to understand the pension changes a little bit more. So is this kind of like what Hershey did, which was adopt the IFRS? Or are you still on a GAAP system?

This is John, Eric. We -- I'm somewhat familiar with what Hershey did, but not expert on it. What we did is we are staying with GAAP. So ours is a GAAP method. It's not a hybrid of GAAP and comparability. It's just a straight GAAP method that a number of other companies over the past 12 to 18 months have adopted also.

Okay. And so what was the expense hit that you were looking at using the old method that was, I guess, so significant and volatile based on the lower interest rates and return assumptions? Like what would that negative, and I realize it's noncash, but what would that negative expense have been?

I'm not sure I can answer that. Let me start it this way. You saw what happened to our FY '12 earnings base going from $1.76 to $1.84. So that's about $0.08 in the past fiscal year that it was impacting us by. Once we changed the accounting method going forward, we're now on the new accounting method, and so I don't have a number that says hypothetically, '13 or '14 would've been x, y or z. I think it's logical to conclude it would have been something higher just because of the further decline in interest rates. But the way we look at this now is we've got a new base, the amortization is out of that base in all future periods. And so when we look at our operations and the results we expect, it's much cleaner, and there's no either hidden tailwind or headwind in those numbers.

And Sanford Bernstein's Alexia Howard has our next question. Alexia Howard - Sanford C. Bernstein & Co., LLC., Research Division: Can I ask first of all, are you able to break out what the underlying profit growth excluding acquisitions was in the Consumer segment?

We have -- Alexia, this is Chris. Obviously, we have that detail. What I'll tell you is that the business would have been up at a modest rate, even without acquisitions. Acquisitions were a role, but they -- I mean, order of magnitude, they weren't even half the growth. Alexia Howard - Sanford C. Bernstein & Co., LLC., Research Division: Great. That's really helpful. And on the Lamb Weston business, could you give us a little bit more detail about exactly where that growth is coming from, what channels, what type of customers and which regions are you seeing the biggest strength in?

Sure. I would just kind of start with the organization is very focused on our customers, and that focus is paying off. There is some growth domestically and a lot of that growth is driven by product mix. And you heard Gary talk about sweet potatoes, and that continues to be a very positive light. But a lot of the growth is coming from emerging markets outside the U.S. and outside of Europe. And we're very aligned with our customers in supporting that growth. And frankly, a lot of the effort over the last 18 months has been with our team, effectively managing through the dynamics that we deal with year-over-year in a crop-based business. And our ability to do that and improve our ability to work to those dynamics has been a big part of that focus. But feel real good about our alignment with customers and where we're headed.

We have a question now from Robert Moskow with Crédit Suisse. Marcela Giraldo - Crédit Suisse AG, Research Division: This is Marcela for Rob. So in line with Bryan's question before, do you feel that this year's guidance comes in the context of a tougher environment? Meaning specifically, is the guidance for the rate of [ph] business maybe more conservative this year versus previous years?

I would say our guidance is what we believe is appropriate for this year. We feel very confident in that 6% to 8%, and I wouldn't say that it leans in one direction or another. Marcela Giraldo - Crédit Suisse AG, Research Division: Okay. And then a follow-up, if I may. You mentioned some rebound in QSRs in the U.S. Is that something you are factoring into your Commercial segment guidance for this year?

Well, we certainly are expecting another very good year for Lamb Weston, and that does play a role in it.

And we have a follow-up question now from Rob Dickerson with Consumer Edge Research.

We haven't really discussed I don't think any points on your private label portfolio. It sounds like with the 4% to 6% expected inflation, there could still be a little bit of pricing on the branded side. But if we were to see commodities just drift a little bit more, which is what we've really been seeing in the past couple of days, would you expect pricing to then ease more quickly on the private label part of the portfolio versus the branded or not really? André J. Hawaux: Rob, this is André. I wouldn't necessarily see that. I wouldn't see it that way at all.

Okay. And why is that? André J. Hawaux: Well, again, you have to look at the commodities that we -- or the commodities that are underlying the basket of whatever that product is. So if we're taking a look at, for instance, bars or now pita chips and things like that, I think we're going to have look at the underlying basket of commodities that support that business and determine where that's going. But I don't necessarily see us rolling back pricing in either of the branded or unbranded. Again we, as John articulated, we see inflation in our portfolio next year. We don't see deflation. So I don't see that as something that we're going to need to do.

And we have a follow-up now from Eric Katzman with Deutsche Bank.

I want to follow up on the pension stuff, 2 questions. Isn't the 83% figure actually pretty low relative to the peer group? I mean, isn't the peer group in the kind of the 90% to 100% funding? And then the second question is again, on this -- the amortization exclusion. So, John, does the volatility -- you're now putting the volatility of the service cost and the returns and the amortization of those costs or gains or what have you, that's all going to be an extraordinary item that's kind of excluded in the fourth quarter every year as opposed to any kind of recognition of the expense of the pension from period to period?

Yes, let me take those in order, if I can. So first of all, the issue of relative pension funding levels, one thing I think that's very important to keep in mind is our pension liability is measured as of May 31, 2012. I don't have the interest rate curves in front of me, but I am confident that, that is an absolute historic low point for discount rates. So when I look at 83%, and where we sit today, my concern is probably as much about a risk of overfunding if rates rise too high and too fast than it is about underfunding. So we are -- we have measured our liability at the absolute lowest point in discount rates in history. So companies that are measuring their discount rates at any other time over the past 12 months are going to have higher funding levels. So that's why you have to understand that math to understand why I'm so confident. The other question you asked, and again, I'm going to refer you to the materials because there's a lot of moving pieces here. But let me be clear. Our pension expense going forward is going to fully account for the 3 elements of pension cost that I referred to in my opening remarks. The first of it is our service cost, every time an employee works a day or a year and earns a future benefit, the full cost of that service cost is in our pension expense. The second thing that is in our pension expense is the interest on the liability that we have accrued at any point in time. The third element that's in our pension expense is the income we get from the returns on our assets. So all of the elements that you would normally expect to be in pension expense are fully included. The only matter that is going to be captured at year end is when there is a significant mark-to-market gain or loss, and there is no guarantee that there's going to be one of those gains or losses every year. But to the extent there are those significant mark-to-market gains or losses, those will be what's captured at year end as a comparability item. And maybe just for a little bit of additional color, interest rates are now at essentially an all-time low. To the extent those interest rates rise in all likelihood next year, we would have no gain or loss because we wouldn't be over a threshold where we would have to recognize any gain or loss. So I apologize for the accounting lesson here. You're probably all eligible for some CPE credit now, but again, I'd ask you to take a hard look at the materials, and we'd be certainly happy to work with Chris to clean anything up.

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

André, can you talk a little bit about the trade promotion plans for fiscal '13? And how much of a reduction in trade promotion is the source of the funding for the advertising and consumer promotion? Is it nearly all of it or how do we best think about it? André J. Hawaux: Yes, I'd -- David, I'm not going to get into the particulars of our trade funding. But I think what's really relevant into the discussion is Gary's points that we as an organization have recognized that historically as a company, ConAgra relied too much on push drivers to drive our business. And I think it's appropriate that we rebalance that mix so that we also have a lot of pull behind our brands, which historically we've underinvested in. So I think that's the right way to look at it. I don't want to get into specifics of what's going to happen to our trade funding. I do know that, that is what we're doing. That's what the pricing and margin is going to provide us the ability to do. And I think that's really important for the health of our brands going forward. And I think we're making the right decisions across the board.

Yes. David, I think André is right on target. And remember, when we talk about the trade spend, that's going to show up in improvement in our net sales line. The A&P dollars is a separate line item. So you're going to see improvement in our net pricing, and you're going to see us increase our marketing spend, our A&P dollars.

And have you had any of these discussions with your retail customers yet? And how was their reaction to the switch, so to speak, from trade to advertising and CP spending? André J. Hawaux: So the answer, David, is we have talked the talks with many of the retailers, and we've talked to them about this. They understand it. What they really want us to do is to be investing behind our brands, behind the innovation. They are very complimentary of the innovation we are bringing to market in multiple categories. They want to see their traffic counts up. They want to see customers picking up products in the center of the store. So they're very supportive of the actions that we're taking.

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

Thank you. 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.

This concludes today's ConAgra Foods Fourth Quarter Earnings Conference Call. Thank you again for attending, and have a good day.