Conagra Brands Inc (CAG) — Q2 2015 Earnings Call Transcript

Good morning. Happy holidays and welcome to our second quarter earnings call. Thanks for joining us today. I’m Gary Rodkin here with John Gehring, our CFO, and Chris Klinefelter, VP of Investor Relations. Before we get started, Chris has a few words.

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 would like to learn more about the risks and factors that could influence and impact our expected results, perhaps materially, I'll refer you to the documents we filed with the SEC, which includes 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 Q&A, or on our website. Now I'll turn it back over to Gary.

Thanks, Chris. Our second quarter comparable EPS was $0.61, about where we expected to be when we gave our guidance. Keep in mind last year’s second quarter was our strongest for the last fiscal year. We saw good profit performances in both Consumer Foods and Commercial Foods this quarter. Our Private Brands segment performance is clearly not up to our expectations. We now expect recovery for this segment to take longer than originally planned and I’ll say more about all of that in a minute. Overall, we’re confident that we’re strengthening the foundation of our Company. This year was designed to deliver stabilization and recovery, and on balance, that’s happening. The Consumer Foods brands with the biggest improvement opportunities are responding favorably. In our Commercial Foods segment, we’re gaining new business domestically and across the Company, and we’re highly focused on a more efficient organization at all levels. We expect to meet our EPS commitment this fiscal year, despite the fact that Private Brands will be down for the year. Now I’ll offer more insight into each of our segments. Consumer Foods posted a 2% net sales decline, with volume and price mix both down one point; comparable profit increased 7%. We’re executing according to our plan which calls for a better share improvement, growth in specific faster growing retail channels, and stabilization of those big important brands where we’ve been struggling. We plan for fiscal ’15 to be a year of foundation building, and it is. We’re making good progress, particularly in light of the challenges everyone is experiencing in the marketplace. By focusing on where we can get growth, faster growing channels and retail fundamentals to be specific, we’re directing our resources toward our best opportunities for wins. In terms of domestic share gains, one example is in frozen single-serve meals. Earlier this year, we achieved the number one dollar share position in frozen single-serve meals and we’ve maintained it. Despite the challenges of the category, this is a large and profitable section of the store and very meaningful to retail customers. And we plan to leverage our critical mass and expertise to continue leading the category and help retailers grow. Marie Callender's continues to perform well with a long-term success story that just keeps getting better. We grew net sales, share and volume during Q2 in single-serve meals and took share in multi-serve meals. I’ll highlight a brand we haven't talked much about yet in frozen multi-serve. The P.F. Chang's Home Menu is an acquisition we made a couple of years ago. We renovated the product line this year, restaging it into the marketplace during Q2 with improved packaging and pricing strategy. The line now features all the components of a bundled complete meal including appetizers, entrées, and rice. We’re seeing very strong early results. Now I want to share results on what we’ve called our fixed and grow brands, meaning Chef Boyardee, Healthy Choice, and Orville Redenbacher's. We’re stabilizing these brands with a focus on what we call perfect at retail, meaning the basics: pricing, packaging, promotion, and placement. Starting with Chef Boyardee, this brand is really turning around for us. It posted volume growth during the quarter, as well as dollar sales increases and share gains. Admittedly, that's on an easy comparison given our issues last fiscal year, but we feel good about the fundamental corrections we've made. Consumers have responded very positively to the return of the easy open lid and retail customers are supporting the brand with good in-store displays. This is a big brand with strong marketplace equity and presence, and we’re not letting up on the continuous improvement work here. Regarding Healthy Choice, as you know from our past comments, we’re emphasizing the Café Steamers line at Healthy Choice because it continues to have significant growth potential. It's truly differentiated with proprietary tray-in-tray technology that makes for a great tasting product. As part of expanding this line, we introduced Healthy Choice Simply Café Steamers in Q2, which are made with nothing artificial and contain 100% natural white-meat chicken. Entrées such as lemon herb chicken leverage the steaming technique for a fresh and crisp taste, and while it's early for these entrées, initial results are encouraging. We are now beginning to lap some of the assortment pruning we did last year on slower selling sub lines and as we continue to do that, we expect to see ongoing sequential improvement in Healthy Choice. On Orville Redenbacher's, we’re starting to see positive developments. We've simplified and streamlined flavor assortment and assumed we’ll have an on-shelf presence that’s designed to have more impact. Packaging changes that improve retail visibility will go into the market in January in time for the Super Bowl. Changing the graphics might seem simple, but we’re confident it will be meaningful and positive. When we made a similar change in ACT II Popcorn late last year, double-digit sales growth followed. We’re also encouraged by early results for Orville Redenbacher's Skinnygirl varieties. We have other areas of strength in the Consumer Foods portfolio involving sound margin management and strong consumer demand. For example, Slim Jim, RoTel, and Reddi-Wip all grew volume in Q2 even while we took price to better reflect rising commodity input costs. Good execution on pricing plus strong acuities with good consumer demand built over time are helping the Consumer Foods results. Our intensified focus on Club, Dollar, and Convenient stores continues to accelerate. As you know, these retail outlets are growing faster than traditional grocers and we’re now taking share within these channels. We have a lot more opportunity here as we look forward. We’re securing distribution for brands like Hunt's and Reddi-Wip in Clubs and Peter Pan in Dollar stores as we speak. We’re aligning our innovation with the formats and offering these outlets need and that's an important part of our growth. Our ability to customize products, packaging, and brands for these retailers is vital, and we've had good success. This is a testament to what we can do when we’re clear about our objectives. We harnessed our resources and focus. Before I finish my remarks on Consumer Foods, I’ll note that the comparable 7% operating profit growth showed that productivity and efficiencies are coming in strong. Inflation, which is significant on proteins, is manageable overall. We do expect to have FX headwinds to deal with, which means we’ll need to continue to be as effective and efficient as possible. We continue to drive being perfect at retail, making sure every promotion dollar and advertising dollar works as hard as possible and with a good balance between the two. We’re being more efficient with our investments and ensuring that they are truly value-add. Now I’ll turn my focus to the Private Brands segment. Profits were below year ago amounts and a meaningful portion of that is due to the pricing concessions we made last year that we haven't yet lapped. We were expecting that part of the decline. But sales were weak during the quarter. Volume was down 6%, largely because our customers have put a lot of business out to bid and our competitors are responding aggressively. It is clearly a fight for share going on in the food industry and in some categories, the battle includes branded players as well as Private Brands. We’re experiencing some cost spikes in specific commodities which are impacting profitability in the short term. A pricing initiative is underway and should help pass on the higher commodity costs over time. Regarding the rest of this fiscal year, we had originally expected modest profit growth in fiscal '15. Right after further evaluation, we’ve revised our outlook. This outlook better reflects the continuing competitive pressures, the impact of the commodity cost increases, the extended time needed to achieve the cost benefits from our network optimization, and in general, the overall timeline we needed to make sustainable improvements in how we operate this segment. The Private Brands segment profit will be down in fiscal '15. Results should significantly improve in fiscal '16, when we expect the business to recover and start growing. Improvement largely boils down to execution. This is a transformative undertaking to create scale in Private Brands and it’s been more complex and required more time than we originally expected. We’ve learned a lot, but there’s still more fundamental work to do. While the environment is definitely very challenging, our issues are primarily our own execution and they are fixable. We clearly understand that we need to change how we operate this business, so that we consistently meet and exceed our customers’ expectations and build stronger Private Brand partnerships. When that happens, we’ll see improved and more consistent business performance in Private Brands. Our turnaround plan is focused on several areas of our overall execution. First, we’re working hard to increase our customer responsiveness and speed. Some of this is just the basics like getting packaging graphics done faster. Second, we’re intent on improving our commercialization processes by eliminating bottlenecks and getting new products on shelves when the customer expects them. Third, we’re establishing better service levels for customers, that includes things like fill rates, and on-time delivery realizing that each customer has different requirements and we need to meet those expectations. And fourth, we’re building better connections between sales and the supply chain to optimize margin management. That will enable us to, for example, be more responsive to commodity moves. To sum up those improvement areas, we need to become the true value-added partner that we know we are capable of being and we have to earn our right to be seen that way. We have deep convictions that we’ll get there. When we do, that will mean less business put out to bid, more value-added innovation opportunities, better category management to drive velocities, and much improved absorption in our plans, overall a much better top and bottom-line performance. This will take time, the work going on now isn’t an immediate impact on our end-market performance, but we have a great deal of focus, energy, and resources pointed squarely on improvement and we expect to start reaping the rewards of our efforts in fiscal '16. We remain committed to our long-term strategic vision for Private Brands. The marketplace tells us that the fundamental appeal of Private Brands to consumers is real and the strategic importance and profitability of Private Brands to our customers is real. And we know we can add value in a scaled way given our infrastructure. Realizing our vision will take more time, but we will make it happen. Moving on to Commercial Foods. Sales were up 2% over year ago amounts and comparable operating profit increased 8% versus year ago. In our biggest business in this segment, Lamb Weston sales and profits were up this quarter. We’ve added customers domestically and moved into a potato crop that is more efficient for processing, positively impacting our earnings delivery. We’ve continued to diversify and strengthen our customer base, gaining share domestically and adding assets internationally, which bodes well for long-term growth. Some of our key international customers have faced slowdowns in their business due to a food safety issue from a meat supplier in Asia. But we view that as temporary; results for the other Commercial Foods businesses were in line with the year ago and they’re poised to deliver solid performance in the back half of the year. For those of you who may not have seen the announcement a few months back, we’re now up and running with the Chinese potato processor we acquired during Q1, giving us the ability to serve our customers in this market with local production, which will play an important role in expanding our business in that market over time. And before I leave the Commercial Foods segment, it’s worth mentioning that the Longshoremen's labor situation on the West Coast is impacting international shipments. It’s been mildly disruptive to date and we hope it’s resolved soon, but it could be more of an issue as the year progresses. We will keep you posted. Outside of our segments, many of you know we have some very good businesses classified within equity method investment earnings. For example, Lamb Weston/Meijer, a large joint venture between ConAgra Foods, Lamb Weston and Netherlands-based Meijer Frozen Foods, recently announced plans to expand its frozen potato facility in Bergen Op Zoom, Netherlands to be complete in 2016. That’s another vehicle to accelerate international growth. And our milling joint venture Ardent Mills, which incorporates the former ConAgra Mills business, is off to a very strong start. This deal will be accretive to comparable EPS in a few years and is clearly a long-term strategic and financial win for us. Before I close today, I want to just touch on our CEO search. Obviously, I am firmly committed to leading ConAgra Foods until our new CEO is named. As I’ve said before, my intent all along has been to retire in May at the end of fiscal '15, and I will be flexible depending upon the needs of the Company. I know our search committee is being extremely thorough and diligent in their selection of the next CEO to lead ConAgra Foods and we will share any news when there is some. For now, I’ll summarize our Company's progress so far this year like this. We said fiscal '15 would be a year of stabilization and recovery, and that's what is clearly happening in the Consumer Foods and Commercial Foods. Attributing to that is our overall effectiveness and efficiency work taking place throughout ConAgra Foods. We are on track for the resulting SG&A savings, good productivity, and good synergies. The near-term outlook for Private Brands has weakened. We’re working on fundamental execution improvements to make us a better partner to our customers and to be seen as the value-added player we know we can be. We believe in material year-over-year growth in fiscal '16 as realistic and we expect margins to gradually improve over time, and we have strong conviction about the long-term opportunity. On balance, we’re making good progress in many parts of our business, enough to offset weakness in our Private Brands segment, which is why we’re reaffirming guidance for fiscal 2015 EPS and our debt reduction goals you've heard before. I wish you and your families a great holiday and John will share additional details now.

Thank you, Gary and good morning and happy holidays to everyone. I am going to touch on four topics this morning. I’ll start with some comments on our fiscal second quarter performance including our additional impairment charge this quarter. Next, I will cover comparability matters, then on to cash flow capital and balance sheet items and finally I will provide some comments on our outlook for the balance of the fiscal year. Let's start with our performance, overall the fiscal second quarter comparable results were in line with our expectations and reflect good progress against several key focus areas, as well as continuing challenges in our Private Brands segment. We have reaffirmed our full year goals and continue to expect fiscal 2015 results to reflect stabilization and recovery. Before I cover some of the details, I would remind everyone that with the formation of the Ardent Mills joint venture in the fiscal first quarter, flour milling results prior to the formation of this JV are reflected as discontinued operations. Also our share of earnings from our 44% interest in Ardent Mills is included in equity method investment earnings. With the fiscal second quarter, we reported net sales of $4.2 billion, about 2% below the year ago quarter. We reported earnings per share from continuing operations of $0.05 versus $0.48 in the year ago period. The sharp decline in reported EPS was driven by a non-cash impairment charge that I will say more about in a few minutes. Adjusting for items impacting comparability, fully diluted earnings per share were $0.61, slightly below comparable year ago amounts reflecting weaker performance in our Private Brands segment and expected dilution from the Arden Mills transaction, offset by stronger performance in our Consumer Foods and Commercial Foods segments and lower interest in corporate expenses. Now I’ll share a few comments on our segment performance. Starting with our Consumer Foods segment, where net sales were approximately $2 billion, down about 2% from the year ago period, reflecting 1% volume decline and 1% of negative price mix. As Gary noted, we’re pleased with the progress we are making on key initiatives and the improvement in trends. Our Consumer Foods segment operating profit adjusted for items impacting comparability was $310 million or up about 7% from the year ago period. The operating profit reflects the improving volume trends and lower marketing and SG&A costs. Foreign exchange had a negative impact of $8 million on net sales and about $6 million on operating profit for the segment this fiscal quarter. Our Consumer Foods supply chain cost reduction programs continue to yield good results. This quarter, cost savings were approximately $45 million and largely offset inflation of about 4%. Inflation was slightly higher than our expectations driven by cost increases on certain input particularly proteins, as well as higher transportation costs. On marketing, Consumer Foods advertising and promotion expense for the quarter was $89 million, down about 19% from the prior year quarter, due in part to changes in timing and reallocation of funds from advertising to in-store promotion. In our Commercial Foods segment, net sales were approximately $1.1 billion or up about 2% from the prior year quarter driven by 2% volume improvement. The Commercial Foods segment's operating profit was $148 million or 8% above the comparable year ago period. The operating profit increase principally reflects the volume growth and benefits from improved quality crop in Lamb Weston. Equity method investment earnings were higher this quarter due to the addition of earnings from the Ardent Mills joint venture. Moving onto corporate expenses for the quarter, corporate expenses were approximately $92 million. Adjusting for items impacting comparability, corporate expenses were $58 million versus $64 million in the year ago quarter. Our Private Brands segment delivered net sales for the quarter of $1.05 billion, down about 5% from the prior year quarter driven by a 6% volume decline resulting from category softness and pressures from both branded and private branded competitors. Operating profit excluding items impacting comparability was approximately $49 million, down 46% from the prior year quarter. This decline reflects weak volume performance and margin compression driven by pricing concessions in the prior year fiscal year, as well as temporarily higher operating costs associated with supply chain initiatives. The performance and our outlook for the balance of the fiscal year also reflect additional margin pressures from rapid increases in several key commodity inputs, particularly tree nuts and durum wheat. While over time, we expect to recoup some of this lost margin through pricing, the pricing lag and related margin loss will not be recovered in the current fiscal year. Due to the shortfall in our profit and cash flow performance in our Private Brands segment and our updated expectations relative to the timing of improvement in cash flows in this segment, we have updated our goodwill impairment analysis. As a result, we recorded non-cash impairment charges of approximately $247 million or $222 million after-tax. This charge is principally related to the impairment of goodwill, but also includes some impairment charges related to certain brand or trademark assets in the Private Brands segment. The additional impairment is driven by the changed performance outlook and reflects the fact that the underlying discounted cash flow valuation models are very sensitive to changes in cash flow and other assumptions. While we’re disappointed with the setbacks in Private Brands this quarter, we are confident that we’ll improve the margin structure of this business over the next several quarters, as we execute pricing for specific commodity increases, improve our execution especially related to customer service, pricing, and margin management and complete supply chain initiatives which are driving higher one-time costs in the near-term. Based on our latest forecast, we expect operating margin to improve and to reach double-digit levels over the next several years. Now I’ll move onto my next topic, items impacting comparability. Overall, we have approximately $0.56 per diluted share of net expense in the quarter’s reported EPS related to several items. As previously discussed, we recorded $247 million or $0.51 per share of non-cash charges related to goodwill and other intangible asset impairments in our Private Brands segment. On hedging for the fiscal second quarter, the net hedging loss included in corporate expenses was approximately $25 million or $0.04 per share. Next, we recorded approximately $21 million or $0.03 per share of net expense related to integration and restructuring costs. Also in the fiscal second quarter, we recognized a tax benefit of $8 million or approximately $0.02 per share related to the favorable adjustments of prior year federal income tax credits. Next I’ll cover my third topic, cash flow, capital and balance sheet items. First, we ended the quarter with $122 million of cash on hand and $536 million in outstanding commercial paper borrowings. We continue to target operating cash flows of approximately $1.6 billion to $1.7 billion for fiscal 2015, and we expect that this will provide us ample cash to achieve our fiscal 2015 debt repayment target. On the working capital for fiscal year 2015, we expect working capital changes to contribute modestly to operating cash flow. On capital expenditures, for the quarter, we had capital expenditures of $90 million versus $171 million in the prior year quarter. For the full fiscal year, we now expect CapEx to be in the range of $550 million to $575 million, somewhat lower than our previous estimate. Net interest expense was $75 million in the fiscal second quarter versus $95 million in the year ago quarter. Dividends for both this fiscal quarter and the year ago quarter were $106 million. On capital allocation, as we have previously noted, our capital allocation priority through fiscal year 2015 will be the repayment of debt. By the end of fiscal 2015, we expect to have repaid around $2 billion of debt since the Ralcorp acquisition, including $1 billion this fiscal year. We repaid about $500 million earlier this year from the Ardent Mills proceeds. We remain committed to a strong dividend and intend to maintain our current annual dividend rate at $1 per share as we de-lever. However, during this period, we expect to limit our share repurchases. In this quarter, we repurchased only an immaterial amount of shares. While we expect limited acquisition activity in the near-term as we repay debt, we will continue to evaluate investments to strengthen our performance. As we enter fiscal 2016 with a stronger balance sheet, we expect to have more flexibility in our capital allocation to consider dividend increases, share repurchases, and additional growth investments in addition to some debt repayment. As Gary noted last week, we announced plans to add production capacity to support growth in our Lamb Weston/Meijer joint venture in Europe. This expansion will not require a capital contribution from the partners as it will be financed by the joint venture. Now I’d like to provide a brief update on our fiscal 2015 outlook. For fiscal 2015, we continue to expect diluted earnings per share, adjusted for items impacting comparability to grow at a rate in the mid-single digits from our fiscal 2014 comparable base of $2.17. Our current full year guidance reflects our view of several key performance factors, including the following; first, in our Consumer Foods segment, we continue to focus on fundamentals in-store, which are driving volume stabilization, and we expect a stronger year-over-year operating profit performance. In our Commercial Foods segment, we expect good sales and profit growth led by stronger performance in our Lamb Weston business. While we believe the improved potato crop and volume growth will drive profit improvement in Lamb Weston, our international growth will be lower than plans due to near-term customer issues in Asia and impacts from the West Coast port labor dispute. We expect our food service and other commercial businesses in this segment will post modest profit growth in fiscal 2015. In our Private Brands segment, we now expect volumes and profits to be down year-over-year, reflecting competitive challenges and a longer timeline for improving our operating margins. We remain very focused on margin recovery in this segment; while our current results are being impacted by in-plant commodity increases, we have begun to take pricing in the affected categories, but the pricing lag will impact the current year. Also, as we have previously noted, we are incurring temporarily higher operating costs this fiscal year related to certain supply chain initiatives, which will benefit future years. We do expect to see good margin improvement over the next fiscal year. This fiscal year we also expect higher equity method investment earnings due to the contribution from Ardent Mills. As a reminder, while we are confident that overtime Ardent Mills will be accretive to our earnings, there is about $0.08 of EPS dilution included in our fiscal 2015 outlook. Overall, equity method investment earnings in total are expected to be in excess of $100 million for the full fiscal year. Overall, we have made good progress in both our Consumer Foods and Commercial Foods segments through the first half of the year. As we have noted, we still have more work to do to improve the performance in our Private Brands segment. Our expectations for the full year remain on-track, despite headwinds from Private Brands, transportation issues, and volatility related to FX and commodity markets. That concludes our formal remarks. I want to thank you for your interest in ConAgra Foods. Gary and I along with Tom McGough and Paul Maass, will be happy to take your questions. I will now turn it back over to the operator to begin the Q&A portion of our session, operator?

Two questions on Private Brands. First would be, I think last quarter Gary you’ve talked about service levels in that unit being up to, back up to sort of a 98% level and really the key was just getting past, lapping these pricing concessions and then there were a bunch of things that you’d listed, that start coming through in the fiscal second half, that would start to improve margins? And then on this call, I think you did mention some service issues still lingering. So I am trying to get a sense was there a step back in service levels or I guess I am still not clear really on what changed that you wouldn't have known about last quarter, that's now going to sort of push back the timing on being able to improve the margin structure at Private Brands? And then I've got a follow-up there.

All right, Andrew, I am going to let Paul tackle that one.

Yes, so the way I would frame it up for you, Andrew, is that a lot of the service progress that we have made clearly around just the on-time delivery, fill rate and structural improvements, a lot of the things we’re referencing were due to planned consolidations and their very structural nature. And we have made a lot of progress, but we have more work to do. Kind of the what’s new in the way we’re defining it is the overall service with our customer. Clearly on-time fill rate, those are important, but the way we interface with the customer in everything that we do to strengthen that partnership with them. And that's really what we’re getting at here is beyond those very service metric type of things, the overall relationship.

If we consider what has changed and compare your expectations for EBIT in Private Brands for the full year from last quarter to now, I'm trying to understand how much of the downgrade was due to timing differences between cost and pricing compared to other factors like competitive bidding and promotional levels from the brands. The overarching question seems to be around the visibility of this business. Many are asking whether a $45 million per quarter run-rate in EBIT is the appropriate long-term profitability target for this segment, especially since significant synergies from Private Brands are expected to materialize in the latter half of this year, yet it doesn’t appear that will translate positively. This is a long question, but I'm seeking clarity on what has really changed, as I still don’t have a clear understanding.

Yes, Andrew, I understand your question and appreciate it. I want to provide several points that will help clarify the situation. First, I acknowledge that our business is not currently where we want it to be, which is frustrating for everyone involved. It has been more challenging and taken longer than we anticipated, but it’s important to note that these issues can be fixed. The earnings revision you see reflects a delay in our recovery rather than a long-term issue. I am confident that we will achieve earnings growth in 2016, and I believe the Private Brands sector will continue to grow faster than the overall food industry. Our vision and confidence in Private Brands remain strong, despite the short-term challenges we face. This year, we are encountering softer performance in the Private Brand category, which affects our volumes. Additionally, as John mentioned, inflation is significantly impacting our snack, nut, and pasta businesses due to immediate cost pressures. Although we are taking pricing actions, these lag behind the cost increases. Beyond these headwinds, the most critical issue lies in our execution. We have lost business because we haven't engaged with our customers effectively, and we take too long to complete basic tasks that they expect us to handle. That's why we have developed a focused turnaround plan to get back on track. I want to directly address the question of what we're doing to improve our business. Our turnaround efforts are concentrated on four key areas, starting with our customers. We are committed to narrowing our focus, as we’ve found that a concentrated approach leads to better performance and increased customer confidence. When we spread ourselves too thin and add complexity, it negatively affects us, so we know adjustments are necessary to enhance effectiveness. Customer brands are crucial for our clients, and maintaining their confidence is essential. We have confidence in many areas, but if we lose it in any respect, we must take aggressive steps to restore it, which is what we are prioritizing. The second area of focus is on commercialization and the speed of bringing our products to market. We are currently too slow in this aspect, and accelerating our execution will help improve sales and overall performance. The third area involves managing costs and service efficiently. We have made progress, but there is still work to be done. We must approach this on a customer-by-customer basis, embracing the unique dynamics of each category and client, which is our current direction. The fourth area is enhancing connectivity within our business. Given the inflation we've faced this year, better internal connectivity is crucial for navigating these challenges effectively. In conclusion, as we implement these changes, we will become a more valuable partner for our customers, and I believe we can achieve this through necessary execution improvements.

Gary, Paul, I add apologies but I do want to follow-up on private label here. I wanted to take just a slightly different direction. So TreeHouse has reported that it has seen three straight quarters of organic volume growth. So like Gary I’ve heard you on the comments about the intensity of the environment, but when I look over at another very big, I know it's a different portfolio of private label, they actually see pretty good strong volume growth that I mean they give us this commentary that some of the traditional retailers are really starting to see some strength when you look at Kroger and some of their numbers. I mean things look better but you guys are seeing I mean, what was the volume in private label, it was down 6%. I mean that's an enormous figure. Given the kind of price contraction that the Company took many months ago, I would think that the one thing you would have protected was your volume. So can you kind of marry up what's the difference between the strength that this other big private label entity and why just the volumes are just so weak?

Dave, that's absolutely a fair question. I'd start by saying from an industry standpoint there are clearly players that are doing well. You referenced one big one. Consumers are more and more accepting of private brands and customers that are winning are emphasizing their own label, and we know overtime, the up market trend is going to continue and that will play well into our skill set, and we know that customers are going to be more and more demanding on supply chain efficiencies, food safety analytics, and all that will leverage our infrastructure. But frankly, we are challenged from an execution standpoint. This is truly a tactical, not a strategic question. We haven't done a good enough job on things like speed and on customer service levels and there have been some specific issues on customer service levels, Paul referenced some but we've had some supplier issues as well, that have hit us; that's not an excuse. Overall, our issues are truly our own execution and what we need to do to drive growth is to level the playing field on service of speed before we can really start to take advantage of any other kind of CPG capabilities that we've talked about. So I can't overemphasize the point that we do now have while the learning curve has been slower than it should have been; we should have moved faster; we do now have a turnaround plan that has four pieces to it. Our effectiveness and efficiency work on Private Brands has addressed some of that, but we need to go further to address the pain points and we have to break some of the bottlenecks that we have but they are really around customer responsiveness and speed, improving our commercialization processes, better overall service levels, and better connectivity between supply chain and sales. So I know that's a bit repetitive from Paul's answer but I just want to point the gun clearly at our own execution issues. I know that this is fixable. These things are fixable. We just need to do a much better job and move faster and I think we now have all the resources in the focused sense of urgency to do that. I wish it had been faster, but the bottom line is we now have that action plan in process.

Okay, I’ll pass along…

And David, sorry David, and clearly we will see a material impact in F16.

Hey, David just one thing I would add is the points you made on our competitor, it is an element of why I am still confident that the outlook on Private Brands is very positive. When we do all the things Gary just mentioned, there is a lot of opportunity here.

I guess, well just getting off of the private label topic for a second, John you’ve kind of written in the press release there were some hedge accounting adjustments that are going to happen going forward. I haven't heard that from other companies. Is that just a function of your ingredient base and its volatility? And then kind of what, so what should we expect, a little mark-to-market within the segments that you are going to pull out or you can't pull it out and it means it's more volatile? Maybe I’ll just, I’ll have that one and then a brief follow-up.

Yes, Eric good question. I am going to try not to get too technical, but historically a portion of our hedges have been, we've used some indexed hedges and this quarter we regularly look at how effective we think those hedges are and I think as we review those, the effect on this of some of these hedges this quarter, we determined that that effect in this was lower than we had planned, probably due to a lot of factors. When that happens, I think just good accounting requires that we change our methodology and recognize those mark-to-market impacts directly under the segments versus what we ordinarily do which is we temporarily defer them through corporate expense. I think in terms of what it means is, what you’ll see is that we’ll change the timing of when we recognize any of these losses or gains. I think it could add some volatility to our results over the next couple of quarters as we unwind these positions. To be clear, it’s just a portion of the hedges we use and my sense is that this issue will be done once we unwind from these hedges, it was just the case where again because of a variety of factors we felt like the effectiveness or correlations if you will had dropped to a level where we felt like we should go to mark-to-market on that subset.

And Eric this is Chris I’ll build on John’s point and just say that we’ve taken the volatility that John was talking about and the impact on our numbers, we’ve taken that into consideration when we are giving you our guidance.

Gary, I want to focus on the Consumer segment for a moment. You have a significant frozen portfolio, and that category has faced challenges since the Great Recession. There may be some indications that consumer health, particularly among the middle class and possibly lower-income groups, is slightly improving with the relief in gas prices. Do you observe any signs of recovery in that segment, both for your business and in general? Could you also provide a broader perspective on the current state of the consumer? Thanks.

Sure Eric. Thanks for the question. I’ll start and then hand it over to Tom for additional insights. The economy remains challenging for many Americans, and we recognize there is overcapacity in both manufacturing and retail, which continues to be a factor. However, there are some positives; for instance, lower gas prices should increase discretionary income for the core consumers, potentially leading to more spending on food both at home and out. Additionally, the SNAP cuts from last November are now behind us, which should also benefit the situation moving forward. It’s crucial to remember that this is a large market with opportunities to grow by improving fundamentals in retail. Overall, we hope the industry has reached a bottom and can look ahead. Now, let me turn it over to Tom, who will provide some valuable insights on the frozen segment and our entire portfolio.

Eric this is Tom McGough, and let me just provide a little bit of context in frozen and what we’re seeing. As you know, it’s a big and important category not only within our company but with our customers. And as you noted, overall category has been down. But overall I think it’s important to note that those declines have been concentrated primarily in the nutrition segment. The premium and value segments are relatively stable and that’s where our two largest brands are positioned in those segments. As Gary highlighted today and as we spoke about last quarter, we captured the number one share position in single-serve meals last quarter and we actually extended our share of leadership this quarter. I think what’s important to note, this second quarter we posted the highest profit we ever have in the second quarter on our frozen portfolio. So we built our share of leadership and we also delivered record results. If you look at the fundamentals of our business, we continue to invest to grow Marie Callender's and we’ve achieved great results not only in our single-serve meals, but in the other platforms. We had a great holiday season on frozen desserts and our frozen multi-serve platform continues to grow. As I said the nutritional segment is challenged and we are building share in that segment with Healthy Choice. We’re posting very strong gains on Café Steamers and we continue to build our business around that platform. And as Gary highlighted, we introduced a line called Simply Steamers this quarter and those are products that are made with no artificial ingredients and contain 100% all natural chicken. It’s really on trend with the desire from consumers for minimally processed foods. We also price those at a higher price point. And that resonates with the consumer despite the higher price point – we’re off to a very good start. Finally, as we look at the rest of our frozen portfolio, we’ve invested heavily in P.F. Chang's. When you go to a restaurant, you typically order an appetizer, and entrées are served with a rice side dish. We have restaged our business to sell that bundle, improved the appetizers, improved our multi-serve meals, and we just introduced a line of frozen rice and we are off to an incredibly strong start on that restage. So overall, while the frozen business is challenged in aggregate, our performance has been very strong this quarter and over the last year. This is a category that we are going to continue to invest smartly to build the category to our brands.

Can I ask about the sticking on the Consumer side, the advertising spending being cut down, that's something we heard about from a number of companies recently. What's the thinking behind that particularly in terms of the long-term investment behind the brands and do you expect that to change going forward or do you expect to stick with setting up promotional activity? Thank you.

Sure, Alexia. This is Tom McGough, and let me address that. I think there are a couple of perspectives here; first and foremost as with any investment we have an ROI approach to allocating our resources. And I think you can appreciate given the breadth of our portfolio, we focus our resources where we are getting the highest return and we are increasing spending on several brands. Marie Callender's, our tomato platform of Hunt's and RoTel, Slim Jim, and especially brands Reddi-Wip and PAM. We have the fundamentals right on those businesses, we continue to invest our volume and share continues to increase. But our perspective is that traditional marketing is only one investment in our brands and we take a more holistic look at the investments that we are making in our brands particularly in getting the fundamentals right. Where we've invested rather significantly has been on, I can highlight a couple of businesses, Chef Boyardee; we invested to improve our products, packaging through the easier lid. The business has responded very-very nicely with our volume up fairly significantly over the last quarter. Importantly, that's coming from non-promoted based volume growth and we see a good trajectory and a higher return from that investment. I just talked a little bit about P.F. Chang's, but we invested to get the product, the pricing, the package right at retail that's resonating incredibly well with consumers and we are seeing strong double-digit growth. The last thing I’d highlight is that as a company, we placed a much bigger emphasis and we've made more investments to grow in alternative channels. As you know, increasingly consumers are shopping in Club and Dollar stores. The win in these channels requires us to have customized product and packaging. But marketing in these channels is very different. Driving trials, if you go through a Club store, driving trials happens in-store, that's how you get the trial and awareness and that's very different than the traditional broad-based advertising, but we are reconfiguring our go-to-market approach, how we invest to drive trial and awareness in our brands and we are investing in many of these customer specific programs that are reflected in our P&L as trade spending and not as traditional A&P. Because you take a step back, we are investing in our business; we do it in a very holistic manner, we are having a very good impact from those investments and we will continue to have that lens of ROI, effectiveness and impact that drives our investment decisions.

Do you mind if I ask two questions? First, regarding the cost savings you mentioned, if I remember correctly, you provided an overall cost savings figure. Are we still on track for the 125 to 150 range for the Private Brands division?

Yes, we are still in that range for the Private Brands and overall we are looking at 350 to 375 across the entire enterprise. Hello? Chris did we lose you?

I am there, can you hear me?

We can now, yes.

Just a question about the Private Brands division and with the volume weakness, what seems to be persistent volume weakness, is there anymore activity, I guess I am trying to get to are there more cost-saving potential here now, while things have been a little slower in terms of their rebuild, are there plant closures are things you can do because of the volume environment to get a little bit more aggressive on cost on that division?

Fundamentally yes, and one of the things that we referenced was just the accelerated cost that we have in our business today around supply chain initiatives where the benefits are getting stretched out and that does, it’s around improved distribution network, consolidation, production consolidation and we will continue to drive optimization on that; it’s a really important part of the overall plan.

And I guess the only other thing I'd add Chris is as we work through the execution of the plan that Paul and Gary have talked about, certainly as we try to more tightly wire the business, that might also result in less touches; that’s a certain thing that might give us a chance to streamline some processes even further than we have through the first phase of our effectiveness and efficiency work.

This is actually Lubi on for Akshay, just had a question on your Consumer Foods business. So the margins in that business were really strong this quarter, I mean I think looking at our model it seems like strongest has been since at least the second quarter of 2010. So trying to get your thoughts on sort of sustainability of that margin performance in Consumer Foods for instance and I think there was a question earlier about sort of your level of brand support, but what gives you comfort that you are not cutting brand support too deep maybe in Consumer Foods such that it could affect the long-term performance there?

Sure, our margins well this is Tom McGough and our margins are what you reflect and it’s a combination of strong productivity, being able to execute pricing to offset commodities, a strong discipline on the trade side to be very surgical to meet marketplace conditions, and we believe we’ve balanced those very-very well, and our margins have been very strong. As I previously said, we look at our investments very holistically. And we are investing in our business for the long-term making sure we have the right fundamentals on the businesses that I highlighted as well as continuing to invest in businesses to sustain long-term performance. So our focus is certainly around building a foundation that sustains growth over time. I think we feel we’ve hit that sweet spot of discipline, while still investing behind our businesses not just in traditional A&P but in other areas to make sure we have the fundamentals right. And that’s going to provide a foundation that we will consistently grow from.

I think every question, every possible question has been asked. I’ll ask about international though. You mentioned some customer-specific issues. I want to know if you could give us a little more color on what that is and how much did it affect the quarter and is it a short-term or is it something that affects the back half of the year? And maybe quantify the West Coast labor strikes and how much that affected the quarter and why that would just be a short-term issue as well?

Yes, this is Paul. The commentary centers around our Lamb Weston business, and the softness in the Asian markets is fundamentally linked to a food safety issue from a meat supplier affecting some of our key customers, which impacts our business. However, the situation is gradually improving, and we expect it to continue on that path. There are positive commitments to expanding the market and opening new stores, and we've positioned ourselves to support that growth. The slowdown at the West Coast ports is significant, as our exports move through those channels, which are currently operating at about 50% capacity. Like many industries, we're navigating through this, and a quicker resolution would be beneficial. It's not having a major impact on the second quarter, but it's something we certainly hope to see resolved to better serve our customers and meet their needs.

Thank you. Before I close I know that Gary wants to offer some thoughts.

Yes just in closing, I want to reiterate that basically three quarters of our business, the two biggest sectors are performing well; their foundations are much stronger than a year ago. We’re managing our cost structure very well; the effectiveness and efficiency work is really playing a part there. The Private Brand business has an intensely focused sense of urgency and resources aimed at this turnaround, but I want to reiterate we believe in the strategy. It’s a bold move that we undertook and it’s a big transformation. We have strong conviction that Private Brand will be a growth sector in the food industry long-term; the issues we have, again to repeat, are our own execution; there’s no escaping that. These issues are fixable. We will drive growth long-term from this business. And with that, I will wish everyone happy holidays and see you in the New Year.

Thank you, Gary. This concludes our call today. And just as a reminder, this conference call 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. Happy holidays and thank you very much for your interest in ConAgra Foods.