Conagra Brands Inc (CAG) — Q3 2015 Earnings Call Transcript

Good morning. Welcome to our third quarter earnings call. Thanks for joining us today. I’m Gary Rodkin here with John Gehring, our CFO, Tom McGough, President of Consumer Foods; Paul Maass, President of Private Brands and Commercial Foods; and Chris Klinefelter, our VP of Investor Relations. We also have our CEO-elect, Sean Connolly with us today as well. 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. As you can see from the release, comparable EPS came in higher than our most recent projections, and we've raised our full-year outlook. Additionally, we're on track for our debt reduction commitment. So there is a fair amount to discuss in today's remarks. But before we get into the specifics of that, I want to introduce Sean Connolly, our incoming CEO. I couldn’t be more pleased with the selection of Sean. He is sharp, seasoned, enthusiastic, and he refuses to lose. His energy and focus will serve ConAgra Foods well, and he is making a terrific first impression here at ConAgra Foods. I know many of you know him and I am confident you'll enjoy interacting with him in the months and years ahead. Sean?

Thanks Gary and good morning, everyone. I am looking forward to transitioning into the CEO role here in a couple of weeks. I am very excited to be at ConAgra Foods and part of this team. This is a highly motivated organization with great brands, strong product lines and incredible people and I believe there is a lot we can do to create value together. Now I imagine many of you have big picture questions about our strategy and goals. We'll get to those over time, but not today. I'll need a lot of study to get where I need to be to provide insight on this. For now, I'll just say that I am committed to long-term value creation as is our Board of Directors. My plan is to spend the coming months digging in and learning everything I can about our company. After that, we'll share our thinking with all of you at an investor event when the time is right. To be clear, that will be several months down the road. Until then, our organization will remain focused on delivering our near-term commitments and our key business initiatives. I look forward to working with all of you as we take ConAgra Foods to the next level. As many of you know, I value a good dialogue with analysts and investors and I believe in transparency and availability, so that you can have a very solid understanding of our plans. Thanks for your time this morning. I appreciate your interest in ConAgra Foods and I look forward to working with all of you. Now I’ll hand it back over to Gary.

Thanks, John. Now let’s focus on the company's third quarter results. I’m going to briefly touch on some overall remarks about the quarter and then ask Tom McGough and Paul Maass to offer some commentary about our segments. Given that this is my last earnings call and the fact that I’m retiring from my role officially in a couple of weeks, I think it makes sense for Tom and Paul, who are running the segments day-to-day to offer the more detailed remarks about segment performance. Our third quarter comparable EPS was $0.59, that’s ahead of our most recent expectations and below our comparable EPS of $0.62 a year ago. All of our segments ended up ahead of what we were planning when we offered our last guidance and we also got some EPS help from lower taxes and higher joint venture earnings. We've refined our view of the year and have taken our outlook up accordingly and we're confident we'll meet our debt reduction commitment. We saw comparable profit growth for both Consumer Foods and Commercial Foods during the third quarter, despite some headwinds that impacted us. To state the obvious, our Private Brand segment continues to be below expectations and our revised outlook for that segment has driven a lot of impairment charge. Obviously we’re very disappointed with our Private Brands' results thus far and we're taking specific actions to improve it. At the same time, most of the company, the two biggest segments are performing well and delivering on commitments. Our Consumer Food segment has grown profits each quarter this fiscal year and we're gradually making progress on the top line with share gains and volume holding steady. Commercial Foods, led by Lamb Weston, continues to make progress on both the top and bottom line as it gains new business domestically to make up for some headwinds, including the West Coast Port slowdown, which has impacted international sales over the near term. So the good news is that most of the company is on track and Paul and Tom will give you some specific examples. In addition to this, we remain highly focused on a more efficient organization at all levels. That's important fuel for ongoing business growth, but along with the progress we’re making across the company, we continue to have a challenged private brands performance. While our learning curve has been steep and taken longer than planned, we’re in the midst of implementing very granular initiatives to significantly improve execution. These initiatives should help our customer service, customer relationships, and in due time our ultimate performance. Our initiatives will also help us to manage cost more effectively. You’ll hear more about that from Paul in a minute. We expect better results from the Private Brands segment in fiscal '16. Now on to more specifics by segment, I’ll ask Tom and Paul to offer their thoughts, so, Tom?

Thanks Gary and good morning everyone. This is Tom McGough, President of Consumer Foods. I want to start by emphasizing that we're on track with our plans for the year, which aim to enhance our market share, stabilize volume, and increase profits. We've focused on building a strong foundation in Consumer Foods, and I'm pleased with our progress, even in a tough market. In the third quarter, Consumer Foods experienced a 2% decline in net sales, with flat volume, a 1% drop in price mix, and a 1% negative impact from foreign exchange. However, comparable operating profit rose by 5%. Notably, we maintained our leadership in frozen single-serve meals, a position we've held since earlier this fiscal year. This success is attributed to the sales and share growth from the re-calendared single-serve meals, driven by effective strategies and solid fundamentals, which have allowed us to invest in growth. Additionally, we successfully revamped the P.F. Chang's brand by updating the core meal segment and launching new appetizers and side dishes for the fall, yielding excellent results. In the center of the store, we've also seen growth in PAM and Reddi-wip, supported by the right strategies and strong fundamentals with consistent investment. During the quarter, we achieved a significant milestone with Reddi-wip, now the top-selling whipped topping, surpassing all frozen and refrigerated competitors. Slim Jim remains a strong and consistent performer with growing sales. We're also making strides with three key brands we've focused on stabilizing this year. Chef Boyardee is showing improvement, with year-over-year volume growth thanks to packaging enhancements and effective promotions. Healthy Choice is increasing its dollar share in the nutritional meals sector, thanks in part to our continued emphasis on Café Steamers. We've introduced a new line called Simply Steamers, which is performing well and aiding margin improvements. Orville Redenbacher's is also demonstrating sequential progress by refining packaging graphics and enhancing product assortment on shelves, a process that will continue as retailers reset their shelves in the coming months. We're optimistic about the advancements we've made with these three brands and expect further progress leading into fiscal '16. While the environment is challenging, there is still growth in our industry. I want to share how we're positioning our brands for sustainable long-term growth by aligning with consumer, customer, and shopper trends. Firstly, we're reallocating resources towards faster-growing retail channels, and this approach is proving effective as we're now surpassing growth rates in Club, Dollar, and Convenience channels. We'll keep investing in these areas to maintain our share of growth in the stronger channels. Secondly, we're addressing consumer demands for transparency and authenticity. As highlighted in recent discussions, many in our industry recognize the need to be more relevant. Fortunately, we have product lines that epitomize simplicity and wholesomeness, like Heinz Tomatoes and others that align with contemporary consumer preferences, such as Healthy Choice and Simply Steamers. By implementing straightforward packaging and ingredient changes, like using all-natural protein and eliminating artificial ingredients, we're meeting consumer desires. The initial performance of these entrees indicates our potential to resonate more effectively with consumers. Lastly, we understand that convenience is crucial for consumers choosing packaged food. Enhancing convenience can involve several strategies, from improving packaging to rethinking an entire product line, as we did with P.F. Chang's. We've approached convenience from a shopper's perspective, marketing a complete meal solution with our appetizers, meals, and rice, which has yielded positive outcomes. In summary, our Consumer Food business has strong growth strategies that focus our resources on the best opportunities and effectively leverage our capabilities. It's important to mention that the comparable 5% profit growth illustrates our strong productivity and efficiencies. Despite facing hedging challenges and unfavorable foreign exchange rates, we successfully grew profits largely because of our effective supply chain management and efficiency gains. Our advertising expenses decreased by around $20 million during the quarter, and we plan to increase our advertising and promotion spending in the fourth quarter. In closing, our objectives for the year were to grow share, stabilize volume, and increase profit, and we are on track to achieve these goals. I look forward to your questions shortly and will now hand it over to Paul Maass for insights on the private brand and commercial segments.

Thanks, Tom. Good morning everyone. I’m Paul Maass and I'll first focus on our Private Brand segment. For profits were well below a year ago amounts as we noted in our February update. We’re in a highly competitive bidding environment, seen some category softness and dealing with high input costs, specifically in pasta. We've also experienced execution shortfalls. Those factors have negatively impacted recent results and near-term expectations for volumes, pricing, and margins. We've reassessed the timing and slope of recovery in our private brand segment and concluded that significant improvement in our top and bottom performance will take longer than we previously expected. We're very focused on implementing significant changes to improve execution, strengthen customer relationships and improve our performance. We've made positive changes already with more to come. Those changes will continue to be implemented over the next several quarters and we expect to improve results in fiscal '16. Even with those improvements coming down the road, clearly our view of future performance is well below previous projections and expectations, which has resulted in the impairment. John will say more about the impairment in his remarks. As I look at the underlying issues in the business there are a few things that count more than others. The level of competitor fragmentation and capacity in the marketplace means that every dollar won in this business is hard fought. We know that speed and agility are hallmarks of Private Brands and are key to winning. Focusing on the distinct needs of our six business units within Private Brands is a must. For example, what it takes to win in pasta is simply different from crackers and the winning priorities in crackers are different from snack nuts and so on. We're strengthening our focus and specialized capabilities and we're leveraging our scale where it makes sense. Scale is clearly a strength of ours, but that's obviously not been enough to win in the marketplace. Having learned some lessons the hard way, we're better equipped to have the right processes and structure to win going forward. We know too well, that the decline in this business has experienced is unacceptable and we're in the midst of stabilizing it so the business can return to growth in fiscal '16. The stabilization and turnaround plan is focused on four executional areas that we highlighted a few months back. We had just defined these focus areas then and we've accomplished a lot in three months in terms of rewiring processes and better defining our priorities. First, we're further narrowing the focus of our sales teams for deeper expertise and capability, which enables decision making closer to our customer, improve speed and reduces complexity. In the Private Brands business in particular, we see the need for simplified processes; they efficiently handle the large volume of work coming from a big number of customer-specific SKUs. Our customers value and appreciate supplier partners. We have deep product knowledge, category by category, customer by customer. This kind of focus has worked well for us prior to acquiring Ralcorp and it can work for us again. Second, we're beginning to improve our commercialization process by eliminating bottlenecks and getting new products on shelf when our customers expect them. With such a large volume of work, we've to be extremely efficient in our responsiveness to customer requests for product modifications, most notably graphics changes. We've already started this process and we're looking forward to further improvement. Third, we are establishing better and more consistent customer service capabilities. While this area has been improving for some time, we're now focusing on the aspects that make the right service levels and fill rates sustainable over time. As we consolidate our manufacturing network, we're improving our execution to ensure dependable, uninterrupted supply. As you would expect, fill rates and on-time delivery are extremely sensitive to retailers in a way that is very different within our branded business. We're talking about their products under their brand names, and there is no substituting another product. So we're positioning our teams to consistently meet and exceed our customer's expectations. Fourth, we're focused on margin management. We're going at this in a number of ways including improved pricing execution to better linkage of our input costs and risk management to pricing decisions and better visibility into new product and promotional effectiveness. This allows us to leverage mix as a margin enhancer as well. Tighter and stronger connectivity among our field, our general management, and our supply chain teams is key and will help us improve our margins. These improvement initiatives have begun and they will continue driving improvement starting in '16. Ultimately, these are significant changes that are intended to improve execution, strengthen our customer relationships and improve our performance. To sum up those improvement areas, these are basic foundational elements in our Private Brands business. For us to be seen as a true value-added partner, we have to improve speed, agility, and consistency. I want to be very clear, we’re fundamentally changing the way we operate this business to succeed in the marketplace over time and create stronger results but we realize this will not be a quick turnaround. Now moving on to Commercial Foods, sales were 1% compared to a year ago and comparable operating profit increased 4%. In our biggest business and the segment Lamb Weston, sales and profits were up slightly this quarter. The big news here is that we were able to drive some top and bottom line growth, despite being negatively impacted by the West Coast port labor slowdown that had a significant impact on our third-quarter volume and profit. We’re pleased the port situation is resolved, but it will take a bit of time to recover from it due to the backlog of product. Business for Lamb Weston domestically is very strong. We’ve added to and diversified our customer base and we’re processing a crop that is better than last year’s, which is positively impacting our earnings delivery. Our international performance for the quarter was below a year ago due to the West Coast port slowdown, despite that emerging markets are an extremely valuable part of the long-term picture. Results for other Commercial Foods businesses were above a year ago and we’re pleased with their performances. These are well-run businesses with focused agendas that are consistently delivering. Outside of our segments, we continue to see good results that are classified within equity method investment earnings. Joint ventures are a very important component of our Commercial Foods businesses and we’re pleased with the strong results from our joint ventures this quarter and fiscal year. With that I’ll turn the call back over to Gary.

Thanks, John, and Paul. As you can see, there are bright spots within the company. And it’s important not to lose sight of the fact that our overall effectiveness and efficiency work is doing what it is supposed to. This is taking place throughout ConAgra Foods and is producing the SG&A savings and productivity we envisioned, which of course plays a big role in our company’s broader goals. Importantly, the execution related initiatives underway in Private Brands will help us stabilize and grow over time. Our most recent results have been weighted down by our Private Brands performance. But when I take a step back, I’m extremely pleased to see the progress our team has made over the last decade. The long-term view shows we made good progress transforming ConAgra Foods into a true operating company with an engaged culture. All of that also tells us that we’re in a position to profitably grow on a sustainable basis over the years ahead. Getting ConAgra Foods to this point has required significant energy and dedication from thousands of people inside the company. I want to thank my team, including all ConAgra Foods employees for all of the sweat equity, talent, and perseverance they’ve devoted to ConAgra Foods. It means a lot to me personally and to all of our stakeholders and it's why the company is set up well for the future. I also want to thank you and the rest of the investment community for the interest you had in our company during my tenure here. I’ve appreciated our interactions and your feedback throughout the years and I wish you all the best. I've truly enjoyed the candid dialogue, the challenges, and good exchange of ideas that I’m sure will continue with Sean. And with that, I’ll turn the call over to John for some additional detail.

Thank you Gary and good morning everyone. I have several topics to cover this morning. I’ll start with some comments on our fiscal third quarter performance including the additional impairment charge in our Private Brand segment this quarter. Next, I’ll cover comparability matters, then on to cash flow, capital, and balance sheet items, and finally I’ll provide some comments on our outlook for the balance of the fiscal year. Let’s start with our performance. Overall the fiscal third quarter comparable results were better than our revised expectations, reflecting a strong close to the quarter in our Consumer Foods and Commercial Food segments and lower tax rate, but also continuing challenges in our Private Brand segment. Before I cover some of the details, I would remind everyone that the results of the ConAgra meals business prior to the formation of the Ardent Mills joint venture in the first fiscal quarter are reflected as discontinued operations. And our share of earnings from our 44% interest in Ardent Mills is included in equity method investment earnings. For the fiscal third quarter, we reported net sales of $3.9 billion, about 2% below the year ago quarter. We reported a loss per share from continuing operations of $2.23 versus earnings of $0.52 per share 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 $0.59, about 5% below comparable year ago amounts, principally reflecting weaker performance in our Private Brands segment and higher corporate expenses, offset by stronger performance in our Consumer Foods and Commercial Foods segments. The fiscal third quarter comparable earnings include approximately $28 million of losses related to certain index hedges. Due to changes in correlations among commodities and these hedges, the company changes its method or recognizing the related mark-to-market amounts. As such, the company has recognized approximately $28 million of expense directly to its operating segments this quarter. Without this change in methodology, most of that expense would have been temporarily classified within unallocated corporate expense and recognized within segment results over the next few quarters. The $28 million of expense is not identified as an item impacting comparability. Now I'll share a few comments on our segment performance. Starting with our Consumer Foods segment, where net sales were approximately $1.8 billion, down about 2% from the year ago period, reflecting flat volume, a 1% decline in price mix, and a 1% negative impact from foreign exchange. Our Consumer Foods segment operating profit adjusted for items impacting comparability was $282 million or up about 5% from the year ago period. The operating profit reflects the improving volume trends and lower marketing and SG&A costs. Gross margins were down slightly as the benefits of pricing, mix improvement, and cost savings were offset by a mark-to-market on the aforementioned index hedge derivatives of approximately $21 million. Foreign exchange had a negative impact of $17 million on net sales and about $8 million on operating profit for the segment for this fiscal quarter. Our Consumer Foods supply chain cost reduction programs continue to yield good results. This quarter, cost savings were approximately $70 million and largely offset inflation of about 4%. Inflation was driven by cost increases on certain inputs, particularly proteins. On marketing, Consumer Foods advertising and promotion expense for the quarter was $81 million, down about 20% from the prior year quarter, due in part to changes in timing between the third and fourth quarters. In our Commercial Foods segment, net sales were approximately $1 billion or up about 1% from the prior year quarter. Results were driven by a 2% volume increase, primarily reflecting the increased domestic sales in our potato business. The Commercial Foods segment's operating profit was $145 million or 4% above the comparable operating profit in the year ago period. The operating profit increase principally reflects the benefits from increased domestic volumes and the improved quality crop in Lamb Weston, offset by lower international volumes including the impacts from the West Coast port labor dispute. Our Private Brands segment delivered net sales for the quarter of $1 billion, down about 5% from the prior year quarter driven by a 7% volume decline, resulting from execution shortfalls and pressures from both branded and private branded competitors. Operating profit excluding items impacting comparability was approximately $37 million, down 44% from the prior year quarter. This decline reflects the weak volume performance and margin compression driven by supply chain execution challenges and lower overhead absorption. 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. Given the segment's recent poor performance and continued execution challenges, particularly the issues that we experienced over the last fiscal quarter, we have reassessed the nature and extent of the executional challenges across all elements of this segment as well as our estimates of how long it will take for our recovery plan to positively impact the financial performance of the businesses in this segment. Due to the significant shortfall in the profit and cash flow performance in our private brand segment and our significantly lower expectations relative to the timing of improvement and cash flows in this segment over the next several years, we have updated our goodwill impairment analysis. As a result, we recorded non-cash impairment charges of approximately $1.3 billion or $1.2 billion after-tax. These charges are principally related to the impairment of goodwill, but also include some small impairment charges related to certain brand or trademark assets in the Private Brands segment. The additional impairment is driven by the significant change in our performance outlook and reflects the fact that the underlying discounted cash flow valuation models are very sensitive to changes in near-term cash flow and growth assumptions. Notwithstanding the setbacks in our Private Brand segment this year, we continue to believe that we will see improvement in the margin structure of this business going forward as we improve our execution, especially related to customer service, pricing, and margin management and as we complete supply chain initiatives that are driving some higher costs in the near-term. Moving on to corporate expenses, for the quarter, corporate expenses were approximately $50 million. Adjusting for items impacting comparability, corporate expenses were $51 million versus $29 million in the year ago quarter. The increase versus last year's third quarter reflects a shift in timing between quarters for some expenses and higher benefit and incentive accruals this year. Equity method investment earnings were higher this quarter due to the addition of earnings from the Ardent Mills joint venture. Next, I'll move on to items impacting comparability. Overall, we have approximately $2.82 per diluted share of net expense in the quarter's reported EPS related to several items. As previously discussed, we recorded $1.3 billion or $2.81 per share of non-cash charges related to goodwill and other intangible impairments in our Private Brand segment. On hedging for the fiscal third quarter, the net hedging gain included in corporate expenses was approximately $6 million or $0.01 per share. Next, we recorded approximately $22 million or $0.03 per share of net expense related to integration and restructuring costs. Also in the fiscal third quarter, we recognized a tax benefit of $3 million or approximately $0.01 per share related to favorable adjustments of prior year federal income tax credits. As a housekeeping detail, I will point out that our comparable EPS of $0.59 excludes the $0.01 benefit to GAAP EPS resulting from their requirement to use weighted average basic outstanding shares to calculate EPS when there is a loss. Now I'll cover my third topic, cash flow, capital, and balance sheet items. First, we ended the quarter with $137 million of cash on hand and $436 million in outstanding commercial paper borrowings. We're targeting operating cash flows of approximately $1.55 billion for fiscal 2015, down modestly from our previous estimate, due in part to higher projected year-end inventory levels related to certain crop-based inputs and higher costs for certain raw material inventories. We still expect to have ample cash to achieve our fiscal 2015 debt repayment target. On capital expenditures, for the quarter, we had capital expenditures of $116 million versus $133 million in the prior year quarter. And for the full fiscal year, we now expect CapEx to be in the range of $500, somewhat lower than our previous estimate. Net interest expense was $80 million in the fiscal third quarter versus $95 million in the year ago quarter. Dividends for this fiscal quarter were $107 million versus $105 million in the year ago quarter. 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 have repaid slightly over $600 million to date this year including $500 million from proceeds related to the Ardent Mills transaction. We remain committed to a strong dividend and intend to maintain our current annual dividend rate at $1 per share as we de-lever. While we continue to limit our share repurchases, this quarter we did repurchase about $38 million of shares. And while we expect limited acquisition activity in the near-term, 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 debt repayment. This quarter, we did announce 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 now expect diluted earnings per share, adjusted for items impacting comparability to be in the range of $2.15 to $2.19 per share. This is slightly higher than our recent estimate as we have passed along some of our third-quarter over delivery that was made possible by a lower tax rate. Our current full-year guidance reflects our view of several key performance factors, including the following: continued good execution in our Consumer Foods and Commercial Food segments. In our Private Brand segment, we expect volumes and profits to be down year-over-year reflecting the challenges we have discussed and our reassessment of the timing and pace of improvements in volume and operating margins in this business. We also continue to expect higher equity method investment earnings due to the contribution from Ardent Mills. As a reminder, while we’re off to a good start and remain confident that over time Ardent Mills will be accretive to our earnings, there is about $0.08 of EPS dilution included in our fiscal 2015 outlook. Equity method investment earnings in total are expected to be in the range of $120 million for the full fiscal year. Overall while we still have more work to improve the performance in our Private Brand segment, we have made good progress against key initiatives in many areas of our business in fiscal 2015, including Consumer Foods, Commercial Foods, corporate and SG&A expense control and our Ardent Mills joint venture. 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’ll now turn it back to the operator to begin the Q&A portion of our session.

Good morning, everyone.

Good morning, Andrew.

Good morning, Andrew.

Welcome Sean. Great to hear from you again and Gary, really wishing you all the best moving forward. I guess there are two questions from me if I could. First Sean, this may not be a question you’re prepared to answer really just yet, but you’ll tell me if that’s the case, I guess if we had asked you and maybe prior roles that you had in food, Cannibal, Hillshire and such realizing this may ultimately be a very different outcome as it relates specifically to ConAgra. Trying to get a sense of what would your thoughts have been regarding sort of the marriage if you will of Private Label and Brands under the same roof because there’s still obviously quite a bit of investor skepticism around the pairing and then I just got a follow-up?

Well, I appreciate the question, Andrew, and I appreciate that you all have many questions for me about how we’re going to create value going forward. Clearly, being just a few weeks in to ConAgra Foods here, I am in the early days of learning and I’ve got a lot more work to do. So I’m not in a position today to give you the kind of perspective that you’re seeking but I do look forward to engaging with you down the road and sharing that perspective because I’ll have it. For now, just know that I do see tremendous opportunity to create value here at ConAgra Foods and I’m really happy to be part of the team.

Got it, understood. And then Paul, I realize ConAgra won’t give full-year sort of '16 guidance really until next quarter. The Private Brands margin I think around 3.7% was maybe the lowest since ConAgra’s owned it. Are we able to say maybe at this stage though that this is sort of a bottom on margins for this unit or giving visibility is still sufficiently murky that we can’t quite say that yet as we think out to 2016 specifically in Private Brands. Thanks very much.

You bet, yeah, I would say we’re clearly disappointed with where we’re at and we do intend to deliver profit growth in '16 and that’s what we’re all focused on doing.

Thank you and good morning.

Good morning, David.

Good morning, David.

Gary, thanks for everything, I really appreciate it and good luck with your retirement and future activities and Sean, welcome back. So guys, a game-changing event yesterday with Kraft and Heinz and Gary, Sean I don’t know what you want to comment or not but Gary, gosh you’ve been at this a long time. You started at ConAgra, was a decentralized structure, your first action was to turn ConAgra into I think the annual report said one turn, it into one entity. I feel like the ZBB actions and the elimination of so much internal cost structure as executed by Heinz, 3G and others is astounding. The numbers yesterday just blew everybody away in terms of the kind of value creation and the stock kind of proved it. Gary, how do you respond to kind of the cost-cutting efforts that the company has taken so far and why aren’t there just dramatically larger efforts that ConAgra could employ just given the size of the entity, and again from where you started when it was decentralized to then it kind of comes together in this one unit, it feels like we’re going the other way with ZBB right now, I hope that was somewhat clear?

Yeah, David, understood and you know from a lot of the discussions we’ve had in the past and from the results that we have generated pretty significant savings from our supply chain and SG&A functions year-after-year and the continuous improvement in efficiencies of our operations as well alive for us. So I think we’ve been at that for a long time, putting a lot of points on the board, and I expect that the future will hold the same.

Well, in principle, I don’t comment on other companies in our industry. So I’m sure you understand that I know we’ve a lot to add here. I just think for those of you know me, you know I’m a big believer in a lean enterprise because that ultimately creates a strong bottom line and fuel for growth and I think that’s just a philosophical view. Beyond that, I don't have a lot to add.

Okay, well I look forward to your more detailed comments later on. Thanks everyone.

Good morning, thanks very much.

Good morning.

I have a somewhat detailed question regarding synergies in the Private Brands business, as we haven't discussed them in some time. You mentioned that you altered some assumptions, which seems to have led to the write-down this morning. The last we heard about synergies was around the $300 million mark by 2017, which was about 18 months ago; please correct me if I'm mistaken. Have those assumptions changed related to the write-down, and could you provide a general idea of where in the segment reporting those synergies currently lie? Thank you.

Yeah, Jonathan, this is John Gehring. I will cover that. First of all I would say we have been delivering the synergies that we set out to deliver, obviously we’re not getting those to the bottom line and obvious what that implies is that just our base business execution has deteriorated. And that’s what’s really I think reflected in the impairment and how long it’s going to take us to turn that around. So I think we still are on track to drive out the cost and probably as we started out, we said about two-thirds or three-quarters of that was going to be in the COGS area and supply chain and that’s still the case and an awful lot of that is being realized in procurement areas. So I’d say we’ve made good progress on the SG&A. We continue to make good progress in supply chain, but we’ve got to get the base business stabilized so that more of those synergies drop to the bottom line.

Thank you. John, I'll just follow up though. I’m trying to understand what segment kind of the Private Brand, Consumer, Commercial how would those synergies split? Are they overwhelmingly or even across the three?

I would say that the majority of them is still within Private Brands. The consumer has benefited over the last couple of years from some scale, particularly in procurement areas, but I would estimate that around two-thirds are still within the Private Brands segment.

Great, thank you. And if I can just get one last question in for Gary before and Gary thanks for everything, I guess as you look back over the past 10 years and just philosophically, with gross margin being a trade-off between pushing for market share and price and water changes in commodities over that time. From the time that you joined 10 years, my guess is you had a vision of growing gross margin maybe a little bit more so than has happened. Can you comment about why shouldn’t and forget about the Private Brand side of the business, just the branded side of the business carry higher gross margins at ConAgra and what were some of the surprises maybe on the road to that, that maybe give us some learnings about the job that John faces?

Yes. I think that’s a good question, Jonathan, and we're always looking to improve our margin structure. We had a spell I can think of three or four years of very dramatic inflation that was tough for all of us to manage through, but I think the balance between driving for productivity on the supply chain side as well as SG&A has served us well. And I think to Sean's earlier comment, operating in a lean fashion is what's really required in an industry that frankly is not a high growth industry. It’s one which is a very large landscape and we have to battle for share. So I am pleased that we've been able to certainly recently start to make some forward progress on the share front, but it's always going to be a balance, but continuing down the productivity front is really important because that's what gives the fuel to grow.

Gary, best wishes from me as well and Sean welcome back. I have a question and a follow-up if I can. ConAgra is trying to turn around Private Brands for many quarters now I think by the company’s own words haven’t necessarily been successful yet. So how do we get confidence that this latest effort will finally I guess be the one that solves the riddle, right? I am sure we can see you are talking about some legitimate changes being made, but I am an outsider and I hear that one of the key differences will be faster graphic changes on packages, I’ll be honest that doesn’t really excite me that much. So any color there would be helpful.

Yes. Let me start by saying clearly we're not where we want to be with the Private Brand business. It's obviously been disappointing for all of us here at ConAgra. This has been more difficult and taken longer than we anticipated and planned. However, I think we all firmly believe we can improve our performance by focusing on what we can control, which is our execution and we are firmly committed to making those necessary changes. So a little more color, Paul.

Yes, Kenneth, bottom line, we do need to improve our own execution. You're kind of asking what do we really mean by that, and simply put, I would say we are changing the way we're running the business, focusing on the four areas that I described in the formal comments. Narrow product focus with deep expertise in each business, improving commercialization speed, consistently meeting our customers’ service expectations and most importantly expanding our margins. These are basic things that are required to win in Private Brands. And I think it's really important we stay really close to our customers. They've given us plenty of actionable feedback regarding what we're doing right and what we're doing wrong. We've been really granular in our assessment and we have a clear understanding of the root causes of the challenges and we're committed to executing all these changes in the whole overall turnaround effort. So I appreciate what you're saying, but I just reiterate that we're committed to it and we have confidence we will grow profits in '16.

Hi. Good morning, everybody.

Good morning, Eric.

Gary, it's been a pleasure. Sean, welcome back. So I guess just a quick detailed question, with the impairment, should goodwill expense be significantly lower? I guess it's been running since the transaction is like, call it $100 million to $110 million is that going to switch to being much lower now?

No, Eric, actually the impairment of goodwill, goodwill is not an asset that we amortize. So really the impairment is going to have very little impact if any on our amortization expense going forward.

Okay. I'll follow up and then I guess maybe Gary and Sean you could both address this kind of more of an industry question. Some of the other companies have recently talked about seeing somewhat better category trends sequentially and I’m just kind of as you kind of look at the last couple of months, are you seeing it and what do you attribute it to better macro or the industry starting to get the product lines better aligned with the changing consumer and I understand it’s modest but we’re certainly all hoping it happens.

Eric, I would just start by telling you we see it clearly on the away-from-home side and you know that we’ve got a very large scale advantaged food service business anchored by Lamb Weston and we are clearly seeing that happen here in North America, on the consumer front, Tom you’re seeing what?

Yes, generally speaking as we look forward we see it to be an industry with nominal growth that's primarily defined as a market share battle and our focus is on the things that we can control, fixing the fundamentals within our portfolio, investing in our businesses. While there are some macro things that we believe should provide some tailwinds, lapping the snap reductions, certainly lower gasoline prices ultimately provide additional income. We’re not really counting on those to be a part, we're really focused on the things that we can control and we’ve made very good progress in building our share in very big and important categories.

Good morning, everyone.

Good morning, Alexia.

Good morning, Alexia.

So Gary, it’s been great working with you, and Sean definitely welcome back again. So just one question there was some discussion earlier about the improvement from the innovation that you’re seeing in Chef Boyardee, Orville Redenbacher, Healthy Choice, and I remember about a year ago, Gary was seeing we've been trying to recruit new consumers into those brands and it's just proving a bit challenging. How are you measuring the return on investment in those innovations and product developments in that, how can you be sure that the money that you're turning into the brands now is really going to drive value creation as the time? Thank you and I will pass it.

Alexia, this is Tom McGough. Let me address your question. We strongly believe in building brands and that this is most effective when they are ANP ready. This means having clear consumer insights, an effective strategy to succeed in the marketplace, and strong business fundamentals. We are investing in brands like Marie Callender, Reddi-wip, Hunt, and Slim Jim, which are all ANP ready, and we are seeing positive results from these investments. For example, we have attained the leading market share in our largest category, frozen single served meals, and we have also become the category leader for Reddi-wip in both refrigerated and frozen segments. We observe tangible returns when we support brands that are ENP ready. The businesses you mentioned required some work to become suitable for further investments. We concentrated on stabilizing and growing those businesses and have been focusing on insights and strategies throughout this year. As we approach the fourth quarter and the fiscal year 2016, we have more brands that are ANP ready. Our ANP will increase in Q4, and we anticipate making larger investments in FY '16. This year has been foundational in ensuring everything is aligned, and we see the positive impact when all these factors are in place. This is our general approach to making investments in our portfolio.

Good morning and good luck Gary and welcome back Sean. So my question is for Sean and so one way to look at your fit with ConAgra or something that investors have talked about is you obviously have a very, very strong branded background. But on the Private Label side perhaps not as much. Can you just talk about from your perspective why this role is a good fit for you personally and perhaps maybe comment on the fact that you haven’t had as much experience in Private Brands and why that shouldn’t really matter in this case?

Well, Akshay, I think you know I've been doing this for about 23, 24 years now and over that time I have managed all sorts of businesses from branded businesses to commercial businesses and private branding businesses. So I’m very comfortable here at ConAgra Foods with the businesses we’ve got. It's very familiar to me and that's why I am enjoying myself now going deep on each and every aspect of our operations. So I can get back to you all in the coming months with an assessment of what I see. What I can tell you with conviction is I am here at ConAgra Foods because I see a tremendous opportunity to create a lot of value over time. We have tremendously strong assets and we have got a highly motivated team. So overall, I am very excited to be here and I think we can put some points on the board.

Hi, thank you and best wishes Gary and good luck Sean. So my question actually is for John Gehring, when I saw the release today and the comments that all three business units delivered results just a little bit better than you thought, when you did your pre-announcement. I guess it’s good, but it was only two weeks left in the quarter when you had your profit warning. And it's just strange to see all three units doing better than you thought with so little time left in the quarter and for Sean to execute the visibility into the operations is going to have to be good, the systems are going to have to be good. So maybe you can just give us a little more color on what changed in those two weeks that surprised you on the upside? Thanks.

Yes, I appreciate the question, Robert. Obviously day in, day out we're trying to forecast our business as best we can. And I don’t want to quibble with the timeframes. I would just note that we had not yet closed the third period of the quarter which is also the biggest period of the quarter. So the timing of the release versus the date of the information we have is a little bit off, but nonetheless, I think the things I would point to is first of all about $0.02 to $0.03 of the over-delivery was driven by the lower tax rate and that’s just really a function of in the third quarter at the end of the third quarter every year we reconcile our prior year provision to the actually final tax return. That's just something that happens late in the quarter. So we're unable to predict that until we get through the work. So that is probably $0.02 to $0.03 of it. I think the other piece is we're really in the consumer business again the last period of the quarter was the biggest and it finished stronger. And then I would say the other element is in the commercial business in Lamb Weston in particular. Their domestic volumes came in strong, but I would say they also had a little bit of upside in terms of what we're assuming around the port issue on how much throughput we would get which has obviously been a challenging thing to predict over time. So we clearly are working every day to get tighter on our ability to forecast the business, but we did have a few things come to us for the last month of the quarter that created a little bit of volatility.

Hey good morning. Thanks for taking the question and best to both you Gary and Sean. Hey John, just a question for you. Free cash flow or cash from operations guidance is down a little bit, but I guess if I did the math right, you got to generate about $800 million or so of cash from operations in the fourth quarter, which is a lot higher than the fourth quarter last year and I think looking back even most fourth quarters over the last 20 years. So can you just talk a little bit about some of the moving parts in 4Q that get us to that cash from operations? Are there any, I don't know, I guess sort of discrete or one-time items that help it, and just try to get a shape for whether or not we can forecast a similar number for next year or whether, whether or not there are some one-time things that are helping this year? Thanks.

Yes, I will. We will discuss next year at a different time. Our fourth quarter is typically a very strong period for cash generation. While I don't have all the details in front of me, our inventory levels are significantly higher as we enter the fourth quarter, and we anticipate they will remain elevated at the end of the fourth quarter. However, we expect a greater amount of inventory to be liquidated this year compared to previous years. Additionally, I believe we will see more progress and contributions from our accounts payable and some of the accruals in the fourth quarter. I also expect our tax payments year-over-year to differ this time. Therefore, there are several factors at play outside of earnings, but I want to emphasize that we generally experience strong cash generation in the fourth quarter.

Thank you. Well 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're available for discussions. Thank you very much for your interest in ConAgra Foods.