Conagra Brands Inc (CAG) — Q1 2016 Earnings Call Transcript

Good morning. During today’s remarks, we will make some forward-looking statements, and while we’re making those statements in good faith and are confident about our company's direction, we do not have any guarantee about the results that we will achieve. So if you'd like to learn more about the risks and factors that could influence and 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 measure 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 over to Sean Connolly.

Thanks, Chris. Good morning, everybody. I am glad to be with you on our second call together. As you know, we've been digging deep since I joined ConAgra Foods earlier in the year, and we are aggressively pursuing the right course of action to maximize value creation for our shareholders over time. While we still have plenty of work in front of us, we are clearly on the move and making tangible progress. When I last spoke to you on June 30th, I made the point that our company is all about long-term value creation. You should consider that a permanent part of our mentality that will not change. So as I've said before, we will always be open to any realistic actionable path that will create significant value for our shareholders. At the same time, we have a base plan which is in and of itself a very promising path to value creation. As you heard on June 30th, it is centered on focusing our portfolio, strengthening our fundamentals and becoming much more efficient. We are in the early days of implementing this base plan and it involves bold actions on costs, talent and individual businesses. This is our primary focus right now. So it shouldn't surprise you when we share news about the bold actions we are taking in this regard. These actions are part of our commitment to running the company well and represent a pragmatic and responsible approach given the current industry environment and our desire to realize the full potential of our business. I mentioned this to be declarative that our focus on stronger operations, which are required no matter what the future holds, does not conflict with the mentality of being open to other ways to create value. It is as straightforward as that. Now recall our base plan consists of four pillars: one, divesting private label; two, expanding margins; three, improving our consumer-branded business and Lamb Weston; and four, maintaining our commitment to a balanced approach to capital allocation. This morning I'll offer a few words on each of these pillars. First, we are on track in terms of our divestiture of the private brands business. We had a lot of interest and expect to have more to share on this front later in the fall. Given the planned divestiture, we will not be providing detailed results for this segment which has been reclassified as discontinued operations. Second, we are making good progress around our margin improvement efforts through a more aggressive approach to SG&A and improved supply chain and trade productivity. On SG&A, we are well into mobilizing an intensive SG&A reduction effort that is aimed not only at offsetting stranded costs associated with the private brands divestiture, but moving ConAgra into the top quartile of SG&A efficiency in our space over time. As we discussed last quarter, absolutely everything is on the table here. This will take time as some of this work will require system and capability improvements that are not turnkey. Nevertheless, if we find inefficiency we will get it out as fast as possible. We will have more specifics to share on this later in the fall as well. Hand-in-hand with our focus on efficiency is an intense focus on driving profitable growth by capitalizing on the highest potential brands and categories in the Consumer Foods segment and growing the Lamb Weston business in our Commercial Foods segment. Consistent with this effort, we are delighted that Darren Serrao has joined as our Chief Growth Officer to guide our efforts in maximizing the value of our brands. Darren and his team are hard at work on improving connectivity and boosting speed to market, ensuring that strong insights lead to relevant and timely products with the right marketing support. As we undertake all of these efforts, we remain committed to maintaining an investment-grade credit rating and a balanced capital allocation strategy, including investments in organic and inorganic growth and returning capital to shareholders through our top-tier dividend and share repurchases, as well as continuing to pay down debt. John will discuss capital allocation for fiscal year 2016 in more detail later on this call. Now turning to the quarterly specifics. As you saw in our releases, we are off to a strong start for fiscal 2016, reporting comparable EPS of $0.45, up from $0.39 in the prior year. We have a good foundation and positive momentum in both Consumer Foods and Commercial Foods. In Consumer Foods, we reported net sales of approximately $1.7 billion, flat compared to the prior year reflecting flat volume, a 2% improvement in price mix and a 2% negative impact from foreign exchange. Operating profit was $248 million, up 22% on a comparable basis with margins up more than 250 basis points. Throughout fiscal 2016, we are focused on building on the foundation established during fiscal 2015. Our plan is concentrated on strengthening our brands and providing resources behind the brands and channels that generate the best return. By focusing on the strongest brands and channels, we are getting better price realization and trade efficiencies. The outcome is a better price mix and margin improvement. The strong operating profit we delivered in the first quarter is direct evidence of our progress and reflects the improved price mix and benefit of the more targeted approach to advertising and promotion investment. I want to highlight a few brands that also demonstrate the progress we are already seeing in the segment. We continue to invest and achieve strong operating results on Marie Callender’s, Hunt's, Ro*Tel, Reddi-wip, Slim Jim, and PAM, all our category-leading brands that are well-positioned with consumers and deliver strong margins. We'll continue to invest in brand building, A&P, renovation, and innovation and expand into growing customer channels. As discussed in the past, there has been an intense focus on having the four Ps right where, as we call it, being perfect at retail, executing well on product, packaging, pricing, and promotions. Along these lines, Chef Boyardee and Orville Redenbacher’s grew sales in the quarter. In addition, PF Chang's was restaged with improved packaging graphics and a stronger product range last year. And since the restage, the brand has posted strong double-digit growth. We continue to make progress in transforming the Healthy Choice franchise as well. Healthy Choice Café Steamers continues to perform well in a challenging segment. And Simply Steamers, our newest Café Steamers product, contains nothing artificial while offering 100% natural protein. These new items are performing well and importantly they command a higher retail price. Looking ahead in Q2, Banquet will be restaged with a complete product overhaul. That means increased food quantity and improved food quality along with a much-needed modernization of packaging and higher retail pricing. This focus on strengthening brand equities and expanding margin is providing the fuel to invest in those brands that have the fundamentals right, are consumer relevant, and have accretive margins - what we call being A&P ready. As a result, marketing investments will increase for the balance of the year again in a highly disciplined way. This is a virtuous cycle. Over time stronger brands lead to better pricing power and higher margins. We have a lot more to do but the results over the last six months are a good indication of the opportunity going forward. We anticipate profit growth from the Consumer Foods segment for the full year as we continue to drive efficiencies and prioritize the key brands and sales channels that have the best opportunity for success. I am confident that this focus will be the key that unlocks our branded Consumer Foods segment’s ability to further improve its margin profile over time. Now I'm going to turn to Commercial Foods. Net sales were approximately $1.1 billion, up 3% compared to the prior year quarter. The Commercial Foods segment's operating profit was $139 million, up 13% on a comparable basis. The segment's strong performance reflects higher volumes and net sales across all Commercial Foods' businesses, with profits benefiting primarily from Lamb Weston sales growth, favorable mix, and operational efficiencies helped by improved raw potato quality. Lamb Weston delivered strong volume growth in North America driven by organic growth with key customers across all channels. While domestic growth outpaced international growth in the quarter, we expect international sales to return to normal levels in the back half of the fiscal year as we continue to recover from the impact of last year's West Coast port labor dispute. We remain focused on accelerating the growth of Lamb Weston internationally. The global QSR industry is aggressively expanding in emerging markets with potatoes remaining a critical part of the menu. At the same time, Lamb Weston's North America business is the market leader in North America with a strong foundation and is positioned to continue to grow. As I noted earlier, we will not be providing results for the private brand segment which has been reclassified as discontinued operations and thus not a segment anymore. At a high level, I'll say that while we've taken the right steps to improve execution and begin restoring this business to better profit, private brand is still feeling the impact of category softness and higher input cost that we anticipated this quarter. The underlying comparable profit performance, while still lower year-over-year in Q1, should improve sequentially throughout fiscal 2016. At this point, I'll turn it over to John, but before I do, I want to reiterate that we are still in the early days but we are making excellent progress. There is a great deal of change underway at ConAgra Foods and our team is excited and we are energized. We are operating with urgency and we've embraced the mindset of taking whatever bold action is required to unlock shareholder value. While some of these initiatives we discussed would be completed in fiscal year 2016, others will be a multiyear effort. And we look forward to keeping you up-to-date as we continue to deliver on our plans. With that, John over to you.

Thank you, Sean. And good morning, everyone. In my comments this morning, I'll recap our fiscal first quarter performance including comparability matters, and then address cash flow, capital, and balance sheet items. I'll also provide some brief comments regarding certain components of our fiscal 2016 outlook. Before I comment on performance, I want to address a few key points related to the divesture of our private label operations. First, during the quarter we met the necessary accounting requirements to reclassify the operations we are divesting as assets held for sale. At the time we met these requirements, we were required to further assess the carrying value of the assets on a held per sale basis. As a result, we recorded an additional impairment of approximately $1.95 billion. The impairment does not reflect any offsetting benefit from the tax loss we expect to generate from the sale of our private label operation. At this time, we have not met the necessary accounting requirement to recognize the tax benefit related to the capital loss. However, we remain confident that the company will be able to realize significant tax benefits in the future from utilizing this capital loss carry forward. In addition, in accordance with GAAP, the company is no longer recording depreciation or amortization expense on the assets held for sale. Discontinued operations for the fiscal first quarter reflect about one penny of EPS benefit from the absence of depreciation and amortization. The benefit in subsequent quarters will be more significant. Next, while the business is being divested are substantially the same as those previously reported in our private brand segment. There are businesses that were previously part of our private brand segment that will be retained as part of our Consumer Foods segment. The results of operations for these businesses, including any impairment charges in prior periods related to the associated assets are reflected in the Consumer Foods segment for all periods presented. There are also businesses that were previously reported in our Consumer Foods and Commercial Foods segment which will be included in the divesture and have therefore been classified as discontinued operations. As such, the results for these businesses are now reflected in discontinued operations for all periods presented along with the other private label operations being divested. Overall, the net impact of these changes is fairly small relative to the size of our Consumer and Commercial Foods segments. Now I'll recap our performance for our fiscal first quarter. Overall, diluted EPS from continuing operations as reported was $0.38. After adjusting for items impacting comparability, diluted comparable EPS including the contribution from discontinued operations of about $0.04 was $0.45 this quarter versus our prior year quarter's comparable earnings base of $0.39. As Sean noted, both our Consumer Foods and Commercial Foods segments performed very well. In our Consumer Foods segment, net sales were approximately $1.7 billion for the quarter, about flat for the year-ago period, reflecting flat volume, a 2% improvement in price mix, and a 2% negative impact from foreign exchange. Segment operating profit adjusted for items impacting comparability was $248 million, or up about 22% from the year-ago period. And operating margin on a comparable basis expanded over 250 basis points versus the year-ago quarter. Foreign exchange this quarter had a negative impact of $28 million on net sales and about $11 million on operating profit for the second. Our Consumer Foods supply chain cost reduction programs continue to yield good results. This quarter cost savings were approximately $40 million and inflation had a negligible impact on results this quarter. On marketing, Consumer Foods advertising and promotion expense for the quarter was $77 million, up about 7% from the prior year quarter, reflecting our efforts to continue to strengthen and support our brands. In our Commercial Food segment, net sales were approximately $1.1 billion or up about 4% from the year ago quarter. Commercial Foods segment's operating profit was $139 million, or 13% above the year-ago quarter's operating profit adjusted for items impacting comparability. Discontinued operations posted a loss of $3.23 per diluted share this quarter reflecting the impairment charge related to the pending divesture. After adjusting for this charge and expenses related to restructuring, the private label operations earned $0.04 per diluted share this quarter. Expected earnings from the private label operations were included in our earlier guidance. Moving on the corporate expenses. For the quarter, corporate expenses were approximately $85 million. Adjusting for items impacting comparability, corporate expenses were $72 million versus $58 million in the year-ago quarter. The increase versus last year's first quarter reflects higher incentives and office lease cost. Equity method investment earnings were $37 million for the quarter and $26 million in the year-ago period. The year-over-year increase mostly reflects the inclusion of a full quarter's profit for the Ardent Mills joint venture. The prior year quarter only included two months of earnings from this joint venture. Our comparability this quarter included two items. First, the expense related to the impairment of goodwill and other assets in the private label operations. This is included within the results of discontinued operations. And second, about $0.03 per diluted share of net expense from restructuring charges, $0.02 of which is in continuing operations and one penny of which is in discontinued operations. On cash flow, capital, and balance sheet items. We ended the quarter with $114 million of cash on hand and $1 million of outstanding commercial paper borrowings. Total operating cash flows for the fiscal first quarter were approximately $67 million versus $234 million in the year-ago quarter. The decrease is driven principally by timing matters related to payroll, incentives, tax payments, as well as higher working capital driven in large part by higher receivables related to the increase in sales. On capital expenditures for the quarter, we had capital expenditures of $108 million versus $90 million in the prior year quarter. Net interest expense was $80 million in the fiscal first quarter versus $83 million in the year-ago quarter. And dividends this fiscal quarter were $107 million versus $105 million in the year-ago quarter. On capital allocation, for fiscal 2016, we remain committed to an investment-grade credit rating and a capital allocation strategy appropriately balanced between further debt reduction, a top-tier dividend, share repurchases, and additional growth investment. The company will assess opportunities to increase the dividend after it is further along with the development of its strategic plan. We did not repay any long-term debt or repurchase any shares this quarter. We have approximately $132 million remaining on our existing share repurchase authorization. And subsequent to year-end, we did repay $250 million of long-term debt principally through commercial paper borrowing. Now I'd like to provide a few comments on the balance of fiscal 2016. As we noted in the release, we will offer more details on fiscal 2016 EPS expectations after we are further along with the profits of divesting the private label operations and have finalized our SG&A reduction target. We expect the Consumer Foods segment to post modest comparable operating profit growth for the full fiscal year despite higher marketing investment, one fewer week in the year, and headwinds from FX, higher incentives, and stranded costs. We also expect the Commercial Foods segment to post modest operating profit growth despite having one fewer week in the year and higher incentive costs. With regard to the second quarter of fiscal 2016, we expect EPS adjusted for items impacting comparability to be approximately in line with the year-ago quarter. Despite strong fundamentals and expectations for continued margin expansion, comparable operating profit for the Consumer Foods segment in the fiscal second quarter is expected to be negatively impacted by foreign exchange, higher incentives, and expected stranded costs related to the divestiture of the private label operation. Also, marketing costs are planned to be higher as we continue to increase our support of key brands to drive growth. The Commercial Foods segment is expected to post an increase in profits year-over-year in the fiscal second quarter. The second quarter guidance includes contributions from the private label operations which are now in discontinued operations and as previously mentioned will reflect a benefit from the absence of depreciation and amortization expense. In closing, while we are working through a great deal of change, we are very pleased with our start to the year and the progress we've made in improving our business fundamentals. That concludes our formal remarks. I want to thank you for your interest in ConAgra Foods. Sean and I, along with Tom McGough and Tom Werner, will be happy to take your questions. I will now turn it over to the operator to begin the Q&A portion of our session.

Good morning, everybody. Just two questions from me if I could. First, with respect to private brands. The new impairment charge that you talked about this morning, I guess implies that the carrying value of that business is potentially below the $3 billion level that at least had been reported in several media stories recently. And obviously, you don't control the media side of it or investor expectations. But I guess is there a reason that investors should think that the carrying value as it currently shows is not consistent with the potential sale price for any reason that we may be missing?

Yes, Andrew. This is John. Let me comment on that. In order to prepare financial statements, we have to make accounting estimates. We have, in preparation of the financials, made we had to make an accounting estimate that I think is conservative. The process is very fluid right now. I would tell you that the process is on track from a timing standpoint. There is a lot of interest in the business, but while we have made a conservative accounting estimate, I don't think we are going to speculate any further on where we think the ultimate outcome of the transactions will be.

Got it. That's helpful. We understand that you mentioned the sales process is planned and there is considerable interest. I'm curious about your thoughts on the necessary structure for a potential sale to generate value at a specific price. Specifically, does there need to be an equity component to benefit from potential improvements in the asset's margin structure, which seems to be underperforming? How broadly have you been considering different structural options?

Andrew, I think I mentioned in the last quarterly call that we are open to considering all possible structures. Ultimately, our main focus is on finding the best approach to maximize value for our shareholders. We are not committed to a specific outcome and will pursue the route that offers the greatest value.

Okay. One last thing if I could. Sean, I know that back in fiscal 2013, ConAgra made a significant effort to increase reinvestment in marketing. However, I don't think that spending led to much of an incremental return. You mentioned earlier that you'll approach things differently, but have you looked at that period at all? Could you share your thoughts on why you believe the future spending will yield different results than it did before? Thanks.

Yes, Andrew, let me hand this off to Tom McGough because Tom has been leading this business for a bit now. And he is quite a student of the days back in 2013, I think Tom is doing an excellent job segmenting this portfolio. Tom, why don't you add a little color here?

Sure, Andrew. This is Tom McGough. Just let me begin by saying that we really like our portfolio and believe that there is a lot that we can do with this. Ultimately, we believe investing in brands will strengthen those brands to earn higher prices over time. As we look back at our investment in brands, we believe that investment is best done in three ways. One, we segment our businesses with a sharp eye to those that when we invest do we get a return. Second, we only invest as Sean alluded to when brands are A&P ready. That's meaning having the right fundamentals, a consumer-relevant proposition, marketing that has impact and accretive margins. As you can see, we made very good progress on increasing our margins and we are beginning to reinvest. As you look across the portfolio, there are businesses like Marie Callender’s, Reddi-wip, and Hunt's that have those fundamentals right; we are increasing our investment primarily in those businesses. And over time, particularly in this fiscal year, we will have a meaningful increase in our A&P spending based on those principles and concentrating the resources on those brands.

Great, thank you, good morning. Wanted to ask a little bit about the volumes in the quarter for consumer. Flat volumes was a pretty good result, our Nielsen data was indicating though something worse like around negative 4% or negative 5%. Can you just talk about kind of the differences here and how you expect volumes in consumer to move forward?

Sure, David. This is Tom McGough again. As you look at our overall performance, the scanner result is one component of our volume. As you said, we had flat volume and net sales that were up 2% when you adjust for FX as we executed pricing. As you look at our in-market performance, I would segment it into three buckets. The first is we continue to drive very strong growth particularly in brands that we've invested in, Marie Callender’s, Hunt's, Slim Jim, Reddi-wip, and PAM. We've also focused a lot on winning where consumers are increasingly shopping. Those are in non-measured channels like Club, Dollar, C store. And we are outperforming in those channels. The second area that we focused on is stabilizing businesses that have been challenged in the past. We are seeing very good performance as we strengthen the fundamentals of those businesses. Brands like Chef Boyardee and Orville grew in the quarter. We made a big investment in a brand like PF Chang's last year. It is growing solidly, and we will be launching a similar type of initiative on Banquet going forward. And when you look at where we’ve had volume weakness, we've made a strategic decision not to chase non-investment grade volume. And what that means is that we are driving trade efficiencies to eliminate negative ROI, merchandising programs, and we’re proactively pruning our line of low-performing, lower-margin items. We believe we are making the right trade-off to enhance our margins albeit in the near term, lower volume on some of these brands. We are at the very early stages of building these new capabilities, but I think when you look at our results holistically, margin growth, brand investment, pricing, we are making very good progress and that demonstrates the potential that we have in our portfolio.

So are you trying to tell me that you expect that volume growth improves in the Nielsen data because of all these factors? And that this flat volume number that you report on shipments is maybe a leading indicator? Is that fair?

I think what you are going to see over time is a business that continues to strengthen. Overall, we are in a very challenged environment, and our performance should be roughly in line with overall category trends. But we are investing in our businesses and we would expect our volume performance to strengthen over time.

Just one data item. What's the D&A on private brands that will be eliminated for the full year? Can you just quantify that figure for us?

Yes. I believe that's about $175 million in that range.

Hi. Two questions if I can. You said the sale of private brands would result in a significant tax loss carry forward; that makes sense. I am just curious can you use these, and accounting is not my strength so if this is obvious just feel free to laugh, but can you use these potential tax losses against your ongoing business? Or must they be used against a gain on sale elsewhere? And if it is latter, how long do you have to utilize that loss before it turns into a pumpkin?

Yes. It is a capital loss carry forward, so we'll use it to shield gains on proceeds from future transactions. And I believe the loss carry forward period is five years. And we certainly have a lot of confidence that we have our time horizon to use it.

Yes, thank you for that. And then Sean you said in your prepared remarks that the focus on stronger operations does not conflict with the mentality of being open to other ways to create value. Can you just talk a little bit about why you included that statement? And the reason I am asking is the first question I get on ConAgra is almost always, do you think Sean is at least open to hearing about all options? And you said nothing new here; your comment today is nothing incremental but it reiterated what you said in the past. I am just curious why you felt it was important to sort of emphasize the point if you will.

Well, number one, I think it is appropriate to be very consistent on this matter. And number two, there are obviously different views out there in terms of what is the right path forward for ConAgra. We are absolutely well aware of those views. We understand it. We understand the different perspectives in the merits of different points of view. At the end of the day though we've got a business to run; we've got business to improve. That's our responsibility. We are going to do that. But at the same time we want to make sure everybody knows that we are squarely focused on maximizing value. And that means we are not rigid about value creation. We are holistic, we are flexible, but we are also pragmatic and we deal with what's real. And what's real today is we are focused on a base plan that we think has a tremendous amount of potential for our shareholders.

Hi, good morning, folks. I want to pick up I guess on the last question. The comment about future divestment to tap into the tax loss carries forward. As you think about what state those may be, are you thinking more prodding around the edges? Or could we be potentially considering larger chunks of the portfolio moving out?

Well, Jason, I'll take that. We are not going to speculate on hypothetical deals because there is nothing to report here. Obviously, we on an ongoing basis always look at different ways to maximize value for our shareholders and we will continue to do that. If we have something to report we'll certainly do that but I think the key message is if there is something that makes sense for our shareholders, we are absolutely going to consider it. And our shareholders should expect us to be proactively conducting that analysis on an ongoing basis.

Let me refocus on the core Consumer Foods side. We've mentioned several initiatives aimed at improving performance moving forward. One of these is straight spend efficiencies, which indicates there could be significant opportunities at ConAgra. However, as we consider the path ahead, that same analysis suggests that achieving this might require sacrificing a considerable amount of volume. We prioritize value over volume, and I believe you do as well. My question is whether you are prepared to give up some volume and market share in order to reach the right pricing levels to enhance profitability. Additionally, what challenges do you anticipate needing to address to accomplish this?

Jason, Tom McGough just used a phrase non-investment grade volume a little bit ago and I have been using that phrase for a long time. There not all volume in the food industry is created equal. And certainly the industry and ConAgra particular has been over committed to things like 10 for 10's and deep discount our base volume in its past. We've got an opportunity in front of us to meaningfully expand our margins and there are going to be a variety of things that go into that. Part of that is going to be being very clear-eyed around maybe pieces of the business that we just haven't gotten to improving over the years. What works is our plan on that, volume that is not investment grade, do we really need it in the base so we are going to be very practical about this because big picture, we are squarely focused on margin improvement in our consumer segment as our first priority. And clearly we are developing new capabilities around pricing, trade, mix management that we lacked in the past. Our productivity work is also mission-critical as is our SG&A effort. But at the end of the day, we need strong brands and better innovation. And the reason for that is so we can improve volumes over time, reduce elasticity of demand, and ultimately grow our market shares. And altogether, that is a proven combination for value creation. And that means we've got to prune some non-investment grade volume in early days, and we will do that and it is just part of running a business well.

Good morning, everyone. Thank you for being here. I want to touch on something important that we've discussed before. John, you mentioned something, and I’d like to ask a question because I'm not very familiar with the accounting side related to impairment. When you assess impairment for long-lived assets or assets held for sale, does the feedback from your discussions include anything beyond just net pricing value and cash flow estimates? Is that included in the impairment guidelines? Do you also consider what you might be able to sell it for based on your conversations?

Yes. In fact, Jonathan, when you move into discontinued operations and assets held for sale, the requirements do change and so it has some impact on how you have to measure certain assets but clearly trying to make an estimate of proceeds as I referred to earlier is a big input into how you ultimately arrive at that value and to go ahead and measure impairment. It is a different methodology.

Thank you very much. Sean, could you provide more details about the increased investment in marketing for the fiscal second quarter, particularly regarding the core consumer business? You mentioned that certain brands are ready for enhanced consumer marketing. How do your priorities for marketing investment look, especially in light of many other companies reducing advertising spending? What is your approach to changing the digital mix and lowering costs? Additionally, could you elaborate on the types of spending you plan for digital versus traditional and the brands you believe are prepared to support this marketing strategy in the second quarter versus future initiatives? Thanks.

Sure. I think first of all it is not confused ConAgra's historical A&P spending with many of our peer companies. We've been nowhere near the levels they have been, where a lot of those companies have been probably out over their skies and over-investing and pulled back. Historically, we've actually been the opposite case. We've under-invested but I will say to Tom McGough's credit, Tom and his team were very clear-eyed last year about identifying A&P spend that was probably poorly allocated, should never have seen the light of day and they pulled it back, that established a fairly low base for us in the year-ago period. And obviously that's not a position you want to be in on a perpetual basis because you lose brand health, you lose the ability to take price, and ultimately you lose margins. So our plan all along has been to surgically begin to invest back to strengthen our brands, so we can build in more pricing power, build that brand equity, and ultimately drive the right kind of mix and margin-accretive innovation. That is our plan. And Q2 is a meaningful quarter for us in terms of kind of getting back on the horse. So we do have a series of new initiatives that are important to our franchises like Banquet and others that I mentioned before that will experience launch costs for a lack of better phrase in quarter two. These are absolutely the right investments to be making in the name of brand strength, higher price realization, and stronger margins. And we will only pursue those kinds of investments when we've got a brand that we conclude is A&P ready with all the right conditions around it. So that part of our plan and it is all part of this rather multi-faceted approach to margin expansion.

Good morning. I have a follow-up question regarding the capital loss. If you take the current value of the private brands on the balance sheet and add back all the write-downs, the capital loss would be around $4 billion, suggesting a tax asset that could exceed $1 billion. Is this a reasonable way to approach it? Also, if the tax asset is indeed that substantial, can it be utilized all at once, or does it need to be applied in increments per transaction or event?

Yes. This is John. I believe your reasoning is correct. I am not a tax expert, but I am not aware of any restrictions on how much can be utilized at once. It seems to depend on the transaction size and various tax bases. So, I am not aware of any limitations.

I guess then it would give you a lot more flexibility if you were to start thinking about other parts of our portfolio in terms of how you structure transactions just because you don't have to think as much about the effect of capital gain doesn't factor into the equation as much. Is that fair?

Correct.

Thank you. Can you hear me now? Thank you. You mentioned before that you are rationalizing promotion spend and perhaps doing so with better analytics. Are there examples in the past or mistakes that were made in terms of how ConAgra promoted in the past and you had learned from and perhaps corrected types of promotions perhaps? And then you also mentioned that you are investing in your businesses and brands. Could you give some examples of where you think the returns are going to be, what type of investments will be made that we will see play out this fiscal year? Thanks.

David, let me - -this is Sean. Let me take the first part on trade and I'll turn it over Tom on the other piece of it. If you look at just marketing spend in total, companies tend to toggle one way or another. They are either overly tilted towards trade or they are tilted on kind of below the line marketing spends. We historically have been in the former. We are a company that has been heavily relying on trade historically. Trade in our industry I think all of you know is highly inefficient, it has gotten better over the years its systems and analytic tools have become better, but this ultimately comes down to a cultural shift. If you are a company that is culturally built around moving boxes and relying on trade as a catalyst for moving maximum volume, that seeps its way into your culture and it requires significant cultural change to change that muscle memory for a different approach. We are clearly committed to a different approach. We want to build brand strength, we want to compete on dimensions other than price, we want to get our margins up, we want our brand health up, but we are going to pursue all that in a surgical way. So there is no one aspect of trade that is worth pointing out. It is a habitual thing when you get overly reliant on trade and deep discount promotions and it is a highly inefficient way to run the railroad. So we will migrate to a more progressive approach here over time as we build that capability. It is one of our top priorities. We are making meaningful progress here in terms of the approach we take, the talent we have managing it, et cetera. It is a big part of our margin expansion plan, our brand health plan. Tom, you want to cover the other piece?

Sure. Specifically when you look at our marketing investments, I have bucketed in a couple of areas. First is we are going to now invest where we are feeling really well. Marie Callender’s is a business in our largest category frozen single-serve meals that is consistently growing and we are going to increase our investment to continue to drive that business. Second on tomatoes. That is a platform that we have a strong point of difference in how we process our tomatoes. That's very consumer relevant. We've advertised that consistently. We are amplifying our efforts in that area to drive home that message. The third would be on brands like Reddi-wip that having another clear point of difference of brand that is made with real cream, 15 calories. Over last year we actually have captured the number one spot in the combined refrigerated and frozen topping area. This is the business that continues to grow at a double-digit rate. And we are going to amplify our spending on brands like that. At the same time we made progress on getting the fundamentals right on many businesses. Healthy Choice Simply Steamers is a product with, as Sean said, nothing artificial, 100% natural protein, it is really resonating with consumers and we are going to invest to drive awareness on that. That's flavor or the type of investments that we are going to make. We are going to be very disciplined in investing in those brands that are A&P ready and have margins that can support that investment over time.

Good morning, everyone. I want to focus on the Consumer Foods segment. Sean, with your extensive experience in the industry and observations of ConAgra over the years, you've heard various CEOs mention the need for cultural changes. There have been initiatives like the 10-for-10 program on Banquet and several cost reduction efforts that haven't significantly improved consumer margins. Consumer Foods margins seem to have remained in the mid-teens for a long time. Do you believe that certain parts of the portfolio and our market share are sufficient to push margins into the high teens, possibly by divesting elements that complicate things? Could you provide more details on why we should expect an increase in those EBIT margins?

Sure. Happy to tackle that, Eric. First of all, with respect to kind of my view and how it is different from others who have come here before. I am not going to comment on the past, but what I will say, and I mentioned last quarter, is this: when I was thinking about joining this company, one of the things that was really important to me was having confidence that I was going to be backed by a Board of Directors that were willing to embrace both change. And for those who on the call that know me, know that I am not afraid to get after bold change in order to get after opportunity. And clearly my Board, I wouldn't be here if the Board wasn't really looking for change, and they have given me the latitude to do that. So when we say everything on the table, it is on the table and we will pursue bold change. And with respect to our consumer portfolio, I think some of the stuff that Tom has got going on right now is indicative of what this portfolio is capable of. Now it requires, because a number of brands in the portfolio, rigorous segmentation around where do you want to place your bets. But there are businesses that have historically not done much. Where there is built-in latent opportunity that needs unlocking. If you look at the Hunt's tomato example that Tom points out, Hunt's tomato for a long time didn't get a lot of attention, didn't get a lot of luck. The team acknowledged that Hunt's is the one tomato in the industry that is not peeled chemically. It is peeled naturally with steam and in today's environment where consumers are looking for real authentic food, that is a meaningful point of difference and it was sitting there for the taking all along, and the team recognized the insight, they activated against the insight and they are driving significant margin expansion and growth. Similarly, if you look at a business like Reddi-wip, for years Reddi-wip was number two fiddle to other larger competitors and with the topping space that just happens to be artificial. While in today's day and age when you are looking at consumers that want authentic products, a real cream product is right in the wheelhouse of what the consumers are looking for. So the team recognized that opportunity, they activated against it, they got top-line growth, they got margin expansion; we've got these kinds of opportunities in many different places across the portfolio. Sometimes it is a matter of recognizing the insight, sometimes there are some innovations needed, and there are some packaging improvements needed to bring us in the modern era. But having worked on a lot of large-cap food companies in my career, our portfolio quite frankly is not a whole lot different in terms of strength and potential than other portfolios. For some reason, we've acted historically like it is. And I reject that notion. I think that there are spots in this portfolio where we can take the actions necessary to create value to drive margin structure. And of course, the cost side of it, it is a big part of our playbook as well and as you can tell, we are after that quite aggressively.

Good morning, everyone. I would like to follow up on the margins, specifically regarding the SG&A efficiency you mentioned at the beginning of your prepared remarks. You mentioned a goal of reaching the top quartile in SG&A efficiency. Can you provide some numbers on how much that could reduce costs based on your benchmarking, and how quickly you expect to achieve this? Thank you.

Alexia, we will do a pretty thorough deep dive for our investors on all our efficiency programs at a later date not just SG&A but trade, COGS, all of that. But what I can say is that let's look at our starting point. If you first of all when you are dealing with SG&A, it is important to strip out A&P pieces. So you are kind of looking at underlying infrastructure based SG&A. We closed last year at about 10%. And while that is significantly below many of our peers in the industry, which reflects the work that a company has already done to get cost out, it is not as low as Kraft Heinz as an example, which is everybody's new benchmark, at least the pro forma they have signed up for. So we reject the notion that we are good enough. We know we got to do better. We know we've got to look at every single level we can to get there. And as a result, we've been intensively working on four pillars to make progress on SG&A. We will have more to talk about here at a later date in terms of what it adds up to. But it comes down to zero basing; every single thing in our budget has been now been zero-based. Spans and layers and outsourcing where it makes sense to outsource and somebody else can accomplish some of the back office stuff that we do more efficiently and then procurement. Those are four areas that we are after every single day with a professional program management approach and we are making tremendous progress. We look forward to sharing a bit more of a deep dive on that at a later point.

Thank you, good morning. Sean, just a couple of quick questions strategically. So there's a lot of the call that discussed around private label, the deferred tax asset, the new strategy on building the brands, therefore you've improved brand strength and margin improvement, et cetera. It leads to this overall profitability pickup when you couple it with cost savings, and then you can spend back on a more focused basis such that you drive growth. And a lot of that strategy, quite frankly, is very similar to what it sounds like what you did at Hillshire, and it worked very well. But from your perspective, when you think about where you are now relative to the strategy you did at Hillshire, is it necessary, really a part of the strategy now, it's necessary to divest a number of the underperforming brands just because of the increased complexity of the portfolio such that the improved margin spend back et cetera strategy is much harder to tackle? Because of the diversity of the portfolio relative to what you had at a company like Hillshire? Thanks.

I believe it's essential to examine your portfolio segmentation and prioritize your focus. Our decision regarding the private brands business reflects our belief in the advantages of having a more streamlined portfolio. In the other parts of the business, it's important to understand that some areas will require investment for growth while others will primarily contribute to profit and cash flow. You need to be realistic about the segments that continuously pose challenges. If you don't have a strategy for addressing these issues, someone else might see more value in them than you do, which is a crucial consideration for effective portfolio management. These challenging segments are often smaller businesses, but they require attention. A significant aspect of managing a business for strong margin growth involves being realistic about those segments that either go unnoticed or consistently present problems, where you need to have a plan or consider alternative actions. This will be part of our approach as we continue to manage the business.

Thanks, Sean and Tom. And I was wondering if you could give us a little insight into how you're structured within Consumer Foods right now? Tom, who reports into you from an operating perspective? There was a time, a glimpse in time, where there was a grocery division, frozen, snacks and store brands, and then enablers. And then it was rolled back up. And I don't think I have a good sense of how you're structured within Consumer. And maybe that could help us understand a little bit about, within these divisions, we can start to figure out what are the priority brands within the divisions, and how they are going to be allocated resources.

Sure, Robert. We have consolidated our leadership into two business groups. The frozen group and the grocery group, which is essentially our grocery shelf-stable and snacks refrigerator portfolio. And that is structured; we run the portfolio as Sean has said with an eye to segmentation. So one level below that is segmentation about businesses that we are going to invest to grow and those businesses that are going to drive margin and profit.

Hello, good morning. I just had a quick question for you. I wanted to make sure I have the right basis for the private brands business that will be sold. I think you talked about a mid $300 million EBITDA level. Is that still a good estimate for EBITDA for the business you're selling? And maybe along those lines, what are the sales would be? And can you speak to the recent trends volumes anything on that business?

I think Chris, possibly specifically that number you are referencing for the mid $300 million, the number we offered in the fourth quarter for fiscal 2015. John, did you have some other color you want to add?

No. I think that's the range we talked about and I think the trends I think Sean has talked about those trends. Our first quarter performance was as planned below where we were year ago. But consistent with what we had planned and where we are in the recovery process.

Thank you for taking the question. This is Diana Chu on for Pria. I was wondering, I guess the rating agencies are all looking for at least $3 billion of debt pay down with proceeds from private brands. If this asset were to fall short, how quickly could you move on additional asset sales? Thank you.

Pria, I am sorry, somebody is filling in for Pria, and we are not going to comment on hypothetical in terms of other follow-on deals. We don't have anything to report in that regard. Obviously, we continue to look at other ways to create value but there is really nothing to report at all in that regard beyond private brands.

The only thing I'll add is we said along that we are focused on investment-grade balance sheet and credit rating and debt repayment is going to continue to be a priority in our capital allocation.

Thank you. Well, just as a reminder this conference is being recorded. It will be archived on the web as detailed in our news release. And as always, we are available for discussions. Thank you very much for your interest in ConAgra Foods.