Conagra Brands Inc (CAG) — Q3 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 reconciliations of those measures to the most directly comparable measures for Regulation G compliance can be found in either the earnings press release, Q&A or on our website. Now, I’ll turn it over to Sean.

Thanks, Chris. Good morning, everyone and thanks for joining us to discuss our third quarter fiscal 2016 earnings. As you saw in our earnings release, we delivered another positive quarter as results exceeded our expectations with comparable EPS of $0.68, up from $0.59 in the prior year. Yesterday was my one-year anniversary as Chief Executive Officer of ConAgra Foods. And I can tell you, I am pleased with what we are accomplishing. Clearly, it’s been an active year as we’ve methodically taken the necessary steps to help ConAgra start to unlock the value opportunity that I saw so clearly when I first started thinking about taking this job. Simply put, we are driving focus and discipline into the Company and the impact can be seen not only in our P&L but also in our culture, where our team is energized, optimistic, and determined about the path ahead. And while we’re pleased with our progress over the past year, we’re also clear-eyed that there is much more to do. Accordingly, our team remains hard at work on executing our plans to build a stronger, more consistent, and more valuable ConAgra Foods. Before John and I get into the details of our Q3 results, I want to take a step back and provide you with my perspective on where we are relative to our strategic plans. In February, we completed the sale of our private label operations to TreeHouse Foods, marking the conclusion of a robust sale process. The sale enables us to sharpen our focus on our consumer and commercial businesses and it provides us with meaningful capital. We’ve already deployed $2.15 billion of the proceeds to reduce debt and going forward as part of a balanced capital allocation program, we plan to pursue further debt reduction. As we’ve discussed previously, the sale also provided a sizeable tax benefit, which can be used in the future. In addition to completing the sale of our private label operations, we have been hard at work at strengthening the foundation of our two businesses. We’re executing our $300 million efficiency plan, primarily within consumer to build ConAgra into a lean, more focused Company. We are confident this effort will improve profitability, advance our growth agenda, and unlock shareholder value. As we’ve said previously, we expect to realize the majority of our efficiency improvements in fiscal 2017 and 2018. We also remain on track to bring our consumer and corporate leadership teams together under one roof at our new headquarters in Chicago this summer. I’m excited about our plans to develop a more open physical space that will facilitate collaboration and accelerate our shift to a leaner, more nimble, innovative, and performance-oriented culture. Finally, we remain on track to complete the separation of ConAgra into two public companies in the fall of calendar 2016. As we said when we announced the proposed spin-off, our goal is to enable both ConAgra Brands and Lamb Weston to operate as vibrant pure-play companies with enhanced strategic focus and flexibility. I’ll talk more in a moment about the progress we’re making in each of these businesses, but let me reiterate that when you take all factors into consideration, we believe the separation of ConAgra Brands and Lamb Weston is the right path to maximize value as we expect shareholders to benefit from better operating performance and more consistency from both businesses following the separation. As you know, there is a lot of work to complete between the announcement of a proposed spin and the separation itself. We’re hard at work on that front and we will have a lot more information to share via SEC filings and investor days over time. Ultimately, our ability to drive value across these businesses is a function of how well we execute. To that end, our solid Q3 results exceeded our expectations and give me confidence that we’re identifying the right actions to drive improved profitability. So on to Q3 in detail. Our Q3 results for the Consumer Foods segment reflect continued progress and momentum around establishing a higher quality investment-grade volume base. Even though we experienced a volume decline, we had a strong price mix during the quarter. We’ve been implementing initiatives to improve pricing discipline and trade efficiencies while driving renovation and targeted brand investments. Importantly, as we undertake these actions, we remain relentlessly focused on execution. We’re making good progress on all these fronts. From a top line perspective, we saw volume declines where we expected them. The vast majority of the Q3 consumer volume decline was on Banquet, 90% to be exact. But more broadly, in the second half of last fiscal year, we funded several major deep discount promotions, particularly in our frozen business. These kinds of deals can drive big spikes in low-margin promoted volume. And given our deliberate plan to reduce our reliance on deep discount promotions, we expected lower promoted volume. What we were counting on though was solid performance on most base consumption trends and strong margin expansion broadly, and that is basically what we got. You see the entire segment’s margin expansion in the release but it is important to note that on Banquet we saw over 200 basis points of gross margin expansion despite investments in higher quality. Furthermore, we also made other below the line investments to build the brand the right way for the long haul, namely advertising and promotion support. These collective investments do not have the same immediate impact of promoted price points below a dollar but they represent the right way to manage a branded asset for long-term value creation. This notion has been missing for too long at ConAgra. We’ll be relentless as we continue these efforts because at the end of the day, we want sustainably stronger margins, which require strong brands; and strong brands don’t compete on the back of giveaway deals. As a result of our efforts, on a comparable basis, operating profit was $340 million, up about 17%. Operating margins were up more than 300 basis points from the year-ago period driven by these three factors: price mix; supply chain productivity; and modest material deflation. Our focus in Consumer Foods will continue to be on expanding margins. The cornerstone of this effort is strengthening the brand that generates the best return. By focusing on our strongest brands, we’re getting better price realization and trade efficiencies. As you’ve heard us discuss before, our approach provides the fuel to reinvest in brands that have the right fundamentals, are consumer relevant, and have accretive margins. And we’re not just talking about investments; during the third quarter we supported our brands in a highly disciplined way as evidenced by our 12% increase in advertising and promotion support. We’ve increased advertising and promotion spending 13% year-to-date. We’ve been investing in brands with clear differentiators and relevant consumer benefits like Marie Callender’s, Hunt’s, RO*TEL, Reddi-wip, Slim Jim, and PAM. I’ll talk in a moment about our efforts in the frozen category but in the center of the store, we continue to make good progress with our real food initiative around the Hunt’s brand and we are very pleased with the progress we’re making with RO*TEL, which delivered very strong results during the Super Bowl. In addition, through focused execution, we increased sales, built share, and won the holiday season across Marie Callender’s pies, Reddi-wip, and PAM. Our investments are also coming in the form of innovation and renovation. As you heard me discuss, we intend to continue enhancing our portfolio with a focus on further premiumization, wellness, and authenticity. We expect to achieve this through a combination of organic innovation and smart acquisitions. A great example of our investment in innovation comes from our Healthy Choice Simply Steamers line, which you heard us discuss previously. This is a clean label, nothing artificial version of our Café Steamers offering, and we’re continuing to drive wellness-based innovation with this line. In the fourth quarter, we’re adding four new premium varieties including three cheese tortellini, a sweet and spicy Asian style noodle bowl, creamy spinach and tomato linguine, and an unwrapped burrito bowl. Consistent with the consumer focus on authenticity, these new recipes will spotlight organic, non-GMO ingredients. Renovation will also be a driver of margin expansion. Building on an example we touched upon last quarter, our work to restage the Banquet franchise continues. As I noted earlier, Banquet represented the vast majority of our volume decline in the third quarter, as we reduced our reliance on deep discount promotions and raised our everyday shelf price above $1. While we recognize it will take time to rebuild the buying rate among households that are long accustomed to $1 Banquet, we’re confident that the higher price points enable us to invest in product enhancements and higher quality advertising and promotion that will re-educate consumers about the brand. Not all consumers will transition with the brand and we’re okay with that. But given the higher quality, we expect to attract new consumers to the franchise in time. We continue to believe our plan for Banquet is the right one for its long-term brand health and financial strength. And this highly disciplined approach to margin expansion is one we plan to methodically apply to other brands with similar opportunities. Another primary staging candidate is Bertolli, which we see as right for the same type of targeted investment. With Bertolli, we are stepping up our work to renovate our frozen skillet business and make the brand even more relevant to today’s shoppers. We’re expanding occasions through the addition of Family Size Skillets within our lineup. And looking ahead, we are embarking on major renovation investments in the Bertolli brand to upgrade proteins, such as all-natural chicken and dramatically simplify the ingredient label. As we continue to renovate around the brand, we will support the product upgrades with increased marketing spend to drive profitable growth. As I’ve said many times, unlocking the full value potential of our branded portfolio will be a process, not a flip of the switch. But it is a battle-tested process and it will succeed. It all starts with the unwavering belief that strong margins are the key to maximizing value and that strong margins are the byproduct of executional excellence across disciplines, spanning everything from supply chain productivity to pricing and trade analytics to mix management and targeted high ROI marketing to exciting innovation. Make no mistake about it, ConAgra is becoming much stronger in each of these disciplines and you are seeing the impact in our margin expansion. Over time, as we wean ourselves off of our historical over-reliance on deep discount trade deals and rebuild our innovation pipeline supported by more effective marketing, you will see sales grow but in a much higher quality fashion. We are confident that there is a lot of room for progress and we are relentlessly focused on continuing to execute against our goals. It is about the delta, meaning the change we can drive as opposed to a snapshot assessment. Overall, I’m very encouraged by the work going on in Consumer Foods. Investment creates a virtuous cycle. Over time, stronger brands will lead to better pricing power and higher margins, and we are clearly on the right path to maximizing value. Now, turning to Commercial Foods, net sales were approximately $1.1 billion in the quarter, up 6% compared to the prior year. The Commercial Foods segment’s operating profit was $175 million, up 21% on a comparable basis. While the Commercial Foods segment posted strong results across the board, Lamb Weston was particularly strong. Sales for Lamb Weston’s potato operations grew across North America during the quarter as well as in international markets. International sales performance for Lamb Weston was noticeably strong, reflecting the lapping of the impact of the West Coast port labor dispute in the year-ago period as well as improving demand in key Asian markets. As we’ve indicated before, Lamb Weston remains well-positioned to capitalize on the significant international growth opportunities created by the aggressive emerging market expansion of major quick-service restaurant chains. In our Lamb Weston North America business, we continue to see positive growth momentum across many of our key customers in the quick serve restaurant and operator distributor channels. We have industry-leading innovations and customer service and our breadth of diversified products continues to position this business as a clear market leader in North America. Now, before I turn it over to John, I want to take a moment to acknowledge our talented team as we work to transform ConAgra into a stronger, more consistent Company with a more valuable future. While there has been significant change during the past year, our people are energized and focused on serving our customers, and I’m excited about the path forward. Over to you, John.

Thank you, Sean, and good morning, everyone. This morning, I will discuss several topics, including a summary of our fiscal third quarter performance, discontinued operations, comparability matters, cash flow, capital and balance sheet items, and our outlook for the remainder of the fiscal year. I’ll begin with our fiscal third quarter performance. Diluted EPS from continuing operations was $0.41. After adjustments for comparability, diluted EPS for the fiscal third quarter, including discontinued operations, was $0.68, surpassing our expectations and showing improvement from $0.59 in the same quarter last year. Both our Consumer Foods and Commercial Foods segments performed strongly. In the Consumer Foods segment, net sales were about $1.9 billion for the quarter, down roughly 2% from the previous year. This includes a 4% volume decline and a negative 1% impact from foreign exchange, partially offset by a 3% improvement in price mix. Adjusted operating profit for the segment was $339 million, reflecting a 17% increase year-over-year. The operating margin expanded by around 300 basis points compared to last year, driven by pricing discipline, mix management, supply chain efficiencies, and favorable input costs, despite higher marketing and incentive costs. Foreign exchange negatively affected net sales by $28 million and operating profit by $12 million this quarter. In terms of marketing, Consumer Foods advertising and promotion expenses were $91 million, up 12% from the previous year as we continue to invest in our brands. The Commercial Foods segment reported net sales of approximately $1.1 billion, a 6% increase from the prior year quarter, with an operating profit of $175 million, which is 21% higher than last year’s third quarter profit, mainly due to strong volume and margin expansion in our Lamb Weston business, along with the resolution of last year’s West Coast port labor dispute. Excluding comparability impacts, equity method investment earnings were $27 million this quarter compared to $33 million in the same period last year, reflecting lower earnings from our Ardent Mills joint venture due to unfavorable market conditions. Corporate expenses for the quarter totaled roughly $155 million. When adjusted for comparability, these expenses were $73 million versus $52 million in the prior year, mainly due to higher incentive costs tied to our improved operating performance and the timing of incentive accruals. We are progressing well with our SG&A cost savings initiatives and anticipate significant benefits over the next couple of years. It’s worth noting that our fiscal third quarter results reflect initial benefits from our cost savings programs, partially offset by some stranded costs from our private label divestiture. Additionally, the benefits of our cost savings initiatives are primarily focused in the consumer business, and we have set aggressive targets and plans to offset any stranded costs that arise while selectively investing back into the business to enhance operating margins over time. Discontinued operations showed an EPS of $0.05 this quarter, reflecting the private label business's operations through February 1, 2016. After adjustments, the discontinued operations earned $0.11 per share this quarter, including about $0.05 per share from the elimination of depreciation and amortization expense. Our earlier guidance included expected comparable earnings from the private label operations. We estimate that the divestiture resulted in a capital loss of about $4.2 billion pretax, or $1.6 billion after tax, which can be utilized over the next five years. We remain confident in obtaining significant future tax benefits as we reshape our portfolio. Regarding comparability items, this quarter included four items: about $0.16 per share of net expense from restructuring charges, approximately $0.04 per share of net expense from transaction costs related to debt reduction, around $0.03 per share of income from a pension settlement gain at a joint venture, and approximately $0.11 per share of income from discontinued operations as detailed in our Regulation G disclosures. On cash flow, capital, and balance sheet items, we ended the quarter with $503 million in cash and no outstanding commercial paper. Our total operating cash flows through the fiscal third quarter were approximately $695 million, down from $740 million last year, primarily due to higher tax payments this fiscal year. We typically generate a significant portion of our annual operating cash flows in the latter part of the fiscal year and expect total operating cash flows from continuing and discontinued operations to be around $1.2 billion for the year. For capital expenditures, we spent $100 million this quarter compared to $83 million last year. Net interest expense was $77 million this quarter, down from $80 million in the same quarter last year, while dividends totaled $109 million compared to $107 million last year. In terms of capital allocation, we remain committed to maintaining an investment-grade credit rating and a balanced capital allocation strategy that includes debt reduction, a competitive dividend, share repurchases, and growth investments. As mentioned earlier, we completed the divestiture of our private label operations this quarter, receiving more than $2.6 billion and allocating approximately $2.15 billion to long-term debt repayment. We plan to use the majority of the remaining proceeds for additional debt repayment in the coming months. During the fiscal third quarter, we did not repurchase any shares and have about $132 million remaining in our share repurchase authorization. Looking ahead to the rest of fiscal 2016, with the sale of our private label operations, we are now providing guidance based on earnings per share from continuing operations. We have included quarterly and annual EPS details from continuing operations for the current and previous fiscal years in our Regulation G tables and written Q&A documents. For the full fiscal year 2016, we expect EPS from continuing operations, after adjusting for comparability items, to be between $2.05 and $2.07, compared to $1.93 for fiscal year 2015 on the same basis. So far this fiscal year, we have earned $1.56 from continuing operations after adjustments. To meet our full-year guidance, we anticipate comparable EPS for the fiscal fourth quarter to be around $0.50. This guidance reflects strong fundamentals in both Consumer Foods and Commercial Foods segments, although it is lower than the prior year comparable amount of $0.55, primarily due to last year's extra week, currency exchange impacts, increased marketing investments, and higher incentives this year. Additionally, the EPS guidance for fiscal 2016 from continuing operations should not serve as a starting point for estimating fiscal 2017 projections for either ConAgra brands or Lamb Weston, as we need to finalize various details, such as capital allocation, financial policies, the timing of SG&A savings, trade efficiency benefits, brand investment targets, and any short-term stranded costs associated with the Lamb Weston spin-off. We will provide further details on these items during the investor day events we plan to hold ahead of the spin-off. In closing, despite significant changes, we are pleased with our performance this fiscal year in enhancing margins across our businesses and managing the substantial changes in cost structure and portfolio that we believe will drive value creation over time. That concludes our formal remarks. Thank you for your interest in ConAgra Foods. Sean and I, along with Tom McGough and Tom Werner, are here to answer your questions. Before we open the floor to questions, Chris would like to share a few remarks.

Thanks, John. Before we turn it over to Q&A, I want to take a minute to update our listeners on investor relations here at ConAgra Foods. As pretty much everyone knows, our Company is moving its headquarters to Chicago and a lot of you have asked me personally if I am moving to Chicago. And while the decision to move to Chicago is best for the Company and its future, it has come with some changes on the people side of things for all the reasons that you would expect; family, stage of career, and a host of other elements that play a part in evaluating major moves. Along those lines, I am not relocating to Chicago. I’ll be transitioning out of ConAgra Foods over the next few months, but I’ll still be your point of contact until we have all of the IR resources in place with the new organization. I have worked with many of you for more than a decade and a half and gotten to know several of you well. As well my more than 16 years at ConAgra Foods had me in the mix of plenty of the Company’s ups and downs, it’s been very satisfying to play a part in helping advance the Company’s mission. Looking back on all of this, I tremendously value the relationships that have come with the job. And I am thankful for the personal growth opportunities that have come with serving over 16 years in this capacity. I will certainly miss the day-to-day interaction with great people inside and outside of this Company. And I want to emphasize that I feel very good about what the future holds for this organization, given its leadership and its mission.

Chris, I appreciate that and I appreciate your 16 years of service at our Company. You have been an important part of our team and we wish you continued success in the future. So, thank you and best wishes. And with that operator, let’s open it up to Q&A.

Chris, I want to wish you all the best moving forward and thank you for your help over the years. Two quick questions from me; I think first, Sean, at Hillshire, you had focused much of your effort on really raising what you would call the center line profitability of the business. As input cost moves can play with margins in any given period of time and we certainly know that deflation among other things is helping sort of the industry right now, but I guess most important, where do you see the center line consumer margin now, given your reported consumer margin this quarter is really as high as I think I have seen it how and how high can that move going forward? And I’ve got just a quick follow-up.

I’d say, Andrew, I am very pleased with our progress obviously and in no way is our work done. Clearly, there is some benefit in our margins from the absence of inflation but that is far from the whole story. We absolutely cannot discount the benefit of increased discipline across the margin expansion levers that we talked about earlier, things like pricing; trade; productivity; mix; stronger brands. We do expect the center line of our profitability to go north over time. We also expect that the standard deviation around that center line will decrease over time. And you are absolutely right, in any given quarter, margins could be impacted by short-term inflation or deflation. And what I would say is you won’t see you get overly exercised by that because we will stay focused on what’s right for the long haul. But yes, there is some benefit in there from the absence of deflation but our work is not done; we see further opportunities, and that’s why we are going to be relentless in pursuing.

Thank you for that information. I appreciate John’s comments about being cautious in using fiscal 2016 as a baseline for considering 2017 earnings, especially since you mentioned various factors that could affect the outlook. I'm looking for more clarification on that. It seems like this might be seen as a reset year, possibly due to the need for brand investment to stimulate growth, or am I overthinking it? Additionally, one aspect you didn't mention that could also have an impact is the portfolio offering. I'm trying to understand better what your earlier remarks were suggesting, so I would like to hear more on that.

I think a couple of thoughts. A lot of this just has to do with we’ve got work to do to make sure that we finish our analysis and have a good view of the year and finish our planning process, so we can provide our investors and analysts the right information around those drivers. On the brand and the brand investment targets, let me come back to that. I would see on the portfolio, again, we are not going to speculate on anything there, but clearly, we think there are going to be opportunities for us to change this portfolio going forward. We would share those impacts certainly if and when they come about. On the brand investment targets, specifically that you mentioned, I might turn it over to Tom for a few comments but we are going to continue to make the right investments in our business behind the brand. So, I think it’s really about how do we do that with discipline. And as we finished our plan, those numbers could go up or they could stay flat or it could come down a little bit. But I may turn it over to Tom just to reiterate kind of what our philosophy is around how we are going to invest behind these brands in a disciplined way.

Let me jump in first John. To your question, Andrew, I wouldn’t read anything into John’s comments in terms of where we are going to be. We obviously have a lot of communication with investors upcoming at our respective investor days for ConAgra Brands and for Lamb Weston. And our plan all along has been to get into some of the great detail at that point in time. Obviously, it will be after our 10 filings, etc. We also are going through our typical annual operating plan process. So, we’re evaluating where we want to invest, the magnitude of those investments. All of that is a work in process. And the numbers will continue to get locked up here in the months ahead. And as that happens, we will have a more definitive view on where to go here. So I wouldn’t read anything into it beyond that at this point. Tom, do you like to add to that?

Sure. I think just principally, we believe in investing in brands, but doing it in a very disciplined way with the strong ROI mentality. We’ve talked about segmenting our portfolio so that we’re investing behind the best opportunities and this notion of brands being advertising and promotion ready. Our investments are earned; they are not an entitlement. And while we don’t have a targeted spending level for the entire portfolio, we look at each individual brand based on the segmentation and readiness for investment. I think you see that in our results today where our advertising and promotion is concentrated on a focused group of brands like Marie Callender’s, Hunt’s, Slim Jim, and Reddi-wip. You see that we’re growing sales and share, and they are contributing to the overall improvement of our portfolio margins. So, our intent is to continue to invest to grow through renovation and increased marketing over time. That’s our approach, and our results in this quarter are an indication of that.

Thank you, and good morning. I want to express my gratitude to Chris Klinefelter for his tremendous support. Best wishes in your future endeavors. I have a question regarding the implied guidance for the fourth quarter. The $0.50 estimate seems to be lower than the consensus of $0.57. While I understand there are factors contributing to this potential weakness, I'd like to delve deeper. The margins from the third quarter were quite impressive. If those margins carry into the fourth quarter, we would expect to exceed that figure. However, your guidance suggests otherwise. Could you explain why? Why is there such a significant decline in the Commercial Foods margin, and why are Consumer Foods margins also expected to drop when the overall market seems favorable for margin improvement through net deflation and other strategies you are implementing, Sean?

Yes. Let me jump in, Dave, on a couple of factors just to address them. So, one thing I would remind folks is that especially in our Consumer Foods business last year in the fourth quarter, we put through a pretty strong quarter. So, we’re lapping a stronger quarter relatively speaking. The other thing is we do have some seasonality in our business in terms of the mix of products we sell in our consumer business, which impacts the margins. So, when you look at sequential margins from third quarter to fourth quarter, you should expect to see the seasonality mix impact come down some. And I think we’re still looking at some margin expansion year-over-year in the fourth quarter. So, I don’t think the trends are reversing or significantly flattening out. I really view it as again a number of these mechanical issues, in particular the 53rd week, some currency exchange, higher incentives, and then we’re going to continue to have some higher marketing investment. So, that’s kind of how we see it right now. And again, I don’t think we see any significant breaks in the trend on the Lamb Weston business either.

And just a follow-up, John, can you quantify the effect of this inflationary environment in the productivity? I mean by our math, it would be something like a $0.10 benefit to the quarter, because of lower commodities and the normal productivity that the Company produces. Is that about the right neighborhood to be in?

Let me share a few numbers; I haven’t converted them all at cents yet. But I think productivity was about $30 million in the Consumer segment. Net inflation or net deflation altogether was about $20 million. Additionally, we are comparing against a $20 million impact we experienced last third quarter due to the derivative issue that you may remember. So, those are the main factors influencing the cost of goods sold. That’s why it falls within that range.

I apologize for continuing along the same line, but if your margin increases year-on-year in the fourth quarter, you're looking at around $400 million in operating income. I’m unsure about your sales projections unless they take a significant hit. This suggests an earnings per share figure that is considerably higher than your guidance. So my question is, while you haven’t shared EPS guidance for the year, I believe it's crucial to gain insight into your thoughts regarding this item. We are estimating the year's operating income to be in the mid $1.5 billion range. Is that a reasonable estimate or am I completely off?

You’re probably not way off, Ken.

Okay. Okay. Shifting topics, Sean, I believe all my colleagues have had similar conversations with investors regarding the spin-off of Lamb Weston. From my perspective, most investors I've talked to would prefer selling the business rather than spinning it off. I might not be speaking with the right individuals, and I'm unsure if there are any actual buyers interested. So, this might be a moot question, but to what extent are you experiencing any pressure from your largest shareholders to potentially monetize Lamb in a different manner?

Well, I think we’ve talked about this quite a bit, Ken. And from the beginning and as always, our focus is on maximizing value. And as we think about maximizing value, you should expect that we’re going to consider just about every option that you can dream up and then we will add into the analysis all the information we know about our business and all the information we know about whether or not somebody’s an interested party. And our conclusion, as a management team and a Board, having looked at our options is that the spin is clearly the best way to maximize value here. And that’s our goal. All of this has been considered.

Hi. Good morning, everyone. And Chris, best of luck to you as well.

Thanks, Matthew.

So, I guess one follow-up just on Lamb Weston, I mean the magnitude of top-line growth in the Commercial Foods segment was surprising, even with the benefit of lapping the port disruption last year. Could you remind us whether those tailwinds will continue a bit further into the fourth quarter? And then in terms of your comments on improving international demand, can you elaborate a bit on where you are seeing improvement and how sustainable you think that might be?

Sure Matthew, this is Tom Werner. I will tell you a couple of things, as you think about our Commercial segment. The good news is across all of our business units in the Commercial segment, we grew year-over-year. So, while Lamb Weston was obviously disproportionately, a lion’s share of that, the rest of the operating units performed well as well. I think in terms of capturing international growth and domestic growth, the business, as I’ve said before, is well-positioned. We’re aligned with the great customer base across both North America domestic and international. We feel good about the momentum we have in the business through the first three quarters and we see this momentum carrying into Q4 and into fiscal ‘17. So, we feel great about the business. It’s a fantastic business; it’s performed great this year; and we expect that to continue going forward.

Sean, if I could ask you one question, I just wanted to get your thoughts on the consumption trends at the broader industry level. In the past two months, we’ve seen retail take rate that looks incredibly soft in February and recovered a bit in March but was benefiting from Easter timing. So, from your standpoint just curious if there was any major change in trend or slowdown at the industry level?

From our perspective, a significant part of what you're seeing is really embedded in the base. The consumption data from February didn't look particularly strong for us, largely due to our decision not to engage in deep discounted promotions this year, unlike in the previous year. Additionally, we've raised prices in several businesses which has affected elasticity. However, the most recent consumption data shows a bounce back, indicating that the earlier decline was likely temporary. Growth in our industry has been challenging, which is why we're concentrating on innovation, margin expansion, and efficiency. We are committed to expanding margins and enhancing our growth trends as we move forward with our plan.

Hi, good morning; Kevin Lehmann here for David Palmer. Quick question on Commercial Foods and perhaps building on Ken’s question a bit but perhaps from a higher level. Can you expand on the strategic rationale behind spinning off Lamb Weston? On the case of private label, already that business can be viewed as a distraction to core U.S. retail but many other food periods have food services division. So, how would you say ConAgra differs from others in that regard? Thank you.

We have a traditional food service division that will remain part of ConAgra Brands, which relates to what we mentioned concerning our peer set. This division performed well this quarter and will continue to be integral to our branded business due to the significant overlap, especially with larger food service packages of products sold in the retail channel. In contrast, Lamb Weston operates as a focused, largely integrated business. We believe that by concentrating solely on this area, it will not only maintain its strong performance but also improve further. This approach is distinctly different from our traditional food service business, which you referenced in relation to our peer set.

Sean, I wanted to discuss how retail is responding to your pricing strategy and how it compares to your expectations regarding consumers. Many package food companies, including the important Banquet brand, are adopting this pricing approach as consumers look for value. While trends and profits seem strong, are you facing any pushback from retailers, such as losing shelf space or attention for the category? This is particularly relevant since overall costs are decreasing and prices, especially for items around the perimeter of the store, are coming down. Could you share your general impressions on this situation, including consumer reactions and your discussions with retailers?

I’m very glad to answer this question because I think it’s important to demystify what we are doing and what we’re not doing with respect to average pricing. Keep in mind, average pricing is a function of shelf price or our list price, but it’s also a function of our promoted volume price. And we’ve actually been active on both fronts. I think with respect to merchandising and a $100 million efficiency that we talk about within trade, sometimes what I read is that it sounds as if that’s coming across as if it’s just a cut, as if we’re ripping trade out, that nothing could be farther from the truth. We spend a lot of money on trades, we’ve identified a $100 million in trade spend that we don’t think does much to help us or our retailers. So, when we talk to our customers about being more efficient and impactful with that trade, they’re as interested in that as we are because it helps drive quality sales, it helps drive margins etc. And then separately, I’d say, our customers also value quality volume as much as we do. They understand that inefficiency isn’t helping anybody. So, if we can redeploy inefficiency into brand building, innovation or even more effective merchandising, everybody wins. So, think of the payoff as better margins and stronger brands versus cutting merchandising. Then, when it comes to shelf price, there are three pillars to our pricing actions. Number one is what we call inflation justified list price increases, meaning if we got inflation we feel totally justified in taking a list price increase and that’s we’ll do. The second piece of pricing is the trade efficiency we just talked about which in large part means, reduced reliance on deep discount merchandising and redeployment of those funds toward more effective, more efficient activities. And then the third piece of our pricing strategy is higher-quality driven pricing, meaning we improve the food we’re selling and we charge more for it. And in any given quarter, we’re likely to have a mix of all three of these things, but the ratios could change within each quarter. So that is this strategy that we’re pursuing. Our customers are aligned with us on it, they’re supportive on it, they believe as we believe, it’s ultimately going to lead to better sales, better profit than a higher quality volume base.

Hi, good morning everybody and Chris, all the best to you. I guess just two questions, one just a point of clarification. I think, John, you’d said there was $30 million of productivity in the quarter. Was that gross or net productivity?

We measured all net.

All net, okay. And then I guess the second just as a follow-up to I think it was Ken Goldman’s question about the decision to sort of split or spin off Lamb Weston. As we kind of think about the value of that also in relation to having the tax credit that you have, is it right to think about the value not just of Lamb Weston but also in the context of what other optionality there exists because you’ve got that tax credit to potentially do other things with? So, I guess I’m trying to say is the way it works we should be thinking about the value creation potential more than just one step with Lamb Weston but maybe the potential to use that asset to do other things?

Yes, the way I think about it is, not having value destruction through tax leakage is a good thing and having a tax asset that you can deploy in the future as we think about reshaping our portfolio to be more contemporary, higher margin, and higher performing, is a good thing. Now clearly, the tax asset is one of the tools we can leverage in that reshaping process. I won’t speculate on when that could happen, I’ll just say that we’ll do what makes sense for the long-term value creation potential of the company.

Good morning, this is Lubi filling in for Akshay. I’m wondering, could you give us a sense of how much cost savings initiatives contributed to the margin expansion that we had in Consumer Foods this quarter?

We’re not going to provide specific numbers. I would say we have some modest early delivery from our cost savings program. I would also say a chunk of that was offset by some modest stranded costs that came back into the consumer business. So, I’d say net-net that wasn’t a huge driver of the margin expansion; it was more at the gross margin line.

As we said before that the bulk of the savings we’re going to generate through our programs hits in ‘17 and ‘18. One of the reasons why we don’t want you to start building a model necessarily right now is we’re in the process of pinning down exactly how much of that’s going to hit in ‘17 versus ‘18 as we continue to morph our organization design and things like that. So, a little bit of benefit now but the bulk is coming in the next couple of years.

Hey, good morning folks. Thanks for the opportunity to ask a question. And let me echo the sentiment from others; Chris, it’s been great working with you, good luck on the next venture. I thought Jon Feeney had a very sound line of questioning I want to build on a little bit. In response to his question on trade budget optimization, you referenced it as more of a shell game to optimize efficiency, and I guess my question is why. You’re squeezing SG&A, you’re trying to squeeze COGS through productivity and here’s roughly a $2 billion expense line on your P&L. Why does it need to be a shell game, why can’t you shrink it?

Jason, I believe you may have joined the wrong call, as I don’t recall discussing anything about a shell game. We have significant investments with our customers that we approach with great care, maintaining a mindset focused on minimizing losses while analyzing that spending. We collaborate with our customers to identify areas where funds may not be benefiting them or us and work together on how to reallocate that funding to better support our brands and categories, ultimately improving volume trends and margins. There is some waste in this process, and we intend to aggressively address it, as we aim to be leaders in the industry in tackling this issue. We will remain flexible regarding our approach to waste, redeploying funds where there is a high return on investment. If we lack a high ROI way to redeploy the funds, we will instead reinvest it directly into our bottom line. Our decisions regarding waste will be pragmatic, focused on maximizing value.

Thank you, good morning. Chris, best of luck. I guess, Sean, I wanted to ask a little bit more about Banquet and its, what seems like a really big impact for the brand on the consolidated. If it’s 90% of the volume hit, the elasticity by going over $1 must have been really significant, and I understand why you’re doing it. But I guess my question is as you kind of move through the rest of the portfolio, should we expect similar levels of elasticity as you try to make your promotion more efficient or is it a function of as you improve the product, eventually getting the consumer to recognize that but it just seemed like a very big drop on one brand. Thank you.

Yes, Eric, great question and it’s important that we demystify that. I think Banquet is quite a bit different from our other brands, and I am going to have Tom kind of share some of our detailed thinking on this business. But the impact you see on Banquet is, if again you come back to the notion that there are two things we are dealing with here; one is shelf price, which is baseline volume; the other is promotion strategy and that’s promoted volume. We have actually made a meaningful difference, a meaningful change on both. And part of what you are seeing is how aggressive we were in the year-ago period in promoted activity and the choice not to do that. For example, events that might sell at $0.80 instead of $1 dollar, as you might imagine, that drove some pretty significant spikes in the year-ago period. And when you don’t repeat that, obviously, you’re not selling on profitable volume, but you’re going to see it show up on the promoted volumes side of the volume ledger. At the same time, we also have shelf price increases which shows up as a baseline elasticity factor. So, when you get both, it kind of compounds and that’s what a bit of what you saw in the results. But again, that was entirely planned. We knew what we’d expect there. And we’ve got to migrate to a higher quality consumer base here over time because there were clearly plenty of consumers in that exact window year-ago who were in our franchise for one reason and one reason only, and that’s because we were basically doing giveaway pricing, or giveaway merchandising. And that’s effectively what you saw. Tom, did I miss anything there?

No. Sean, I think that really nails it.

Thank you very much. Just a follow-up question, so all the questions have been said and asked now on the trades and opportunities. Very simplistically, Sean, I am just curious you mentioned the red circles, you draw red circles around the areas where we think we can gain efficiency and then you then redeploy back for higher ROI on those brands. Over the past, I don’t know let’s say as you have done this, especially on Banquet, do you think there is realistically more upside to the $100 million that you have given us and therefore there are more red circles, or there’s more of an opportunity to drop some of that to the bottom line? Thanks.

Rob, I’ll interpret that in the context of a question I've received before, which indicates that our overall cost efficiency program exceeds 300 million—200 million in SG&A and 100 million in trade. My response remains consistent: we will continue to seek further efficiencies. If we identify any inefficiencies in either SG&A or trade, we will address them. Currently, we are focused on achieving that 300 million target. We are on track and feel positive about our progress, and we aim to prevent any setbacks before considering going beyond that target. Philosophically and culturally, we see cost efficiency not just as a project but as a lifestyle, as it fuels our investments and innovations, fostering a performance-oriented culture. We will remain committed to this effort. Specifically in trade, it’s encouraging to see our teams work collaboratively, planning events with significantly enhanced technology and analytics tools. We meticulously review each event, analyzing hundreds or thousands of occasions to understand past performance and identifying what to eliminate, change, or add by customer, resulting in significant improvements. We will keep pursuing this. If there are additional efficiencies to be gained, we will pursue them. However, we’re not ready to speculate on that for now, but that is our underlying philosophy.

Hi, thank you. And best wishes to you, Chris. I have a two-part question. Firstly, I understand that we shouldn’t consider fiscal ‘16 as a baseline for EPS. However, looking at the operating profit in the two divisions, both had very strong performances in ‘16. I'm trying to understand the overall dynamics since both divisions are likely to see significant SG&A savings, trade productivity will continue, but this will be counterbalanced by some dis-synergies. So, in a broader sense, should we anticipate a typical year with these factors offsetting each other, or could it be above or below normal? Perhaps I should wait for the Analyst Day to get more details, but I wanted to frame it in a big picture context.

Rob, we’re not going to get into anything that could look like guidance for next year at this point because we are not ready to do that. Clearly, we feel very good about the direction that we are headed in terms of margin expansion, in terms of our ability to rebuild the innovation funnel. So, we are moving in the right direction, and we’ll look forward to going through each of the businesses in detail and giving some detailed guidance for you, as we do these Investor Days.

Can I ask an interest expense question also? I thought interest expense will be down quite a bit more than what the guidance implies for fourth quarter and then maybe into next year. Can you give us a sense of what interest expense would look like for fiscal ‘17, John?

Well, let me start with the Q4. I believe interest expense is down about $20 million. Just as a reminder, we had deployed the proceeds from private label until fairly late in the year and then also the debt we’re taking out is fairly low-interest debt. So, that’s both the beauty and the curse of these interest rate environments. Certainly, as we go forward next year, you can look at the full-year impact of the debt we just repaid but all we don’t know right now is the capital allocation around some of these other transactions that are still in progress. So, it’s not possible for me at this point or responsible for me to say here is what the other interest rate impacts of some of that capital deployment is going to be. Certainly, I would think those net-net would be favorable to interest expense next year. But we just can’t quantify at this point.

Hi, good morning. Chris, best wishes to you as well. I have two questions, if I may. First, regarding the gross margin performance, it exceeded expectations and was quite strong, particularly due to the lack of private brands. Can you share whether this was primarily driven by consumer demand or commercial activities? I understand that consumer factors have positively impacted the gross margin, but was that the main reason for the improvement? Second, concerning the weak IRI and Nielsen data mentioned earlier, I want to gain insight into certain categories that I consider key for ConAgra. It seems that the decline in those areas is accelerating. Is this an issue of needing to increase spending or perhaps reallocating some trade savings back into the business? I’m trying to understand the steps you could take regarding the focused categories you plan to emphasize in the future to rekindle revenue growth.

Yes. Let me start on the gross margin side. We don’t talk a lot about gross margin details, but to tell you directionally is that both segments have strong gross margin increases. There was proportionally more in consumer than you get in commercial business, but both of them had strong margin expansion.

Chris, this is Tom McGough. When you think about consumption performance, we break it down into two components, what’s non-promoted and what’s promoted. And as Sean said, in February specifically, there was a lot of noise in our numbers. What it was, was the deliberate choice not to repeat some low ROI events from the previous year. And what it wasn’t, was a fundamental weakness in the foundation of the base non-promoted volume. Obviously, we’ve taken price on Banquet, as Sean said, it impacted both base and promoted. When you take out Banquet and look at the rest of our portfolio, our non-promoted base sales were essentially flat. So, we are going through a period, not just our sales in terms of looking at trade productivity, investing it in the right return activities, but the customer environment is also changing. And there is a move for less promotional activity from some customers. I think inherent in what we are driving against is selling more off the shelf and relying less on push activities. So, I think that’s some of the noise that you see in the most recent results, certainly ours but I think more broadly some of this has been driven by changes in customer strategies as well.

Hey guys, good morning. This is Elyn Rodriguez on for Alexia. So, how worried are you about the impact of introducing voluntary GMO labeling at a national level, when the GMA spent millions of dollars in recent years, so why is this happening? Thanks so much.

Well, obviously our position when it comes to GMO labeling is we need a federal standard; anything else makes no sense. At the end of the day, we are for the consumer and we believe in transparency but we think it’s got to be done at a federal level. That said, there has not been a federal preemption and there is a law in Vermont. And we have to do what’s necessary to make sure that we are in compliance. For us to carve out inventories and think we can control what goes into Vermont, is not pragmatic; it’s not really doable at least with any reasonable cost. So we are in a position where we’ve got to do what we’ve got to do. And hopefully where we are right now is not the end of the story, there will be an evolution, there will be a federal standard and there will be a common communication strategy around this. So, ultimately that’s what we care most about but there is no consumer confusion, there is no unnecessary increase in cost of the foods that our consumers are buying, things like that.

Just a quick question on the balance sheet; you have definitely been busy and you talk about additional debt reduction. So, I guess two-part question, one is, should we assume that cash on hand and commercial paper will be used to take out the July maturity? And secondly, should we expect any incremental debt reduction as a function of the Lamb Weston spin?

Yes. So, again, as some of this gets into kind of capital allocation plans, we have to finalize. So, I don’t want to get specific on exactly what we will be on the July maturity. I think if you can kind of do the math a little bit, I think there are a couple of guide post I would point to. One is we continue to be committed to an investment-grade credit rating on the ConAgra Brands business. Certainly, what that implies is as we spin out pieces of business or otherwise change the portfolio where we would lose EBITDA, we would naturally then look to further debt reduction to make sure that our debt to EBITDA ratios are in line with what’s required to be investment-grade. So, I think it’s a reasonable assumption that as we take pieces of business out and spin them off EBITDA or spin them off, it will have some additional debt reductions, but more details to come on that going forward.

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