Conagra Brands Inc (CAG) — Q1 2017 Earnings Call Transcript

Good morning. During today's remarks, we will make some forward-looking statements. And while we are making those statements in good faith and are confident about our company's direction, we do not have any guarantee about the results that we will achieve. So if you would like to learn more about the risks and factors that could influence and impact our expected results, perhaps materially, I'll refer you to the documents we filed with the SEC, which include cautionary language. Also we will be discussing some non-GAAP financial measures during the call today, and the reconciliations of those measures to the most directly comparable measures for Regulation G compliance can be found either in the earnings press release, Q&A or on our website at investor.conagrafoods.com, click Financial Reports & Filings, then Non-GAAP Reconciliations. Now I'll turn it over to Sean.

Thanks, Johan. Good morning, everyone, and thank you for joining our first quarter conference call. This will be our last earnings call as ConAgra Foods as we anticipate completing the Lamb Weston spin-off this fall prior to the holidays. As you've probably seen by now, we announced the timing of dedicated Investor Days for each business. Lamb Weston's will be held in New York City on October 13, and ConAgra Brands will be held on October 18 here in Chicago. Our teams are hard at work preparing for these meetings, and we are excited about the opportunity to take you through a deeper dive on these businesses and why we believe they will create significant value for investors as separate pure-play public companies. Each company will share more details, including financial outlooks and capital allocation priorities at these events. We are confident you will see the unique opportunities available to both companies and why each is well positioned to seize them. Now on to the state of the business and our first quarter results. Once again, it was a very busy quarter at ConAgra as we continue our disciplined and methodical approach to enhancing focus, expanding margins, improving efficiency, energizing our culture and ultimately, creating value for our shareholders. We still have a lot of work to do, but we are pleased with the progress that we have made to date. At a high level, we saw strong results from both Lamb Weston and our branded consumer businesses. On Lamb, we once again saw what a terrific business this is. Sales were up, margins were up and profit was up. The team is looking forward to sharing much more about this jewel of a business on October 13. On our branded consumer businesses, we also made terrific progress. Here, we are seeing clear evidence that our strategy to upgrade our revenue base and expand margins is working. As we have discussed previously, we are intensely focused on positioning our U.S. branded portfolio for long-term success and that starts with building a higher-quality revenue base. As we will discuss in more detail at our upcoming Investor Day for ConAgra Brands, we compete in good categories with many well-known brands that are Number 1 or Number 2 in their categories. However, ConAgra historically prioritized volume over value and accordingly, we've been overly reliant on deep discounting as our chief demand driver, leading us to under-invest and under-deliver on brand building and innovation. In short, we underleveraged some of our greatest assets. The result of this behavior is a revenue base that is overdeveloped in terms of the presence of low-loyalty, price-focused consumers. The problem with catering to these consumers is that, it caused us to neglect the needs of the vast majority of our consumer base, people who are hungry for innovation and premiumization and, it fundamentally limited our ability to drive higher margins. We are changing that. Specifically, to ensure we leverage our brand strength and unlock our margin potential, we have been methodically infusing focus and discipline around pricing and trade promotion while investing in brand building and innovation. Said differently, we are focusing our efforts on practices that support value over volume and walking away from our previous practices that concentrated on volume over value. It is important to understand that while our efforts to improve brand building and innovation are broad-based, the volume declines we're experiencing are largely concentrated within brands that historically targeted the price-focused consumer and heavily relied on deep discounts and promotion to drive volume. In fact, if you dig into the scanner data, you will see that more than 80% of our Q1 volume declines can be attributed to just six brands that have historically been underpriced and over-promoted. We are confident that our actions represent the right way to maximize the value of our branded portfolio over time. As a supporting data point, gross margins on our U.S. retail brands are up about 700 basis points since Q1 two years ago. As we continue to execute this strategy, we believe our revenue base will be better positioned to deliver stronger, more consistent performance over the long term. We have framed our efforts here around five portfolio management principles, or PMPs as we call them, which guide how we intend to manage our branded portfolio going forward. At our upcoming Investor Day for ConAgra Brands, we will go deep on each of these, but I want to give you a sense of our approach. PMP number 1 is upgrading the revenue base. The second PMP is refreshing the core. PMP number 3 is assigning clear portfolio roles. The fourth PMP is ramping up innovation and M&A. And the fifth PMP is effectively backing the winners. These principles represent a tried-and-true approach and in a few weeks we will discuss the progress we're making on each and how they will help build a more focused, higher-margin and higher-performing branded food company over time. One note on PMP number 4, ramping up innovation and M&A. I'm sure you've all seen the news from earlier this week about our acquisition of the Frontera, Red Fork and Salpica brands. These businesses make authentic gourmet Mexican food and contemporary American cooking sauces. We believe this gives us another great platform to provide consumers with unique, high-quality food products. And as an extra enticement to attend our Investor Day on October 18, I promise you will have a chance to sample these tremendous brands. While we have a lot more work to do, I want to acknowledge our sales force for doing an excellent job working with our retailers to explain how our change in strategy benefits them as well as ConAgra. Similarly, I want to acknowledge our supply chain team for anticipating these volume changes and proactively offsetting any loss absorption benefits. With that context in mind, let's turn to our Q1 results. Q1 net sales declined 5% and the impact of divestitures and FX represented about 2 percentage points of the decline. As I mentioned at the outset, Lamb Weston delivered another strong top line this quarter, offset by sales results in our domestic consumer business. In the U.S. consumer market, which, as you know, is challenged across our competitive set, we saw declines due to the actions I just outlined related to upgrading our revenue base. This, along with the impact of FX, more than offset an increase in price and mix. Overall profitability was driven by growth and margin expansion in Lamb Weston as well as continued strong gross margin expansion in our domestic consumer businesses. As a result, total segment adjusted operating profit was up 23%. Additionally, our supply chain team continues to excel at finding more efficient ways to manufacture our products and reduce costs. We delivered adjusted diluted EPS of $0.61 for the quarter, representing 49% growth from the prior year, significantly in excess of our mid to high teens growth estimate. As Dave will point out, some of this is timing related. Now turning to segment performance. As you saw in this morning's release, we are now reporting results in five reporting segments: Grocery & Snacks, Refrigerated & Frozen, International, Foodservice and Commercial. The Grocery & Snacks, the Refrigerated & Frozen, the International and the Foodservice segments represent the businesses that will remain with ConAgra Brands and will become the primary four reporting segments of the independent company post-spin. The Commercial segment consists primarily of the Lamb Weston business. Starting with the Grocery & Snacks segment, net sales decreased 5% based on the actions I just discussed. These efforts, coupled with increased pricing and trade productivity, savings and supply chain and continued SG&A discipline, helped drive growth of 31% in adjusted segment operating income, which translated to a 680 basis points expansion in adjusted segment operating margin. The volume declines in this segment were largely concentrated on a few brands where we are reversing our historical practice of promoting below the $1 price point. Chef Boyardee, and Snack Pack are good examples. Importantly, we saw the margin and profit expansion that we were counting on. Equally important, key sales fundamentals like distribution remained on plan reflecting customer support for our strategy shift towards stronger brands and innovation. Keep in mind, the plan does include some important SKU rationalization. So when you see TPDs pull back in the near term, recognize that is part of a disciplined program to reduce non-value-added complexity while increasing facings and velocity on priority SKUs. You'll hear more about this at our ConAgra Brands Investor Day in Dave Biegger's supply chain presentation. Last point I'll make in this segment is that we continue to benefit from disciplined investment behind A&P-ready brands, such as Slim Jim and PAM among others. Now turning to the Refrigerated & Frozen segment. Net sales decreased 8% while adjusted operating profit increased by 310 basis points to 16% of net sales. The volume decline in this segment was heavily focused on Banquet, an important brand, as you know, is going through a significant makeover. As we've discussed in prior quarters, we continue to work to restage our Banquet brand resulting in increased pricing associated with long-overdue product and packaging upgrades. Accordingly, this was the primary driver of the volume and sales decline in the segment for the quarter. Banquet is now benefiting from much stronger margins, and our consumer data is also showing an improving buying rate from our most loyal consumers and key customers. As we move through the next calendar year and begin to wrap these actions, you will see top line sales declines moderate. From there, we will also fold in new product improvements and innovation. Regarding segment profitability here in Q1, our disciplined pricing actions and supply chain productivity more than offset the Banquet impact and the costs related to a product recall. One other planned action in Q1 is worth noting in Frozen. While Marie Callender's is not one of our historically over-promoted brands, it was over-promoted in the year-ago period. And that was not a good business decision, so we did not repeat it in Q1 this year. These two contributed to our volume decline, but, again, we saw the margin gains we were counting on. Elsewhere in the segment, we saw solid top line performance, namely in Reddi-wip, which continues to be a strong performer for us. The International segment, net sales decreased 6% due to the impact of foreign exchange. Excluding the effects of currency, segment net sales would have been approximately equal to the prior year's comparable quarter. Net sales for the Foodservice segment decreased 1%, and adjusted operating profit decreased 10% to $24 million. This segment was negatively affected by normalization of egg prices after last year's avian influenza outbreak. Overall, the four segments that will primarily comprise ConAgra Brands' ongoing operation post-spin have made good progress, demonstrating the strength of our plan and the opportunity that lies ahead. Much of our team have completed their first full quarter in our new headquarters in Chicago, at the Merchandise Mart, and there is tremendous energy and excitement to build upon our momentum as a pure-play branded company. Now turning to Commercial foods. As I said at the outset of my remarks, Lamb Weston delivered another great quarter, generating approximately 4% net sales growth. In our reported results, the strength of Lamb Weston's performance is masked by the fact that we include the impact of the divestures of Spicetec Flavors & Seasonings and JM Swank, which were completed at the end of July. Adjusted segment operating profit grew 33% in the quarter behind Lamb Weston's continued growth and favorable input costs. We continue to see significant opportunities to drive growth across the Lamb Weston business, leveraging its strong brand to capture emerging markets and international growth. Tom and the Lamb team look forward to sharing much more during their Investor Day on October 13 in New York. Before I conclude my remarks, I would like to acknowledge the hard work and dedication of our talented employees. Amidst significant change, including a successful move to our new headquarters, our team remained focused on delivering our goals and serving our customers. In addition to driving strong performance, our team is also dedicated to being a good corporate citizen, and we were honored to be named to the Dow Jones Sustainability Index for the sixth consecutive year, demonstrating recognition of our commitment to environmental and social goals in addition to economic objectives. Now turning to one of our newest team members, I would like to welcome our new CFO, Dave Marberger, who joins us from Prestige Brands. Dave brings more than 30 years of finance and leadership experience to ConAgra Foods, including ten years as the CFO at Godiva Chocolatier and Tasty Baking Company. I first got to know Dave during his time with the Campbell Soup Company, and Dave is a proven and accomplished finance executive, and I am confident he will be a tremendous asset going forward. We are extremely happy to welcome him to the team. With that, Dave, over to you.

Thank you, Sean, and good morning, everyone. Before I get into my comments, I would like to say how energized I am to be part of this organization and leadership team. I look forward to getting to know many of you and the investor community in the weeks and months ahead. I will address several topics in my comments, including our new reporting segments; a recap of our 2017 fiscal first quarter performance; a summary of items impacting comparability, including some brief comments on goodwill impairment, cash flow, capital allocation and the balance sheet; and some brief comments on our upcoming Investor Day. As we outlined in the release, we now report our business results in five segments. They are Grocery & Snacks, Refrigerated & Frozen, International, Foodservice and Commercial. The Grocery & Snacks, Refrigerated & Frozen and International segments were previously included in our Consumer Foods segment and Foodservice was previously included in our Commercial Foods segment. Upon the completion of the Lamb Weston spin, the commercial segment will include only the historical results of JM Swank and Spicetec through the divestiture date, and the Lamb Weston results will be reclassified to discontinued operations for all periods presented. Now I will provide some comments on our performance for our fiscal 2017 first quarter. Please note that references to adjusted earnings or operating profit referred to measures that exclude items impacting comparability. Overall, net sales for the fiscal first quarter approximated $2.7 billion, down 5% from the year-ago quarter. The divestiture of JM Swank and Spicetec and the negative impact of foreign exchange accounted for approximately 2 percentage points of the net sales decline versus the year-ago quarter. We reported diluted earnings per share from continuing operations in the fiscal first quarter of $0.42 compared with $0.38 in the prior year quarter. Adjusted diluted EPS from continuing operations for the first quarter was $0.61, 49% above the $0.41 delivered in the year-ago quarter and better than we planned. The strong first quarter EPS performance primarily reflects the benefits from continued gross margin expansion, lower SG&A expense and lower interest expense, partially offset by the impact of lower sales volume, lower earnings from our Ardent Mills joint venture and some costs related to a product recall. As I will discuss later, the first quarter overdelivery versus our plan was driven, in part, by timing items for both SG&A and A&P expense. In our Grocery & Snacks segment, net sales were $757 million for the quarter, down 5% from the year-ago period, reflecting a 6% decline in volume and a 1% improvement in price mix. Adjusted segment operating profit was $185 million in the first quarter versus $142 million in the year-ago quarter. The strong increase in adjusted profit reflects continued progress on margin expansion efforts, driven by pricing discipline and favorable product cost and productivity; reduced SG&A costs; and lower A&P spending due to timing, partially offset by the impact of lower sales volume. In our Refrigerated & Frozen segment, net sales were $605 million for the quarter, down 8% from the year-ago period, reflecting an 11% decline in volume and a 3% improvement in price mix. Adjusted segment operating profit was $97 million in the first quarter versus $85 million in the year-ago quarter. The increase in adjusted profit reflects the same continued progress on margin expansion efforts as outlined for the Grocery & Snacks segment, offset by approximately $9 million of costs related to a product recall. In our International segment, net sales were $195 million for the quarter, down 6% from the year-ago period, reflecting a 2% decline in volume, a 1.5% improvement in price mix and a negative 5% impact from foreign exchange. We reported a segment operating loss of $149 million in the first quarter, driven primarily by a pretax impairment charge of $164 million related to our Canadian business. I'll say more about this shortly. Adjusted segment operating profit was $15 million in the first quarter versus $17 million in the year-ago quarter. The decrease in adjusted profit reflects lower sales in gross margins and a negative impact from FX, partially offset by modestly lower A&P and SG&A expenses. In our Foodservice segment, net sales were $268 million for the quarter, down 1% from the year-ago period. Adjusted segment operating profit was $24 million in the first quarter versus $26 million in the year-ago quarter. This decrease reflects lower sales in gross margins, partially offset by lower A&P and SG&A expenses. In the Commercial segment, net sales were $843 million or 2% below the prior year quarter, driven by the JM Swank and Spicetec divestitures. Lamb Weston had a very solid quarter as net sales increased 4% versus the prior year quarter. The commercial segment's adjusted operating profit was $148 million versus $112 million in the year-ago quarter. This strong increase was driven primarily by the net sales growth and margin expansion in our Lamb Weston business, partially offset by the profit decline resulting from the JM Swank and Spicetec divestitures during the quarter. We realized proceeds of $486 million from these divestitures and recognized an aggregate book gain of approximately $198 million. We expect to utilize the capital loss tax asset to offset substantially all of the tax liabilities related to these divestitures. In addition to the segment information, I will also note the following matters related to corporate or total company performance. Equity method investment earnings were $24 million for the current quarter and $37 million in the year-ago period. The decline principally reflects lower profits from our Ardent Mills joint venture. Adjusted corporate expenses were $38 million in the fiscal quarter versus $66 million in the year-ago quarter, reflecting the benefits from our cost savings efforts, along with lower costs related to the timing of certain expenses that will come later in the fiscal year. Advertising and promotion expense for the quarter was $69 million, down 18% from the prior year quarter. Most of this decline was due to the timing of expense that will be incurred later in the fiscal year. Despite this lower spend, total gross rating points for our A&P investments were up 7% for the first quarter versus a year ago, reflecting improved efficiency. For the first quarter, foreign exchange negatively impacted net sales by $11 million and operating profit by $4 million versus the year-ago quarter. Moving on to our SG&A cost savings initiatives, we are making very good progress and expect to realize the remainder of our $200 million of SG&A savings over the next two years as planned. While we saw significant benefits from SG&A savings in the first quarter, I would point out that some of this benefit was due to the timing of certain expenses moving to later in the fiscal year. We estimate that the benefit from timing for SG&A was $25 million to $30 million in the first quarter. I will now briefly summarize the items impacting comparability this quarter. We had $0.34 per diluted share of net expense related to impairment charges. Approximately $140 million pretax relates to impairment of goodwill and approximately $24 million pretax relates to impairment of intangible brand assets, both related to our Canadian business. The charges are principally the result of several factors. First, the change in our reporting segments now requires us to evaluate goodwill at a lower level. In the past, under the previous reporting segments, we were only required to evaluate goodwill at the total International business level. We are now required to evaluate goodwill at each reporting unit within the International segment. Second, while the performance of our International business has been steady over the last several years on a constant currency basis, the significant weakening of the Canadian dollar has negatively impacted the value of the Canadian business on a U.S. dollar basis, which is used for the goodwill analysis. Finally, the brand impairment reflects both the unfavorable foreign exchange movements as well as some weaker top line trends in this portion of the business. In addition to the impairment charges, we recognized $0.17 per diluted share of net gain from the sale of the JM Swank and Spicetec businesses. We also recognized $0.04 per diluted share of net expense related to restructuring costs and costs related to the planned spinoff of Lamb Weston. And finally, we recognized approximately $0.02 per diluted share of net benefit from favorable adjustments to state tax assets. Moving on to cash flow, capital allocation and the balance sheet, we ended the first quarter with $795 million of cash on hand and no outstanding commercial paper borrowings. Total net cash flows from operating activities from continuing operations for the first quarter were $337 million versus $64 million in the year-ago quarter. This significant increase is due to the improved operating earnings in the current quarter and higher-than-normal income tax payments in the year-ago quarter. For the quarter, we had capital expenditures of $117 million versus $102 million in the prior year quarter. Net interest expense was $59 million in the fiscal first quarter versus $80 million in the year-ago quarter due to the paydown of debt during the past 12 months. For the quarter, we paid down approximately $554 million of long-term debt, and dividends for this fiscal quarter were $110 million versus $107 million in the prior year quarter. During the first quarter, we repurchased approximately 1.8 million shares of stock at a cost of approximately $86 million, and we had approximately $46 million remaining on our existing share repurchase authorization as of the end of the first quarter. We continue to 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 investments. Lastly, our estimated effective tax rate for income from operations remains at 33.5% for the remainder of fiscal year 2017. The first quarter reported tax rate was higher primarily from the tax impacts of the noncash impairment charge and the gain on the sale of JM Swank and Spicetec. As we have noted in the release, we are not providing any comments on our outlook today. Instead, we will provide more information on our outlook for fiscal year 2017 and the long-term algorithm for both ConAgra Brands and Lamb Weston at our upcoming Investor Days. We are excited about the opportunities to create value for both of these companies. This 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.

Just two questions on gross margin, if I could. In the quarter, gross margins expanded about 200 basis points and recognizing pricing and trade spend discipline and some input costs favorability were some key drivers, I guess, was any of this due to maybe some supply chain initiatives that may have been taken but not maybe yet talked too publicly? Or is more of that on-the-come, so to speak? And I then I've just got a follow-up.

Well, we'll talk quite extensively, Andrew, about our plans with supply chain when we get to Investor Day. But on gross margin, obviously, there are a number of different things that are contributing to the gains we are seeing and the size of the gains do vary quarter-to-quarter. But the important fact is that, over the past two years, we've made tremendous progress at gross margin and operating margin, and you saw that again this quarter. Quarter-to-quarter, the progress may vary due to a number of factors, but what I'm focused on is that we continue to move the centerline of our profitability north over time, while reducing the standard deviation around that centerline. On supply chain, look, first of all, clearly, the overall goal of our collective efforts is value and margin maximization. And supply chain productivity programs have always been, and will continue to be, an important component of that. And as Dave Biegger will share at our upcoming ConAgra Brands Investor Day, strong productivity has been a legacy strength at ConAgra, and you saw some of that also this quarter. We do have a strong track record of continuous improvement in terms of network optimization, procurement, T&W, etc., and now that we're upgrading our volume base and reducing low-margin business, we are providing a better foundation to build off of, as we plan for future margin accretive innovation. And Dave has obviously brought a fresh perspective around how to sustain that strong historic supply chain performance and build on it even further, and he'll share those views in a few weeks.

Got it. That leads into my next question regarding some of the recent filings, which indicate that ConAgra Brands currently has a gross margin that is significantly lower than that of its large cap peers. I'm curious about how much of this gap you believe is structural and whether there are reasons this gap can't be considerably narrowed over time. Will we hear more about this at the upcoming Investor Day?

Yes, it certainly will be, and if you picked up on one of the comments I made, Andrew, in my prepared remarks, if you look at our branded businesses in the U.S. as an example, you've seen margin improvement of about 700 basis points versus the same quarter two years ago. So clearly, we believe and we demonstrated that we can do the things necessary to expand those margins and by no means do we think our work is done. We will continue to chip away at that, and we'll do it using a number of different factors. And we talked about those factors but, hopefully, investors are getting a sense of how relentless we are in terms of pursuing margin expansion.

I wanted to ask for a bit of clarification on the quarter. You mentioned a timing issue that was around $30 million, which translates to about $0.05, and the lower tax rate potentially added another $0.04. So, if we consider this quarter, should we think of it as approximately $0.54? That's still a significant improvement over your initial guidance, but those two factors are worth noting. Am I understanding that correctly?

Yes. That's correct on the $30 million, David, with the SG&A and the tax rate is actually higher because of the impacts of the sale and the impairment.

I understand your point about the estimates for the quarter. Looking ahead, can you provide any insights on dyssynergies? Sean, your remarks have been very encouraging, but I often question whether there are inherent dyssynergies to address when separating these entities. It would be helpful to get some input, even ahead of the upcoming Analyst Day, as we're compiling forecasts today and would appreciate any information on dyssynergy calculations.

David, the strategy that we've been undertaking to transform this portfolio, we've been at it now for a while, and we have anticipated that you will have some things that flow back against you. It's one of the reasons why we moved so aggressively on the $300 million efficiency program right out of the gate is because we wanted to stay out ahead of this stuff. Similarly, it's the same reason our supply chain team is aggressively trying to get out ahead of any absorption benefits that we might lose when we pull back on volume. So we try to look around corners. We try to anticipate it and then we try to stay ahead of it. So with respect to ConAgra Brands, sure, there will be some modest stranded as we go ahead and step through these things, but that's part of the reason why you see us getting so aggressive on costs. Lamb is a standalone company, and you'll see the details on that in the Form-10. And obviously when you set up a standalone company, you're going to incur some unique costs for doing that but obviously, we strongly believe the benefit of having Lamb as an independent pure-play company with its great performance and growth prospects is really the story there. That's a terrific equity, and we can't wait to tell investors about the story in a few weeks.

Sean, in your prepared remarks, you mentioned efforts to distance yourself from price-sensitive consumers by moving away from several promotional programs, which I believe is a sensible approach. However, one challenge you might encounter at the Analyst Day is that the perception of the ConAgra portfolio is that many of its brands cater to price-sensitive consumers and are seen as value brands. In your analysis of those brands, have you identified a segmentation among consumers, noting what percentage are truly price-sensitive for products like Chef, and what percentage are very loyal? Do you have any insights on this that could assist us?

Yes, I'll make a brief comment and then I'll turn it over to Tom McGough for additional insights. When we discuss the price-sensitive consumers who focus primarily on prices, it's important to note that this group represents only a small portion of our overall user base. In fact, there are far more brand-loyal users, particularly for brands like Banquet. The challenge lies in addressing the needs of this small, highly price-sensitive group, as it can negatively impact the overall business balance. We have strong brands, and remember, there are millions of households earning around $50,000 a year that seek good value, yet they are also very brand loyal. Tom, do you have anything to add?

Sure. What I'd add is, we will provide data that splits our volume base across loyals and switchers, and the vast majority of our consumer base are those consumers that are loyal that buy their purchases based on the strength, the benefit, the features of our products. I think what Sean highlighted is that, by focusing on incremental volume to trade promotion, we're subsidizing the purchases of those people that would normally buy us at full retail price. And our focus on trade is trying to improve the ROI on those merchandising events. So at the end of the day, we will have a stronger consumer base with a higher percentage of loyal consumers, and we will drive margin improvement through the trade productivity that we will invest in those attributes that those consumers are looking for over time.

In looking at the SG&A reduction, I know you talked about how some of it was temporary. I'm trying to get a sense though of how much of the remainder of that, right, is still the majority of that reduction that's not being deferred to later in the year, we can think of as maybe permanent. So maybe could you help us break out some of the drivers of that reduction, may be roughly bucket headcount reductions versus A&P savings, things like that? And I guess, as a carload to that, in terms of the amount that was pushed out of 1Q, I think you said $25 million to $30 million, could we model all of that being in 2Q? Or should we spread that throughout the year, as we look ahead?

First of all, Ken, I'll start, and Dave, if you want to add any color, go right ahead. The SG&A program that we've been focused on is a $200 million program, that is not an A&P program. That is a structural SG&A program. And we are, obviously, making great progress against our $200 million goal. Yes, we are tracking a bit of schedule but also some of what you are seeing, as Dave mentioned, is timing. And we're going to get into our outlook in terms of how it will flow going forward in a few weeks when we get to our Investor Day for ConAgra Brands. But the way I'd think about SG&A or for that matter, any inefficiency opportunities, we got our targets, we're making good progress on our targets, and we'll always continue to look for more pockets of inefficiency because it just gives us more fuel for growth.

And Ken, let me address that. If you examine SG&A and account for all the adjusted items, the total SG&A has decreased by about $75 million for the quarter compared to last year. As I mentioned earlier, around $30 million of that is mainly due to timing and will be recognized in a later quarter. Therefore, the incremental run rate for this quarter is approximately $40 million to $45 million. We initiated the savings in fiscal '16 during Q3 and Q4, so Q2 will see another significant increment, and then it will begin to stabilize in the second half of this year with smaller increases. By the end of this fiscal year, we expect to have achieved 85% to 90% of the total $200 million reduction plan.

Okay, that's helpful, Dave. Quick follow-up, if I can. On Lamb Weston, you decided to load it up with a decent amount of leverage. Is that the natural result of wanting ConAgra Brands to have a squeaky clean balance sheet, maybe for M&A? And I'm a little confused about the decision to spin it off without a permanent CFO in place, it's a little unusual. That's not about anyone in particular, I like John, I'm just not sure how much confidence investors are going to have in whatever path is, I guess, outlined at the Analyst Day given that there is a new CFO coming in a few months later. So maybe you could help us understand the decision-making there?

Yes. Let me provide some clarity, Ken. Regarding Lamb leverage, the ConAgra Board is focused on maximizing total value, and this is a key consideration when making decisions about leverage. As you will see at Lamb's Investor Day in a couple of weeks, it is a very strong business with robust cash flows, and we are confident it will continue to succeed. We will hold off on discussing specifics about capital priorities until the Investor Day. Concerning the Lamb CFO, the important point is that we are making significant progress in assembling the Lamb management team. You will learn more about these individuals shortly, as well as our plans to fill the Board with experienced professionals who will help the company get started successfully. We are advanced in the CFO search process, and while I won’t disclose details or motives publicly, we are fortunate to have John Gehring assist us in launching this process. For those who missed Ken's earlier comments, it was mentioned that John will serve as the Interim CFO in the coming months as we establish Lamb. We will have more information about our permanent CFO in the near future.

I have two quick questions. First, I might have missed this, but what is the effective tax rate for the quarter after excluding all one-time items?

The clean effective tax rate, 33.5%.

Okay. The second question for you, Sean, is regarding the process of reducing your promotional activity and the resulting decrease in volume. As velocity slows, it has a tendency to exacerbate the situation. Can you elaborate on what actions you are taking to prevent a scenario where you maintain the right volume base but struggle to regain momentum? Additionally, could you confirm if advertising and marketing might be down this quarter while you're still in the process of resetting volume, which could impact your brand support?

There's a lot to cover. Let me highlight the key points. First, our efforts resemble remodeling a house; it can be messy, but it's essential for achieving our goals. We are focused on profitable growth rather than just any growth, and we closely monitor indicators to ensure that our business remains on track. For instance, if you analyze the scanner data, you'll notice significant differences between baseline trends and promoted trends. Additionally, our baseline velocities are stable. While TPDs are decreasing, this is because we've been actively removing a long list of low-margin, unproductive SKUs that no longer add value for our customers. This is part of effective category management. We aim to support products that are performing well by updating them, introducing new innovations, and providing appropriate marketing support. Regarding your question about marketing support this quarter, yes, A&P spending was down. This is partly due to timing, as we want our A&P budget to align with planned marketing actions like product launches and significant promotions. Some of the spending reduction reflects our commitment to eliminating ineffective marketing efforts. Additionally, we were able to increase GRPs by 7% this quarter with fewer dollars, which is a positive outcome. It's crucial that we maintain this level of support while we adjust our promotions, allowing us to shift the consumer conversation beyond just price. We will discuss this in more detail, along with our portfolio segmentation strategy, at our upcoming Investor Day.

Two questions. Firstly, on the volume declines. You talked a lot about how a lot of that's deliberate given the actions that you're taken to improve the quality of revenues. Are you able to tell us if you haven't taken those actions, what the underlying volume decline would have been? And further, are you able to tell us roughly what proportion of overall volumes are associated with these consumer segments that you're really not that interested in? So volume is the first one. The second question is we're hearing from a number of places that retailers, particularly large retailers, are beginning to demand more reinvestment in price and promotional activity, which seems to be the opposite direction from where you're going. How do think that's going to play out in 2017? And are you confident that you can sort of hold your ground without losing distribution?

Sure. Alexia, I'll address the second question first. The request for more promotions from some retailers varies significantly by category, depending on their objectives. Generally, our customers are focused on growth and innovation. They want us to evolve our brand to compete on quality rather than just price. There's an increasing demand for challenger brands that emphasize natural, organic, and premium attributes. These are priorities for many of our retailers. This focus is why we're evolving our existing businesses and adding complementary ones like Frontera and Blake's. Regarding our volume, it's essential to highlight that while our actions are widespread, the volume decline is quite concentrated among our six brands, each with its unique situation. Taking Banquet as an example, locking a brand to a $1 price point for ten years is not a sound business choice, as it pressures margins and food quality, while training our loyal customers to buy based on deals. This change was necessary. While the immediate results might look unfavorable, it has improved margins significantly. Moving forward, we need to support the brand with strategies beyond price, which is what our customers expect from us.

This is Lubi filling in for Akshay. The first question is about the consumer brands businesses. Can you comment on the advertising expense this quarter? I'm trying to understand how it contributes to the profit outperformance this quarter. How much did advertising expenses decrease during the quarter? And what should we anticipate for these expenses going forward?

Advertising and promotions decreased this quarter, as we mentioned earlier. Gross rating points increased, which resulted in a higher impact, but our spending was lower. We will allocate some of those funds to the remaining quarters of the year, as discussed. Part of this was related to timing, and part was due to improved efficiency.

Sean, you mentioned in your prepared remarks that there were some good outperformance from the supply chain team in offsetting some of the overhead absorption from the volume declines. Can you talk a little bit more specifically about how they're able to go about achieving that? And then related to that, how were the volume declines tracking versus your expectations going into the quarter?

The supply chain team at ConAgra has been performing exceptionally well for quite some time. We plan to share more about our capabilities with investors in a few weeks. Historically, we have achieved strong gross productivity performance, and we are dedicated to not only maintaining that but also finding new ways to enhance it, which we will detail in the coming weeks. Regarding overall volume, it aligns well with our expectations. Looking back at our recent quarters, I've aimed to be very open about our strategy, its implications, and that it may not always be an easy path, but undertaking this journey is crucial for us to reach a better position. We believe we are on the right track.

Sean, you've made significant improvements to the value proposition. I'm curious about the changes in consumers over the past three or four years. How much of it is due to changing consumer behavior, where strategies that were effective four years ago may not hold the same relevance today? And how much of it is you applying a fresh perspective and new methods to the business? I'm asking this because perhaps these trends continue, and it seems to be a much better time for lower and middle-income consumers right now, with falling gas prices and wage growth. I wonder if this overall improvement is contributing to your pricing strategy and possibly surpassing expectations in results.

When a consumer looks at a brand, it conveys a message to them. For a long time, our brands focused on deals, positioning ourselves as a deal brand. Interestingly, even low-income consumers are seeking communication from brands beyond just discounts. In the past, our PAM business relied heavily on promotions, but if we examine consumer trends in oils recently, there has been a shift towards options like olive oil and coconut oil. Instead of competing solely on price for PAM, we have adapted by introducing olive oil PAM and coconut oil PAM. These modern attributes align with what consumers value and are willing to pay more for, moving the conversation away from deep discounting. This is just one example, and we will share more at our Investor Day. This approach is essential for enhancing customer loyalty, increasing our prices, and strengthening our brand to align with current market preferences.

It's actually Michael Walsh filling in for Todd. Sean and Dave, you've been consistent in publicly stating your desire to retain an investment grade credit rating. And earlier, you mentioned that as well. You also mentioned debt reduction, and I know ConAgra Brands will get a $675 million payment from Lamb Weston with the spin. You're going to lose a chunk of EBITDA. Can you just talk about how much debt reduction you expect going forward? And do you have any type of leverage target that you would manage your balance sheet to?

Yes, thanks for the question. With respect to balance sheet questions, we're going to get into that in earnest in a few weeks at Investor Day. But with respect to ConAgra Brands, big picture as we've said and as you pointed out, as we intend to continue our commitment to being rated investment grade, we'll continue to a balanced capital allocation philosophy with strong dividend and a willingness to buy back shares and an appreciation for smart, value creating M&A. All of those things are fair game, which is not a departure from where we've been but rather very consistent. But we'll get into more details here on that in a few weeks.

Thank you. As a reminder, this conference is being recorded and will be archived on the web as detailed in our news release. As always, we're available for discussions. Thank you for your interest in ConAgra.