Conagra Brands Inc (CAG) — Q2 2017 Earnings Call Transcript

Good morning. During today’s remarks, we will make some forward-looking statements. While we’re making those statements in good faith and are confident about our Company’s directions, we do not have any guarantee about the results that we will achieve. If you would like to learn more about the risks and factors that could influence and impact our estimated results, perhaps materially, I’ll refer you to the documents we filed with the SEC, which include cautionary language. We will also be discussing some non-GAAP financial measures during the call today, and the reconciliations of those measures to the most directly comparable measures for Regulation G compliance can be found in either the earnings press release or in the earnings slides, both of which can be found on our website at conagrabrands.com/investor-relations. Now, I’ll turn it over to Sean.

Thanks, Johan. Good morning, everyone, happy holidays. Thank you for joining our second quarter fiscal 2017 conference call. We’re excited to be with you this morning for our first call as ConAgra Brands, with the spin-off of Lamb Weston successfully behind us. We have embarked on a new era as a branded pure-play CPG company. We’ve made a lot of progress to get to this point, but more importantly, we’re confident that we have a lot of runway to deliver significant improvement in profitability in the years to come. On today’s call, I’m going to take a few minutes to provide some context around where we are and our expectations going forward. I’ll also touch on the progress we’re making against our strategic plans. I’ll cover a few highlights from the quarter and Dave will get into the details before we take your questions. For those of you who are able to join us at our Investor Day in October, you will recall that I left you with six key takeaways about the business and our plans for the future. First, we have clearly moved beyond our roots as an ad company, and later a global conglomerate. ConAgra Brands today is a much different organization. As we discussed with you in October, the differences aren’t just structural. Our culture has fundamentally evolved. The team has developed the focus and discipline required to succeed. Hand-in-hand with these cultural changes are the revenue management capabilities we’ve developed and the deep commitment to cost and complexity reduction efforts now embedded in our organization. We expect these efforts will fuel additional margin expansion over time, which in turn will fuel improved growth and cash flow. It’s also worth repeating that we’re in a unique position to reshape our portfolio in an efficient manner. We have a strong balance sheet and an attractive tax asset. Over time, we can leverage both in a disciplined manner to drive additional growth and maximize value. We have driven a lot of change in our organization, and we won’t stand still. As we continue to implement changes, we will do so in an orderly, thoughtful, and patient manner. We will continue to move with urgency, but our efforts will require time and investments. Moving to slide seven, our actions will continue to be guided by the five portfolio management principles that I introduced on our Q1 call, and that Tom and Darren described in detail at our Investor Day. We will stay focused on; number one, upgrading the volume base; number two, refreshing our core; and number three, the clear roles we’ve assigned to the brands within our portfolio via our rigorous portfolio segmentation process. We will also; number four, ramp up innovation and disciplined M&A; and number five, effectively back our winners with proper A&P and trade investment. Make no mistake, we intend to grow. But we will do so in a manner that is profitable and drives shareholder value. Our PMPs will continue to guide us in that regard. We’ve already made significant progress in shifting our approach to managing the portfolio. The segmentation we described at Investor Day, shown here on slide eight, reflects the renewed focus we have brought to our brands. We have grouped each brand into one of four categories. We invigorate, accelerate growth, reliable contributors, and then grow core and extend. This framework guides our investment priorities, particularly around A&P and innovation. This effort is important to driving improved overall profitability, and has been recognized and commended by our customers, particularly our early efforts on brands like Chef Boyardee and Healthy Choice. Moving to slide nine, we are clear-eyed that our success will require us to break a number of bad habits, and we are making meaningful progress. We are moving from a focus on volume at any cost to a focus on value creation. From a reliance on trade-driven push tools to a reliance on stronger brands, stronger innovation, and consumer pull. As I just mentioned, we’re shifting away from SKU proliferation to optimizing our SKUs with a focus on sustainable returns. We are continuing to make strides in our approach to A&P, which is now more focused, consistent, and tied to ROIs. Our focus on the fundamentals is translating into results. As you can see on slide 10, it was another quarter of progress. We continued to execute our strategy of building a higher quality revenue base, consistent with portfolio management principle number one. The headline on net sales is an 11.5% decline. But I want to call your attention to the next line where we note the 5.5% estimated impact of divestitures and foreign exchange. Our net sales were down as a result of the actions we’re taking to optimize our portfolio, and drive our value-over-volume strategy to upgrade our revenue base. Adjusted operating profit was up 11.6%, driven by strong gross margin expansion, improved mix, more efficient pricing and trade, and continued SG&A savings. This resulted in a 350 basis-point increase in adjusted operating margins to 17%. We delivered adjusted diluted EPS of $0.49 for the quarter, up 26% from the prior year’s quarter, driven by operating income growth and lower interest expense. It’s worth noting that our bottom line reflects core operating performance that was slightly ahead of our expectations, offset by weaker than expected performance from our Ardent Mills JV. Ardent has been negatively impacted by a broader set of market dynamics in the milling industry. To illustrate the point on value over volume, slide 11 shows some of the information that Tom McGough first shared at our Investor Day. The chart on the left shows that we’ve been willing to walk away from lower ROI promotional activities and thus, our incremental volume sales have significantly declined as planned. We began to reduce our reliance on promotions during the second quarter and third quarter last year, so we will soon be lapping these results. The chart on the right shows a steady increase in base sales velocity trends, which illustrates that our efforts are working to build a stronger foundation as core consumers are staying with our brands. Looking ahead at our margins, we are clearly making progress. Versus last year’s Q2, we have driven 250 basis points of gross margin improvement, behind our pricing and trade promotion discipline, supply chain productivity, as well as some input costs favorability. While our second quarter has traditionally delivered a higher margin, we are confident that we will be able to sustain the improvement and hit our gross margin guidance for the year. On the right side of the slide, you can see our operating margin improvements. Helping this number is the fact that our SG&A optimization efforts have come in quicker than we anticipated. In the back half of the year, we will continue our efforts to invest in new capabilities at our brands and thus, we expect operating margins to fall in line with our guidance. While we’re pleased with our margin results to date, we know there is more we can do from here. Our game plan is to grow the center line of our profitability over time. We understand that there is a standard deviation from quarter to quarter, but we’re taking a longer-term view. We’re focused on the center line, and we continue to see room to grow. Our gross margin progress reflects our ability to quickly capture some of the low-hanging fruit we identified early on. Looking ahead, there are no major structural issues preventing us from delivering further improvement, so we will continue to chip away at that opportunity. Another opportunity we’re focused on is successfully expanding into on-trend categories. The Frontera acquisition is a great example. It opens up an opportunity to capitalize on the rapid growth in Gourmet Mexican Cuisine. It has been a pleasure working with Rick Bayless, and the integration process is moving forward according to plan. Turning to slide 15, as we move forward into the remainder of fiscal 2017 and beyond, we will continue to execute against our portfolio management principles. In the second half of fiscal 2017, we’ll be lapping last year’s pricing actions and expect to see corresponding improvement in our top-line trend as we continue to expand our margins. Our innovation progress is also accelerating, and we expect to see our new products hit the market in early fiscal 2018. As I just said, we will continue to chip away at the gross margin opportunity while we deliver profitable growth. We will look to continue to reshape our portfolio. This may include exiting brands in an efficient manner, using our tax assets. It will also include augmenting our current portfolio through a disciplined approach to M&A. We still have a lot of work to do, but we’re pleased with the progress we’re making. We are confident that the plans we have in motion are the right ones to drive improved consistency and profitability at ConAgra and long-term value for our shareholders. Before I turn the call over to Dave, I want to thank our talented, dedicated ConAgra Brands’ employees, who continued to do a tremendous job, serving our customers and executing our strategy. I’m grateful for all you do and wish all of you a happy holiday season. Now, over to you, Dave.

Thank you, Sean. Good morning, everyone, and happy holidays. Slide 17 outlines a few key points related to our basis of presentation. Lamb Weston and related joint ventures are now reclassified as discontinued operations. The commercial reporting segment for the second quarter and ongoing will have no current operating results. It will only include the historical results for Spicetec and J. M. Swank. Please note that references to adjusted items refer to measures that exclude items impacting comparability, and reconcile to the growth closest GAAP measure and tables that are included in the earnings release and in the presentation deck. The Spicetec and J. M. Swank businesses, which were divested in the first quarter of fiscal year 2017, are included in the historical results, and are not called out as items impacting comparability. Moving to slide 18, reported net sales for the second quarter were down 11.5% compared to a year ago. Adjusted gross profit dollars were down 3.6% versus the second quarter a year ago; as gross margin improvement was more than offset by volume declines, unfavorable FX, and the sale of the Spicetec and J. M. Swank businesses. Adjusted gross margin was 31.1% in the second quarter, an increase of 250 basis points compared to a year ago. This increase was driven by supply chain costs reductions, productivity gains, and improvements in pricing and trade efficiency. Adjusted operating profit increased 11.6% due to the large reduction in SG&A, which offset the gross profit dollar decline. I will discuss SG&A in more detail shortly. Importantly, adjusted operating margin was 17% for the second quarter, up 350 basis points from the second quarter a year ago due to the gross margin improvements and SG&A reductions. Adjusted earnings per share was $0.49 for the second quarter, up 26% from the prior year due to significant SG&A reductions and lower interest expense. Slide 19 shows the drivers of our second quarter net sales change versus a year ago; total net sales were down 11.5%; divestitures and FX negatively impacted net sales by 5.5%; volume declines contributed 7% of the decrease, partially offset by a 1% improvement in price mix and trade productivity. Slide 20 highlights our continued strong SG&A performance, resulting from the restructuring we started in fiscal year 2016. Note that this chart represents adjusted SG&A, excluding A&P expense. A&P is included as part of SG&A on the face of the financial statements. Adjusted SG&A was down 21% in the second quarter versus a year ago. For the first half of fiscal year 2017, adjusted SG&A was down $129 million, or 25%. SG&A, as a percentage of net sales, was 9.5% for the second quarter and was 9.8% for the first half of fiscal year 2017. In the second quarter, we continued to benefit from timing on certain SG&A expenses, which we expect to hit in the second half of fiscal year 2017; having said that, we are pleased with our first half SG&A performance, as we are realizing our cost savings goals a bit faster than we planned. Moving to slide 21, this chart outlines the drivers of EPS improvement from $0.39 in the second quarter a year ago to $0.49 this quarter, which is a 26% increase. As we expected, the EPS impact of volume decline was offset by the gross margin expansion from supply chain cost reductions and productivity gains, as well as pricing and trade efficiency improvements. The supply chain gains represented approximately two-thirds of the gross margin increase, while pricing and trade represented one-third. Negative FX from the weakening of the Mexican peso and the divestiture of Spicetech and J. M. Swank were more than offset by the EPS benefit of SG&A cost reductions and interest expense declines due to lower debt. Slide 22 highlights the net sales and adjusted operating profit by reporting segment. In our grocery and snacks segments, net sales were $854 million for the quarter, down 6%, reflecting a 7% decline in volume and a 1% improvement in price mix. Adjusted operating profit was $222 million in the quarter, an increase of 18%. The increase in adjusted operating profit reflects continued progress on gross margin expansion, reduced SG&A costs, and lower A&P spending, partially offset by the impact of lower sales volumes. In our refrigerated and frozen segment, net sales were $740 million for the quarter, down 10.5%, reflecting an 11.4% decline in volume and a 1% improvement in price mix. Adjusted segment operating profit was $120 million in the second quarter, down 7.5%. The decrease reflects continued progress on margin expansion efforts that were more than offset by volume declines and the impact of benefits in the prior year’s quarter from avian flu-related higher volume and sales for Egg Beaters. Our Egg Beaters products' supply was not impacted as a result of the avian flu outbreak, creating the sales opportunity in the prior year quarter. In our international segment, net sales were $211 million for the quarter, down 4.5%. This reflects a 2.5% decline in volume, a 2% improvement in price mix, and a negative 4% impact from foreign exchange. Adjusted segment operating profit was $18 million in the second quarter, down 17%, driven primarily by the negative impact of the weakening Mexican peso. Reported segment operating profit includes a $44 million pre-tax impairment charge to goodwill due to the impact of the weakening peso on our business in Mexico. In our Food Service segment, net sales were $283 million for the quarter, down 1%. Adjusted operating profit was $32 million in the second quarter, an increase of 56% versus a year ago. The net sales results reflect a decrease in sales from exiting a non-core food service snack business. The adjusted segment operating profit increase was primarily due to a one-time inventory write-down cost incurred in the year-ago quarter for the business we exited. As mentioned earlier, there were no sales or adjusted operating profits in the commercial segment this quarter, given the Spicetec and J. M. Swank divestitures and the reclassification of the Lamb Weston business to discontinued operations. Slide 23 summarizes select cash flow and balance sheet information for the second quarter of fiscal year 2017 versus the year-ago period. We ended the second quarter with $3.5 billion of total debt and approximately $1.4 billion of cash on hand. This results in net debt of approximately $2 billion with no outstanding commercial paper borrowings. In the first half, total debt was reduced by approximately $2 billion. As we have stated in the past, we remain committed to an investment grade credit rating for the business. We had capital expenditures of $118 million for the first half of the 2017 versus $110 million in the comparable year period. As previously announced, the Board of Directors approved its first dividend since the completion of the spin-off of the Lamb Weston business on November 9, 2016. A quarterly dividend payment of $0.20 per share will be paid on March 1, 2017, to stockholders of record, as of the close of business on January 30, 2017. During the second quarter, we repurchased approximately 2.2 million shares of stock at a cost of approximately $85 million. Approximately 300,000 of these shares were repurchased before the spin-off. In addition, I want to note the following items related to corporate or total Company performance. Equity method investment earnings were $17 million for the quarter, down 2% versus the prior year due to the Company’s Ardent Mills joint venture performing below expectations due to market conditions. Adjusted corporate expenses were $36 million for the second quarter versus $54 million a year ago, reflecting the benefits from our cost savings efforts. Advertising and promotion expense for the quarter was $97 million, down 9%. Advertising and promotion, as a percentage of net sales, was approximately 4.7% for the second quarter, up from 4.5% a year ago. Net interest expense was $54 million in the second quarter versus $79 million a year ago due to the pay-down of debt during the past 12 months. For the second quarter, foreign exchange negatively impacted net sales by $9 million, and operating profit by $6 million versus the year ago quarter. Lastly, the second quarter effective tax rate was 32.4%. The effective tax rate was slightly lower than planned due to reduced tax expense related to stock compensation expense. I will now briefly summarize the items impacting comparability this quarter; approximately $0.03 per diluted share of net expense or $20 million pre-tax related to restructuring plans; approximately $0.09 per diluted share of net expense or $61 million pre-tax related to extinguishment of debt, primarily related to the Lamb Weston spin-off; approximately $0.09 per diluted share of net expense or $44 million pre-tax related to an impairment of goodwill in the Mexican business; and approximately $0.02 per diluted share of net expense related to tax items associated with the Spicetec and J. M. Swank divestitures. Slide 24 summarizes our full-year fiscal 2017 financial outlook, which is the same outlook we provided at Investor Day in October. As we communicated at Investor Day, this outlook was based upon a pro forma fiscal year 2016 P&L base, which excluded the Lamb Weston and J. M. Swank, and Spicetec results. Lamb Weston is now included in discontinued operations, and is excluded from the ConAgra Brands historical information. However, J. M. Swank and Spicetec are not accounted for as discontinued operations. So those results are included in the historical financial information for ConAgra Brands. As quickly noted on this chart, if you include the J. M. Swank and Spicetec net sales this fiscal year, 2017 net sales outlook is minus 8.5% to minus 9.5%. To be clear, this is not a change in our outlook. We just wanted to provide you with additional detail of the fiscal year 2017 outlook with Spicetec and J. M. Swank included. So, in summary, ConAgra Brands continues to make progress upgrading our volume base. Gross margins are expanding, and our SG&A cost reduction program is progressing well. Our balance sheet is strong and gives us the flexibility to evaluate various opportunities to drive shareholder value. Our outlook for fiscal year 2017 remains unchanged as we start the second half. Thank you. This concludes my formal remarks. Sean, Tom McGough, and I will be happy to take your questions. I will now pass it back to the operator to begin the Q&A portion of the session.

Sean, I know that in past conference calls, I think you’ve talked about how something around six brands or so were accounting for 80% or so of the volume decline. To the best of our ability in tracking some of the recent scanner data, it seems like the volume declines have broadened out maybe to a much broader set of brands across the portfolio, even some of those that are in the accelerating growth sort of quadrant. I just want to get a sense of, is that something that you see in your data? If so, what brings that about, and is it consistent with the expectation that volume trends look to start to improve in the back half of the fiscal year?

Andrew, let me start that, and Tom if I miss any granular detail here, feel free to chime in. What we’re seeing is pretty much exactly what we expect to see. Our actions are, in fact, broad-based and largely around promotion and pricing. But I think big picture, clearly, we’re out to transform this Company, unlock value, and for some time now, we’ve been very proactive in communicating that we need to change some of our legacy practices, and walk away from some of the low-margin volumes that those practices had embedded in our base. We’re doing that and it is working. Big picture, we’re focused on unlocking margin potential. For that to happen, it is a mandate that we change our practices across our brands and upgrade our volume base, and ramp-up an improved brand-building and innovation capability. That’s what we’re doing. I do like what I see, and in the back half, you will see trends improve. In fact, as the most recent takeaway data shows, that’s already beginning to happen.

We are taking a focused and disciplined approach to adjusting the pricing of brands that were previously underpriced and over-promoted, which also includes optimizing our SKU mix. We are upgrading our volume base, shifting towards a more promotional focus with higher margins. Specifically for Q2, there are a few unique aspects to note. Firstly, our presence in the refrigerated segment includes Egg Beaters, and last year we benefited from sales due to the avian flu, which did not affect our supply. Secondly, last Q2 was a significant promotional period for our premium yield brands like Healthy Choice, Marie Callender, and Bertolli. As we progress into the second half of our fiscal year, we will begin to see the effects of that trade promotion. Additionally, at the start of the quarter, we experienced some residual supply issues from PF chains, which affected our merchandising. By the end of the quarter, there was also an industry-wide issue regarding nitrous oxide that impacted Reddi-wip. Overall, we are on track and are successfully building and upgrading our volume base.

Thank you for that color. As a follow-up, the EBIT decline in refrigerated and frozen, even excluding the benefit last year from Egg Beaters and avian flu, was still lower year-over-year. So, I’m just trying to make sure, I understand how that lower EBIT would be consistent, obviously, with the plan around upgrading volume and the expectation that brings about better margin and profitability.

I’ll defer back to Andrew’s question.

To finish the point on Andrew, Andrew, the actions we are taking in Refrigerated & Frozen that you’ve got some weird things in there like the windfall benefit we had last year on Egg Beaters and things like that that didn’t repeat this year, but we are discontinuing significant activities and SKUs that have some profitability associated with it. But frankly, it’s fundamentally not up to our margin standards. We are going to continue to do that, that’s all part of resetting our volume base and creating the right foundation to build up in the future. Dave?

I'll just add one thing here, the impact of Reddi-wip included some costs that affected our operating profit as well. If you take into account both the Egg Beaters and the costs from Reddi-wip, you’re essentially even in terms of operating profit amid the sales decline.

All right, Matt, over to you.

Thanks. Happy holidays, everyone. Thanks for the question. From a supply chain perspective, you've highlighted some of the gross margin favorability being driven by productivity and favorable input costs. I’m just curious relative to the algorithm you laid out at the Investor Day with 3% plus realized productivity, 2% inflation. How do those benchmarks compare to where we are in the first half of this year? On the realized productivity, how far or long are you in the process of being able to achieve those new benchmarks consistently? Are we already there, or are we working toward it?

Yes, I would say the supply chain team continues to do a great job. They have a very strong track record, as Dave Biegger pointed out on Investor Day, and they are not satisfied with that; they believe they can achieve more, and it's not something we will accomplish overnight. However, we are making good progress. I would say we are where we expect to be. Any additional insights, Dave?

Yes. As I mentioned, about two-thirds of the gross margin improvement was driven by the supply chain. Our long-term guidance on inflation was 2.3%, but it's around 1% for fiscal year 2017. As Sean said, we are on track with the realized productivity. We are currently benefiting from a favorable inflation environment, although at Investor Day, we anticipated higher inflation in the first half of the year. So, we are on track.

Okay, great. Thanks. And just one more question, Sean, regarding the promotional environment. You’re obviously still very focused on moving past some of last year’s less productive activity. But in a few other categories like frozen meals, we’ve seen some evidence of more competitive promotion in recent months. Just curious for your observations there whether you’re running into anything that would make it more challenging to follow through on what you’ve intended to do without seeing a little bit more pronounced competitive impact?

No, I think you’re always going to see some differences regionally; you’ll see some differences by customers in terms of behaviors and whether or not they are trying to go to more than every day low price or a high low environment. Overall, guys; since I've been here, it's been fairly rational. We'll have to continue to monitor, are there spikes or pockets of irrationality. We will defend our business as we need to because we need to continue to make sure that our market share is competitive. But on average, I’d say it’s been pretty reasonable and we just monitor this very carefully and take the actions we need to take.

Good morning. This is Weill Cornell with a few questions for David. First one is just looking at kind of where you’re at so far this year, nice feature relative to the consensus in the first two quarters. Why hasn't the maybe the top end of guidance gone up for the full year? If I could really hone in here, I’m looking at an operating margin of 17% in the second quarter and realized there’s some seasonality here. But the guidance kind of implied an operating margin of 14.5 over the balance of the year. So, it seems like trough, while some what we're running at. I just wanted to know what are the factors that play into these numbers?

Yes, let me give you my true sense on that and Dave can weigh in. Clearly, I am very pleased with our margin progress. We have harvested some low-hanging fruits. We’re in a benign inflationary environment, and we’re benefiting from some timing and SG&A increases from short-term vacancies. As Dave pointed out, we need to sustain these margins in the back half and then our top-line trends to hit our guidance. I’m confident we’ll do just that. But two months post Lamb spent, it's still early days. So, we’re standing by our previous guidance and staying very focused on continuing to execute well.

Okay. And lastly, I’m sorry.

No, I think you've covered it, right.

Okay, great. And then lastly just one on kind of some of the advertising and consumer promotion spending. I think you said there might have been a shift in that in the quarter. So just wondering kind of back half what this A&P spending looks like. Is it flattish with upward or is it down and kind of what’s the full year outlook for A&P spending?

Let me give you how I think about A&P. Our A&P was down in the quarter, but take a look at the absolute rate. I think we’re about 4.7%, that is a very healthy level of A&P in my book. So, I feel good about that and we’ve continued to find inefficiency in our previous A&P spend. Just like in place, also in our portfolio, if we can get inefficiency out we do it. We also like to line up our A&P with when we have important in-market activities. So, as you can imagine, with our new innovations coming out in early Q1 of next year, we’re going to have some momentum that we’ve got to build going into that. So, you’ll see a good A&P investment from us in the back half without getting into granular detail there.

I have two questions, if I could. Somewhat a little bit on Cornell's question there on A&P. I guess related to that, there has been some SG&A related spending that has been kind of deferred to the second half of the year. Is that A&P or is there more than just A&P in that? Maybe related to that, in the first quarter, you mentioned maybe something around $30 million of SG&A that kind of pushed through the back half and that still a good number that would apply to the back half of the year?

Let me give you a little insight on that. So, the SG&A that we talked about that I went through excludes A&P. When you see SG&A on the face of the financial statements, A&P is in that, but we’re talking about separately here. So, in the first half, we were favorable on SG&A. We have open positions that we’re continuing to fill. We’re building our capabilities here, and if we make progress in the second half there, that will clearly increase our SG&A percentage. There are also some internal projects that are really backend weighted. So when you look at, we’re going to be closer to the target for SG&A that we talked about at Investor Day at 10.8% of sales. So, that’s kind of how we look at the second half related to SG&A excluding A&P. I think Sean covered the A&P piece of that we look at in the second half.

Okay. That’s great, thank you. And then just a quick question for you on mix improvement and just understand if you have positive price mix. Is that mostly related to lower promotional spending and more efficient spending? Is mix really benefiting the top line at this point or is that more associated with innovation in the future?

Chris, this is Tom McGough. Our pricing is really a combination of a couple of things. One, we were taking pricing where we’ve done product upgrades whether that’s been Banquet or introducing more value-added Healthy Choice simply steamers. A large component of the pricing benefit has been on trade promotion productivity, primarily on our premium meals businesses as well as many other brands within grocery. As you look at our resources, we do apply those on our segmentation on those accelerated businesses that tend to be stronger in terms of profitability.

One other bit of perspective that I think is helpful for people to understand because sometimes I get the question why not more mix impact for margin-accretive innovation faster; why not more gross margin faster? As we innovate particularly when we go into adjacencies as you look at our segmentation, in some case before, and so we built the success model in the marketplace and having empirical evidence that the new innovation is going to work, we may go to a co-packer, and then we do that because we don’t commit capital upfront. Once we’ve got the evidence that it’s a successful innovation, we’ve repatriated. We will invest the capital, we'll bring it in-house. So at sometimes you got a bit of a gross margin headwind on kind of breakthrough new innovations in the early days until you prove it. But that is the right way to manage innovation because you don’t always hit them all out of the park. You have some hits and you have some misses, and you want to be judicious on capital investment in support of new innovation.

Thanks, good morning. Just looking at our own Nielsen data for ConAgra, it looks like in the last four or five months that both base non-promoted sales have contributed to the sales declines in addition to that incremental, and that’s probably one of the reasons that base deteriorating is why the overall volume decline has accelerated. You have that one slide, I think at Slide 11 where you show base velocity is actually accelerating, and I am trying to reconcile those two things and perhaps there is a point about loss of distribution or SKU cutbacks that can sort of explain the base trends and what you’re trying to do?

David, Sean here. At Investor Day, we talked a bit about the mastering complexity project that we are working on, and we’ve also talked about unwinding some legacy practices. One of those legacy practices is SKU proliferation. Guys, correct me if I am wrong here, but I think the quote I had at Investor Day was something like the last 20% of our volume accounts for roughly 70% of our SKUs—something like that. So, we have a lot of complexity and a lot of SKU proliferation that’s not adding up to a lot of volume, which as you might imagine, on the shelf, it doesn’t add up to a lot of productivity. So, we don’t want to have working capital of items like that sitting around our warehouses; we’ve got to clean that up and we’ve been very proactively doing that and you see that in some of the distribution trends. When you do that, as you can imagine, what remains is higher velocity stuff. So, you see a going opposite effect usually of improvement of velocity, and that’s we’ve been looking for, and that’s pretty much exactly what we are seeing.

Do you think that velocity is a leading indicator for those base trends? Do you see an end to these SKU rationalization trends such that we are going to see base trends start to improve sequentially from here?

Yes, I mean you’ve got a mix of things going on is what I call base drivers. I think when you take out the SKU that’s a negative base driver. When you increase price that’s a negative base driver, but conversely, when you have effective A&P and effective innovation that’s positive base driver. This is a process for us kind of continuing to upgrade this volume base. A lot of what we are doing at certain brands will be through this year. There are other brands as we talk about at Investor Day with respect to mastering complexity that we won't even get to the next year. So, I think the picture the way to think about is instead of getting overly exercised around the optics of the top line trend, step back and think about whether or not there is real value associated with that volume to begin with. Because if there is not value associated with it, there is not margin associated with it. Frankly, all it’s giving us is optics, and that’s not what we are in business for, we are in value creation.

Hi, thanks. This might be just another way of asking the same question, but when you get into fiscal ’18 and ’19, Sean, I think a lot of this will modeling positive sales for those two years, but you know the environment is weaker than anybody thought, and you’re taking some pretty aggressive actions to upgrade your volume. So, is the model still work to get to double-digit EPS growth if sales are down in ’18? That’s really the question. Can you still get there even if it’s down?

Yes, the sales guidance we provided was actually a CAGR that extends through 2020. We haven't approached it as a straight line. As you know, this is a large portfolio, and we need to tackle these issues in parts, and we are making significant progress in doing so. Therefore, we are very confident in our algorithm and our EPS guidance. There will be various factors influencing each year based on our progress in the program. However, we feel very positive about our guidance, including for EPS.

Let me ask about the percentage of sales from these products. You talked a lot about innovation taking in at the beginning of fiscal ’18. Where are you now in terms of percentage of sales of new products either introduced in the last year or three years, however you measure that? Where do you hope to get to over time, and how quickly can you get there without that innovation?

Historically, we’ve been at call it 9% level, roughly in that ballpark. We’ve made some progress against that. We put a couple of few points on top of that we call it renewal rate. We want to get to 15, but as you might imagine, rebuilding the innovation pipeline takes longer than just taking out costs. One of the reasons why we got so aggressive on costs in the early days of this transformation is, we’re grounded in a clear-eyed recognition that rebuilding innovation pipe does take longer. So, it’s been important to us to get some of these low-hanging fruit cost opportunities early on while we repopulate the innovation. We are already doing it as I said; we’ve moved from 9 to call it 12, and it will continue to ramp up from here. Importantly, it’s also got to be, it's proverbial fewer, bigger, better idea. For us, that’s particularly important given our track record of proliferating so many SKUs, and we’re working on that because we want shelf efficiency for every item we could out there for our customers.

Great, and there is a follow-up, you talk in the prepared remarks about portfolio changes, kind of alluding to the possibility of divestments, using the tax assets, and then maybe exhibitions as well. How aggressively are you feeling about those types of opportunities at present? What are the criteria because using on either side of the scale to sales to think about what divestments maybe what to offset?

Yes. Good question. The backdrop to always is that we are a portfolio of reshape story that means we need the strength in the businesses we have. We also need to bring in businesses that will be complementary, and we have the unique ability to efficiently divest if we conclude that they don’t fit or they’re more valuable to somebody else. This is an important part of our value maximization strategy; it’s leveraging our balance sheet properly and strategically leveraging our capital loss carry forwards. We’re always in a position of readiness should we see something that we can say confidently makes good strategic sense and good financial sense. That’s really how we look at it; I don’t think in detail getting share beyond that.

Hi. Good morning, everyone. Just a couple of housekeeping items. I guess first is interest expense this quarter is about $54 million. Is that a good run rate we should think about going forward, or is there anything sort of unusual noise on the interest expense line this quarter?

Bryan, no, because we paid down debt during the quarter. The run rate is actually lower in the second half. So you should look at where we are with debt, where we end the quarter as sort of the base to use.

And in terms of where the debt at the end of the quarter at the base use?

Yes. That’s right.

And what rate should we be using?

Use 5%, 5.5%.

Okay. And then the second question in terms of share repurchases, I think you said it’s $170 million year-to-date and you were targeting, I think, $1 billion for 2017. So is that still the expectation that we should be using going forward?

Yes. Let me just clarify that a little bit, because looking at the numbers, that may not be clear. At Investor Day, we announced plans to purchase $1 billion worth of shares, and under a new $1.25 billion authority that we initiated after the spin-off was completed in November. When you look at the second quarter, there is only about half a month where we were actually repurchasing under that authority. So that was about $70 million. $70 million for half a month is kind of the run rate on the share repurchase. So that’s the plan kind of going forward.

Okay. And then the last one, you spent that all you can help in terms of savings 3Q, 4Q in the second half. I know it sounds like there is going to be some moving parts in terms of like when we should start to see the top line effective lapping the big pricing actions last year, maybe where the SG&A starts to come in. What you didn’t say in the first half that will come into the second half; any sort of help at all you could give in terms of things we should think about in terms of savings, 3Q and 4Q would be helpful? Thanks.

We're not going to get into the practice of giving real granular quarterly guidance. I don’t think that’s going to be too helpful. I don’t know if it’s going to be useful to you. What I can say is we’re going to bend the trend, and that’s how you want to think about it. It’s not exactly linear; there's going to be movement on all of these things quarter to quarter because of all sorts of noise we don’t need to get into. You’re obviously going to see a change in SG&A in the back half and you’ll see an improvement on the top line.

Just one question on page 21 of your presentation today; you gave us an EPS allocation which is very helpful, by the way, that EPS bridge. Given that EPS allocation for the net EPS impact of volume loss, and I am wondering you multiply that out, it looks like you have $0.09 you gave us at 15 million bucks, which is about 31% which is roughly your gross margin. I am trying to understand though, within that, I would think maybe if it were some of the lower margin products you were eliminating, maybe some and certainly the 21% decline in incremental sales that contribution margin might be a little bit lower. How much kind of thought and allocation went into that number or is it just kind of putting an average gross margin on it? Secondly, is that a good indicator maybe going forward of the kind of cost of volume, your operating deleverage included as you go forward that might be offset by pricing and other stuff in the year ahead? Thanks very much.

It’s a great question. We’ve spent a lot of time on what I call bridge accounting and most companies know I've done everywhere I’ve been. The way these things come together, you tend to start to look at what’s the price mix piece of this because you can quantify that. You obviously look at supply chain pieces and then the volume piece is sometimes tricky, right, because we have a portfolio of 55 brands that are all at different rates of change and it really becomes a blend. So that’s really how this comes together in terms of what the overall margin impact from the blended overall volume decline. I’m not going to make any commentary on the specific volume piece of EPS going forward, but I would say the guidance we’ve given on gross margin improvement factors in our estimates of what the volume impact would be. So that’s the best I can do for you, and that’s a good question.

Hey, good morning folks. Thank you for letting me ask the questions. Kind of in a similar vein to Mr. Feeney’s question in terms of offsets for volume, as we look at the price mix front, it’s great to see in positive territory for sure. But I suppose, I am just a little bit surprised that it’s not a bit more robust and actually faded quarter-over-quarter given that presumably you are taking out some of your lower price mix products. There should be a nice little mix benefit in there and then, of course, pulling out some of the inefficient trade support, I would think would be a bit of an incremental boost. Can you give a little bit of color on maybe what some of the offsets are and how we should think about that line both in the context of your actions today as well as going forward?

Jason, this is Tom McGough. We have discussed our pricing strategy, which consists of three elements: inflation justification, trade productivity, and pricing aligned with grain quality enhancements. While we have seen positive results in trade productivity upgrades, some sectors, such as beef, oil, eggs, and dairy, tend to have more pass-through pricing effects. For instance, with Hebrew National, we are experiencing a pricing reduction alongside a decrease in the cost of goods, which reflects negatively on pricing but positively on cost of goods, ultimately leading to improved margins. Egg Beaters is another example, where the industry's cost reductions from last year serve as an offset that has held back overall pricing. However, our primary focus is on expanding gross margin, which is evident in our results. We are making continued progress on gross margin expansion in a focused and disciplined manner throughout our portfolio.

Hi, good morning. This is actually Lubi filling in for Akshay. I wanted to ask a question about your innovation plan. Are you able to share any more color in terms of sort of what’s on the docket sort of back half of this year and early fiscal ’18? And then as a follow-up to that, could you comment on what are some of the structural changes if any to the innovation process that ConAgra is undergoing? Is that things like time to market getting faster? Are we expecting a greater contribution in terms of incremental sales of just how we should think about that? Thank you.

Yes, I believe we have shared a comprehensive preview of the innovations in our pipeline at Investor Day. Some of these innovations are nearing market release, while others are still in the development stage and will undergo test marketing. We are excited about our collaborations with brands like Healthy Choice and Slim Jim, which are generating remarkable innovation. It's essential to address the concerns about the industry's lack of growth. As Darren highlighted at Investor Day, when we look closely, there are clear areas of growth. Unfortunately, larger companies have not been as quick to pursue these opportunities as smaller companies, which tend to be more agile and outward-looking. Regarding your question about structural changes, we are indeed more externally focused than we have been in the past. This external focus aligns with one of our company's core values, and we are committed to transforming our insights into actions to accelerate the introduction of our innovative ideas. We are making progress structurally, and I am very enthusiastic about the upcoming developments in our pipeline, which will only improve from here.

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.