Conagra Brands Inc (CAG) — Q3 2017 Earnings Call Transcript

Good morning. During today's remarks, we will make some forward-looking statements. And while we're making those statements in good faith and are confident about our Company's directions, 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, we'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 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.

Thank you, Johan. Good morning, everyone, and thank you for joining our Third Quarter Fiscal 2017 Conference Call. During today's call, I will highlight a few key points from the quarter and discuss our progress towards our strategic plan. You will also hear from Darren Serrao, our Chief Growth Officer, who will update you on our new innovation pipeline. Lastly, our CFO, David Marberger, will share details about the quarter and our outlook for fiscal '17 before we open the floor for your questions. In the third quarter, we made good progress in reshaping our portfolio, capabilities, and culture, resulting in a solid Q3 performance that positions us for long-term competitiveness. We further improved our margins this quarter through a strong focus on cost control and other essential margin drivers such as pricing, productivity, and trade efficiency. Additionally, we successfully sold a robust new product slate for fiscal '18, which Darren will discuss shortly. Our team has delivered three solid quarters this year, and we are now positioned to update our full-year guidance. We expect EPS to be at or slightly above the high end of our previous range and sales to be at or slightly below the low end of our previous range. Our EPS expectations reflect the timing of certain costs, while our sales outlook considers the challenging near-term macro environment our industry faces. I previously discussed the significance of our portfolio management principles, which continue to shape our actions. We have shifted from a focus on volume at any cost to value creation, moving from reliance on trade-driven push tools to emphasizing stronger brands and consumer pull. We are also working to eliminate lower-performing, lower-value SKUs that hinder margins and brand equity. Furthermore, we are adopting a disciplined approach to advertising and promotion, making it more consistent and tied to return on investment. Our commitment to LEAN is not just a project; it is now ingrained in our culture, focusing relentlessly on cost and efficiency to drive stronger margins and support profitable growth. Alongside our organic initiatives, we are also pursuing a disciplined approach to mergers and acquisitions. Recently, we announced the upcoming addition of Duke's smoked meat snacks and BIGS seeds to our portfolio. Duke's is a rapidly growing premium meat snack brand, and BIGS offers a line of premium seed snacks, partnering with prominent brands to enhance their offerings. We believe both Duke's and BIGS will significantly enhance our existing capabilities in meat snacks and seeds, tapping into faster-growing premium segments. We anticipate completing this acquisition this summer. Now, turning to the third quarter performance highlights, excluding the effects of divestitures and foreign exchange, net sales decreased by 4.8%, indicating the start of our anticipated top-line improvement. Adjusted gross margin increased by 180 basis points to 31.6%, driven by supply chain productivity, improved pricing, favorable input costs, and divestitures of lower-margin businesses. We achieved adjusted diluted EPS of $0.48 for the quarter, reflecting a 37.1% increase from the previous year, attributed to reduced SG&A expenses, lower interest expenses, and better profitability from the Ardent Mills joint venture. However, these benefits were partially countered by volume declines and the impacts of divesting the Spicetec flavors and seasonings and the J.M. Swank businesses earlier this year. We're making strong strides in margin improvement with a 180 basis point increase in adjusted gross margin compared to Q3 of last year, driven by our pricing and trade promotion strategies, supply chain productivity, favorable input costs, and the impact from divestitures. Our adjusted operating margin rose by 300 basis points compared to Q3 of last year as shown on the next slide. I am also pleased to report that our trade efficiency and SG&A cost reduction initiatives are on track. We have made substantial progress in adjusting our promotional practices to enhance pricing while also investing in improved quality, updated packaging, and advertising support. We rigorously evaluate the value each SKU brings to our brand, allowing us to eliminate underperformers and reduce unnecessary complexity and costs. The benefits of our supply chain productivity initiatives are becoming evident, leading to stronger and more consistent bottom-line performance. Nevertheless, we acknowledge that there is still more we can achieve, and we remain dedicated to enhancing our profitability over time. Moving forward, we do not foresee any major structural issues hindering our ability to meet our long-term targets, and we will continue to pursue margin enhancement opportunities. While we are committed to cutting costs and improving efficiency as a foundational step towards enhancing the bottom line, we understand that growth is essential. However, we must ensure that our growth is sustainable and centered on profitable volume growth within a more modern portfolio compared to where we were. The left side of the slide illustrates our willingness to forgo lower ROI promotional activities, resulting in a decline in incremental volume sales as we anticipated. It is important to note that we began to reduce our reliance on promotions in the middle of last year, so we are still adjusting to these changes. The chart on the right demonstrates the steady increase in our base sales velocity trends, indicating that our efforts are solidifying a stronger foundation for future growth. Our brands, while streamlined, are performing better and gaining traction in a non-promotional context, which we expect to continue. Overall, our disciplined approach to the top line is beginning to yield positive results. As seen on the next slide, our recent sales results have started to improve, as anticipated. While the macro environment has softened industry-wide, presenting more challenges than expected, it does not alter our strategic plan. We remain focused on execution and continuous improvement. Upgrading our revenue base will give us a solid foundation for future growth, supported by an exciting innovation plan that Darren will discuss now. Darren, over to you.

Thanks, Sean. Good morning, everyone. Even though the food sector is facing challenges due to slowing growth rates, we believe the overall performance of the food industry does not accurately represent the underlying growth opportunities. A detailed analysis shows there are significant and accessible areas where we can achieve much higher growth. We have implemented various strategies across our portfolio to tap into these opportunities, which include establishing a demand-driven innovation and M&A program. These initiatives have enabled us to create a revitalized and extensive innovation pipeline, which we expect to start delivering to the market this summer. Before discussing our innovations, I want to briefly touch on our portfolio segmentation since it influences many of our decisions, from resource allocation to M&A and innovation. This segmentation assesses the relative potential of each category and brand by evaluating category momentum on one axis against brand momentum on another. This creates four distinct performance quadrants, each with its own challenges and opportunities. Our innovation pipeline aligns well with these segmentation priorities, and we are also introducing innovations within the reliable contributors quadrant to modernize strategically important brands that may have been overlooked. We have effectively utilized innovation to refresh and elevate the Healthy Choice brand, distinguishing our offerings across a spectrum from good to best. This approach not only shifts existing consumers towards more premium options but also attracts younger customers through contemporary products. You can observe this transition from traditional dinners to café steamers and then from café steamers to simply steamers. In fiscal '18, we will further enhance this brand by launching a new product line called Power Bowls, which embody modern food values and include a greater variety and density of ingredients in each meal. These bowls feature antibiotic-free proteins, ancient grains, vegetables, and dark leafy greens complemented by pulses and seeds, all presented in a bowl made of plant-based fibers. The initial customer feedback on this new range has been very positive, and we are excited about the upcoming launch this summer. Although Banquet is categorized as a reliable contributor, we are actively working to modernize and premiumize it to bolster its brand relevance, competitiveness, and shelf performance. This journey began last year with a comprehensive brand restage that significantly improved the taste and quality of Banquet meals while allowing for higher pricing and margins. In fiscal '18, we will refresh the Mega Meals line and introduce Mega Bowls to establish a premium tier of protein-rich meals. Mega Meals will be larger than the classic Banquet meals and have significantly more protein, while Mega Bowls will offer modern, fast-casual options like buffalo chicken, mac n' cheese, and chicken fajita bowls. Although we are upgrading Banquet, we will retain its role as a value meal within the category. Our recent acquisition of Frontera Foods provides us with a strong brand in the fast-growing market of gourmet Mexican cuisine. Founded by Chef Rick Bayless, this business has seen significant growth over the past three years, particularly in salsas and sauces. This summer, we anticipate launching two new extensions of the Frontera brand into the frozen meals category, created in partnership with Rick, featuring authentic gourmet Mexican meals in single-serve bowls and multi-serve skillets. While I can't cover all the innovations planned for fiscal '18 today, I want to emphasize our confidence in our brands, our commitment to demand-centric innovation, and our ability to achieve profitable growth across the portfolio. We are just beginning, and there is much more to come in the years ahead. Thank you, and now I will turn it back to Sean.

Thanks, Darren. Turning to Slide 18, as we move through the remainder of fiscal 2017 and beyond, we will continue to execute against our portfolio management principles. As we discussed earlier, we're now lapping last year's pricing actions and expect to see further improvement in our top line trends while we continue to expand our margins. Our innovation progress is also accelerating and we expect to see our new products begin to hit the market in early fiscal 2018. Again, we will continue to chip away at the gross margin opportunity while we deliver profitable growth. Finally, we will continue to look for opportunities to reshape our portfolio. This could include exiting brands in an efficient manner and using our tax asset. We expect it will also include continuing to enhance our current portfolio to a disciplined approach to M&A. We still have a lot of work to do, but we are pleased with the progress we're making. We're confident that the strategy we have in motion is the right one to drive improved consistency in our performance and profitability while delivering long-term value for our shareholders. Now before I turn the call over to Dave, I want to thank our talented and dedicated ConAgra Brands employees who continue to embrace change and execute our strategy while doing a tremendous job at serving our customers. With that, Dave, over to you.

Thank you, Sean, and good morning, everyone. Before I start, I want to note some key points related to our basis of presentation. Lamb Weston and the related joint ventures have been reclassified as discontinued operations starting in the second quarter of fiscal year 2017. The commercial reporting segment for the third quarter and ongoing will have no current operating results. It will only include the historical results, the Spicetec and J.M. Swank businesses we divested in the first quarter of 2017. References to adjusted items refer to measures that exclude items impacting comparability and reconcile to the closest GAAP measure in tables that are included in the earnings release and presentation deck. The Spicetec and J.M. Swank businesses are included in the historical results and are not called out as items impacting comparability. As you can see on Slide 19, reported net sales for the third quarter were down 9.9% compared to a year ago. Net sales excluding the impact of divestitures and foreign exchange were down 4.8% for the third quarter, which is an improvement from the first half of 2017, which was down 5.8% versus the prior year as Sean just mentioned. Adjusted gross profit dollars were down 4.4% versus the third quarter a year ago. Of the 4.4% decline, 2.6 percentage points were from the profit that left the business with the sales of Spicetec and J.M. Swank in the first quarter of 2017. The remaining decline was from lower volume and unfavorable FX, partially offset by the gross margin rate improvement. Adjusted gross margin was 31.6% in the third quarter, an increase of 180 basis points compared to a year ago. Approximately 80 basis points of this improvement came from divesting the lower margin Spicetec and J.M. Swank businesses. The remaining increase came from supply chain input cost reductions, productivity gains, and improvements in pricing and trade efficiency. These gross margin gains were partially offset by unfavorable sales mix and unfavorable FX due to the weakening of the Mexican peso. Adjusted operating profit increased 9.3% due to the large reduction in SG&A, which more than offset the gross profit dollar decline. I will discuss the SG&A in more detail shortly. Importantly, adjusted operating margin was 16.8% for the third quarter, up 300 basis points from the third quarter a year ago. This is the third consecutive quarter of adjusted operating margin improvement of plus 300 basis points versus the prior year. Adjusted EPS was $0.48 for the third quarter, up 37.1% from the prior year due to significant SG&A reductions, lower interest expense due to the significant reduction in debt, and an increase in equity earnings driven by favorable third-quarter performance in the Ardent Mills joint venture. Slide 20 shows the drivers of our third-quarter net sales change versus a year ago. Net sales excluding divestitures and FX were down 4.8%. Volume declines contributed 5.5 points of the decrease, partially offset by a 70 basis point improvement in price mix. As highlighted on Slide 21 and as Sean mentioned, we continue to improve both our gross margins and operating margins. Both Q3 and year-to-date third quarters have delivered improved margins driven by our relentless focus on SG&A, supply chain input cost reductions, and operating productivity. We are also driving favorable pricing and trade productivity to supplement our improvement. I will discuss our outlook for both adjusted gross margin and adjusted operating margins shortly. Slide 22 highlights our continued strong SG&A performance. These results began with the restructuring we started in fiscal year 2016 and continue because of our growing culture of LEAN everyday everywhere. Note that this chart represents adjusted SG&A excluding A&P expense. A&P is included as part of SG&A on the phase of the financial statements. Adjusted SG&A was $202 million in the third quarter, down 21% versus a year ago. SG&A was down $183 million or 24% year-to-date. In the third quarter, we continue to benefit from the timing of certain SG&A expenses, which are mostly related to open headcount, along with some nonrecurring favorability in the area outside the services. The SG&A reductions are on track to deliver the total targeted savings of $200 million by the end of fiscal year 2017 and we are very pleased with our overall performance as we are realizing our cost-savings goals a bit faster than we planned. Moving to Slide 23, this chart outlines the drivers of adjusted EPS improvement from $0.35 in the third quarter a year ago, to $0.48 this quarter, a 37% increase. As we expected, the EPS impact of the 5.5% volume decline was mostly offset by the adjusted gross margin rate improvement of 180 basis points. As I mentioned previously, we obtained approximately 80 basis points of improvement by divesting the lower margins by Spicetec and J.M. Swank businesses. The remaining gross margin improvement came from supply chain input cost reductions and productivity gains. Pricing and trade productivity were partially offset by unfavorable sales mix and unfavorable FX. As I just discussed, SG&A reductions are on track and contributed $0.07 of earnings per share improvement this quarter. EPS improvement was also driven by lower interest expense in the third quarter of approximately $31 million versus the prior year driven by a $2.5 billion reduction in debt from the end of fiscal year 2016 to the end of the third quarter 2017. EPS also benefited from lower weighted average shares outstanding due to the repurchase of approximately $15 million of our shares through the end of the third quarter. The adjusted effective tax rate for the third quarter was 31.5%. This tax rate was favorable to our estimates primarily from tax benefits generated upon the exercise of employee stock compensation awards. Slide 24 highlights our net sales and adjusted operating profit by reporting segment. In our grocery and snack segment, net sales were $850 million for the quarter, down 5%, reflecting a 5% decline in volume. TWICE and trade productivity contributed 50 basis points of net sales improvement, but this was offset by unfavorable sales mix. Adjusted operating profit was $212 million for the third quarter, an increase of 8%. The increase in adjusted operating profit reflects continued progress on gross margin expansion and reduced SG&A cost, partially offset by the impact of lower sales volume. In our refrigerated and frozen segment, net sales were $666 million for the quarter, down 6% reflecting a 6% decline in volume. TWICE and trade productivity contributed 90 basis points of net sales improvement. This was offset by price reductions in our pass-through brands and unfavorable sales mix. Adjusted operating profit was $128 million for the third quarter, up 5% versus the prior year period. The increase reflects continued progress on SG&A cost and gross margin expansion efforts that were partially offset by volume declines and the impact of benefits in the third quarter a year ago from higher Avian flu-related volume and sales for egg beaters. Our egg beater product supply was not impacted by the Avian flu outbreak last year, creating a sales opportunity. The negative impact on the change in adjusted operating profit in the third quarter this year versus the prior year from the decline in egg beaters was approximately 5 percentage points. In our international segment, net sales were $205 million for the quarter, down 3%. This reflects a 4% decline in volume, a 3% improvement in price mix, and a negative 2% impact from foreign exchange. Adjusted segment operating profit was $18 million for the third quarter, up 7% driven primarily by favorable pricing and lower SG&A expenses. In our food service segment, net sales were $260 million for the quarter, down 3% as a result of exiting a non-core food service snack business. Adjusted operating profit was $28 million in the third quarter, which was flat versus a year ago. 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 in the first quarter of 2017. Adjusted corporate expenses were $53 million for the third quarter, down 23% versus a year ago, reflecting the benefits from our cost savings efforts. Slide 25 summarizes select cash flow and balance sheet information for the third quarter fiscal year 2017 versus the year-ago period and versus 2016 year-end. We ended the third quarter with $3 billion of total debt and approximately $700 million of cash on hand. This results in net debt of approximately $2.3 billion with no outstanding commercial paper borrowings. Year-to-date through the third quarter, total debt was reduced by approximately $2.5 billion. As we have stated in the past, we remained committed to an investment-grade credit rating for the business. Net cash flow from continuing operations was $804 million year-to-date third quarter versus $274 million for the same period a year ago. This significant increase was driven by an increase in income from operations, benefits from the timing of tax payments, and very strong working capital improvement in the areas of accounts receivable, inventory, and accounts payable, given our strong focus on managing working capital as a source of cash. We had capital expenditures of $159 million through the third quarter of this year versus $171 million in the comparable period a year ago. We are in line with our internal targets for capital spending. In Q3, we paid a quarterly dividend of $0.25 per share to shareholders of record as of October 31, 2016. This record date was before the spinoff of Lamb Weston. As previously announced, the board of directors approved its first dividend since the completion of the spinoff at the quarterly rate of $0.20 per share. During the third quarter, we purchased approximately $11 million shares of stock at a cost of approximately $425 million. Year-to-date third quarter, we repurchased approximately 50 million shares of stock at a cost of $595 million. At the third Q3 run rate for our share repurchase activity, we would expect to reach our previously announced fiscal 2017 target of repurchasing $1 billion of company stock in the fourth quarter. In addition, I would like to note the following items. Advertising and promotion expense for the quarter was $91 million, down 3% versus the prior year. Advertising and promotion is a percentage of net sales was approximately 4.6% for the third quarter, up from 4.3% a year ago. Equity method investment earnings were $22 million for the current quarter, up $13 million versus the prior year, due to the improved performance of the company's Ardent Mills joint venture. Net interest expense was $46 million in the third quarter versus $76 million a year ago, a decrease of 40% due to the significant pay down of debt through the third quarter of 2017. For the third quarter, foreign exchange negatively impacted net sales by $4 million and operating profit by $300,000 versus the year-ago quarter. I will now summarize the items affecting EPS comparability for the third quarter, which we exclude from our adjusted financial measures. We incurred restructuring expenses totaling $14 million or $0.02 of EPS. We executed a pension settlement approximating $14 million or $0.02 of EPS. We retired high-interest senior debt resulting in expense of $33 million or $0.05 of EPS, and finally, we recognized the tax benefit related to foreign tax incentives in our Ardent Mills joint venture. You can see more detail in this morning's release. Slide 26 summarizes our full-year fiscal 2017 financial outlook, which has been updated from the initial outlook we provided at Investor Day in October. As we communicated at Investor Day, that 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, and it also excluded any estimated impacts from FX. Adjusted diluted EPS is expected to be at or slightly above the high end of the $1.65 to $1.70 range we previously shared. Net sales excluding the impacts of divestitures and foreign exchange are expected to be at or slightly below the low end of the range of down 4% to 5%. Adjusted gross margin is expected to be within the previously provided range of 30.4% to 30.6%, and adjusted operating margin is expected to be slightly above the previously provided range of 15.3% to 15.5%. So in summary, ConAgra Brands continues to make progress executing our strategic plan. We are 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 acquisition opportunities to drive shareholder value. And our updated outlook for fiscal year 2017 continues to support the progress we have made year-to-date. Thank you. This concludes my formal remarks. Sean, Darren Serrao, 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.

Alright. For those of you who are still on the line, we just learned we've been having some technical difficulties and some of our audience has not been able to hear. We are going to go ahead and proceed with Q&A, hoping that the folks who are in the queue for Q&A can get their questions through, and we'll stay the course here and see if we can get this done. Let's open it up to Q&A, Operator.

Good morning, everybody.

Hey, Andrew.

Good morning.

Thank you for your question. There are two points I'd like to address. First, it's encouraging to see the base velocity accelerating as you've noted over the past couple of quarters. However, ConAgra is still losing overall distribution points, much of which was a deliberate decision, even as you begin to see the effects of those actions. Are you finding more ineffective SKUs than you initially anticipated, leading to continued reductions? I'm trying to understand how much more work we need to do on distribution points before we see the velocity more fully reflected in the top line. Additionally, this has implications for our outlook on organic sales in fiscal '18.

Yes, Andrew, let me tackle that. We're not going to get into fiscal '18 this quarter. We'll tackle that next quarter, but on TPDs, as we've talked before, a lot of this is exactly what we've been planning to do. Let's put the volume in its proper perspective. We are fundamentally rewiring a 100-year-old company here for higher margins and better growth prospects, and that wasn't going to be done without unwinding some legacy practices. If you think about what we've done so far this year, we've materially reduced our reliance on promotion, we've raised prices, we've pruned low-value SKUs as you pointed out, and we essentially pushed pause on launching new items so we could begin the heavy lifting of rebuilding our innovation pipeline based on new analytics, and Darren showed you some of that work today, which will hit the shelves next year. The upshot of all of this is that our top line is pretty close to what we anticipated with perhaps a bit more challenging recent environment across the industry, tied to some of the transitory dynamics that have been discussed. But the bottom line is we are making very good progress overall in this company for better margins and stronger brands going forward, and we will continue to look for progressive improvement on the top line.

Got it. And then on SG&A, I think it has been a couple of quarters now where you've been looking for the spending to kick in the coming quarter and it's gotten pushed off, and I think some of that, as you mentioned, was open headcount and things like that. Is that spending that then you do expect to kick in during 4Q or hit 2018, or we're now at a structurally lower point from a relative SG&A standpoint.

Yes, Andrew. We do have some openings. We have opened headcount and we will continue to fill those. We will see an uptake as we get into Q4 and into FY '18. But having said that, we feel very good about how quickly we were able to cut the cost and that we're going to hit our target earlier than we expected, but there will be some increase into Q4 as we fill some of the headcount.

Thank you.

Hi. Thank you. Just to follow up on Andrew's question. I appreciate that there will be some incremental spending in 4Q in the SG&A line. But if you look at the implied margin for the fourth quarter, it's not really much above, I guess by my math, you'll be 13.5% or so. It's really up less than 100 basis points year-on-year. But to your point, the operating margins up over 400 basis points due to the first three quarters. Are there any other headwinds we should be aware of as we think of the fourth quarter? Are you spending a lot behind the new product launches? I know not everything has been totally restated, just feels a little bit conservative to me and just trying to get a better sense of maybe why that is?

Ken, we've got some spend in the fourth quarter, and this is part of you've got to see it's going to split across fiscal years, but some of our new item introduction costs do hit right around the end of the fiscal year, beginning of the new fiscal year. So that's one of the variables that we were dealing with right now. It's why we gave the guidance the way we gave it on the top line. It didn't try to tread the needle any more closely. But this will be our typical going forward new item timing, where we'll talk about our upcoming innovations in Q3, we will shoot to get some of that out the door and incur some of the startup costs in Q4. But some of that also typically would be lead across fiscal years. So that's where you don't want to get overly precise, but that is our launch window.

Okay. And then Sean, you may have talked about this. I missed the first maybe 15 minutes or so of the presentation because of the technical difficulties, but like many of you as food companies, your shipments came in ahead of Nielsen and there has been a lot of speculation about maybe why this is happening. I was just curious for your take within ConAgra. What are you seeing? Are there any non-measured channels maybe picking up steam in the last few months? Just trying to get a better understanding of where that gap is coming from.

There has clearly been a shift to non-measured channels, Ken, but I wouldn't put it all on the last few months. Obviously, this is a hot topic in our industry right now around the recent softening of consumption. The way I think about what we've seen recently is that it's largely driven by transitory dynamics, like for example, the tax refund timing notion that has been widely discussed, and even the warmer winter, we're not particularly exercised about those transitory drivers. What we are focused on is this simple notion that's old as the hills, and that is the fact that consumer behaviors are perpetually changing with the obvious implication being that if we want to be a high performing branded company, we need to evolve with them, and that's what we're doing. We have conducted an analysis as to what's going on with our consumer. We see clear shifts toward things like healthier, more convenient meals, more snacking, and more shopping to your point and unmeasured channels, as well as things like more multicultural consumers. We're tracking all this. We're also interestingly seeing that the foods that are growing are premium-priced relative to those that are declining, meaning interestingly, quality is an important consideration in the consumer calculus around value, not just price. So these findings, whether it's non-measured channels or other things, it's informing our innovation and go-to-market agenda. The way I think about it is in terms of the macro issues you're seeing; these are not what some might call transitory times. These are times that companies like ours need to be externally focused on innovation, and that's what we're doing.

Great. Thank you and good morning.

Good morning.

Hey, David.

Great. Glad you can hear me. I had that same difficulties the others had. I'd like to ask two questions. The first one, it will pick up the thread from Andrew and asking about the revenues, but I just wanted to be specific to the fourth quarter. I think the implying numbers here or something like minus 3 to minus 3.5 year-to-date revenues are down about 6. Can you just call out the factors in Q4 that you expect to occur, such that the sales declines moderate in accordance with how you've given the guidance?

Yes. You may have missed it in the presentation, David. I apologize for the technical difficulties. What you saw in Q3 was the beginning of a trend-bend on the top line. We expect that to continue. We may have some above-the-line sliding expenses in Q4 tied to new items, but we're beginning to see the trend bend and we just anticipate that's going to continue as we get some of our new items in the marketplace as we wrap more of some of the stuff in the year-ago period. That's what we expect and that's what's implied on our guidance. Dave?

Yes. It's Dave. Just to clarify your point, you're right. The guidance implies that for the fourth quarter, sales will be down 3.5% to get to down 5% for the year. As we said down 5% or slightly below, that's where there could be a little bit of difference there. But as Sean said, we're going to continue to bend the trend, but that's how you get to the number.

And then specifically in terms of the new products, the pipeline fill for these new products will occur in the first fiscal quarter of next year, or will you capture some of it in the fourth quarter?

I think bulk of it will be next year, David.

Can you provide details on the input costs for fiscal '17, including where they stand and your outlook moving forward? You have mentioned input costs as a key factor, so I would like your thoughts on how long these input costs might remain favorable for the company.

David, as we mentioned during the Investor Day for fiscal year '17, we anticipated our inflation rate to be around 1% for the year, and that's what we're currently observing. This quarter, we saw a gross margin improvement of 180 basis points, or 110 if we exclude the divestiture. A significant portion of this improvement was driven by enhanced supply chain productivity, including reductions in input costs. We're optimistic about this year. We're currently preparing for fiscal year '18 and will provide more detailed guidance next quarter regarding that year. However, for this year, we are indeed seeing that 1%, which is a major factor contributing to the stability in gross margin.

Good morning, everyone.

Hi, Alexia.

Hi, there. Can I ask about the promotional spending? It seems as though you started off this process really trying to clear out some of the ineffective promotional spending, and obviously, SKU reductions as well. We're hearing from others that retailers at the beginning of this year are kind of asking for sharper priced points, more reinvestment back in promotion. Are you seeing any of that and are you seeing retailers push the private label side of things a little harder this year? Thank you.

Sure. Thanks, Alexia. Regarding private labels, it varies by category. Fortunately, in our categories, private label growth is not significant, so it has less impact on us. About our promotional activities, we have reduced them considerably, but it's important to view this in context. It follows a period where our promotional approach was excessively aggressive. We are still active in promotions and have a substantial trade budget, but our strategy is now more efficient and practical than before. We remain competitive in promotions within our categories, but we are not overextending ourselves as we did previously. We are not abandoning promotions; instead, we're adjusting how we promote, particularly in terms of promotion depth and sometimes frequency for certain brands. There are still many promotions available, and some customers maintain a more aggressive promotional strategy than others. This varies somewhat but remains a presence, influenced by regional factors.

Great. Just as a follow-up, you mentioned an interest in pursuing acquisition opportunities and I think you've said this for some time now. How rich is the environment in terms of the opportunities out there? Can you just remind us of what the key criteria are financially for those?

Clearly, M&A will be a part of our playbook. Whether it's small or modernizing acquisitions like Frontera, or Duke's, or larger synergistic acquisitions. As we weigh these moves, we will be disciplined strategically and financially. In terms of the environment and when we might make an acquisition, it really depends upon the situation, but certainly, if a value-creating opportunity were to emerge, we've got the balance sheet and the organizational capacity to act.

Great. Thank you very much. I'll pass it on.

Thank you for the question. It's a straightforward one. While I don't expect specific gross margin details by segment, I would appreciate any insights on how you're addressing the volume declines in refrigerated, frozen, and grocery segments, particularly with the 5% to 6% drops. Despite this, you seem to be performing well on the profit side. I'm curious about how much of this success is due to improved manufacturing productivity versus changes in SG&A. Understanding where you are in this process could provide more clarity. Thank you.

Jon, both the SG&A programs that we've been working on and our productivity programs in the supply chain have been critical to us being able to expand our margins and being able to offset absorption issues. But one of the benefits we've had as a company, which may be a bit different from what you see elsewhere in the industry, is we plan for this volume reductions. We plan for pull-back and promotion, we plan for SKU rationalization. So our supply chain team in particular has been out way ahead of this from day one, looking for ways to take out costs so that we could offset the deleveraging associated with walking away from this low-quality volume that was embedded in our base. I tip my hat to them because they have done nothing short of an extraordinary job. So we're putting a pretty significant dent in this overall effort this fiscal year, and I think we are doing what, as I've said before, it may not be pretty optically, but if you're ConAgra and you want to get to what we're all trying to get to, which is a higher margin stronger growth profile company, you have to go through these moves. You can't get there without taking this course, and our supply chain team has done an outstanding job in helping us navigate it this year.

Thank you.

Thank you. Just come back, I guess on Q4 in SG&A and the incremental spend. I guess in line with Andrew and Ken's questions, just in terms of how much incremental you would expect to spend given you said it's toward the very end of the fiscal year. Is this a year-over-year increase on advertising of $20 million or $30 million? Is this a substantial step-up or not that much? Again, it's really just trying to reiterate a wider questioning around how much we really should expect this or how much incremental spend should we expect to see in Q4 given the margin guidance? Thanks.

Rob, it might be helpful to explain our current situation. As we reorganize the company, we've also expanded into new locations and created some job openings. We recognize the need to develop new skills in areas like insights, innovation, and integrated margin management, which means we need to hire individuals with exceptional expertise in these key areas. We're very selective about our new hires and patient in finding the right candidates, which is why we've had some open positions this year. However, we are actively hiring and will continue to do so in Q4. This process is more of a gradual transition rather than a significant overhaul.

Okay, fair enough. As we look ahead to 2018, it appears that by the end of this fiscal year, you'll be more at ease with overhead. The original guidance indicated that SG&A's percentage of sales would remain stable over the next few years. Therefore, it will primarily be the growth in top-line revenue and gross margins driving results from 2017. A stable SG&A as a percentage of sales for 2018 seems reasonable.

Rob, we'll get into more granularity on our next call for '18. We did at Investor Day say that SG&A as a percentage of sales would be flat over the three-year horizon. It's 10.8%, so we're obviously more favorable to that year-to-date as a percentage of net sales. So as we close the fourth quarter and then look forward, we'll give you more detail on that '18, but generally, that's the way we're looking at it, yes.

Okay, great. And then just a quick follow-up on balance sheet, M&A, buyback. I know you virtually said $1 billion ASR for the year; I'm assuming that's on track, or you're on track to complete that in Q4 would be the balance of what's left. That's one; and two, just leverage now was trailing 12 months is about four quarters is about 1.5x net debt. As we think forward into acquisitions, I know you want them to be value-added ROIC creative, etcetera. But should we be thinking more of what we've seen so far? Like a number of smaller growth acquisitions to help you leverage your current capacity and supply chain? Or you're open to whatever great value, big or small?

Well, let me address the first part of that and then I can pass it to Sean. Regarding the share repurchase, it is not an Accelerated Share Repurchase, it’s open market. So far this year, we've bought back about 50 million shares of stock for approximately $600 million. With the current run rate for Q3, we anticipate reaching the previously announced portion of the billion dollars for fiscal '17 in the fourth quarter. That's our position, and you can find the details in the earnings release. Sean?

On your M&A question, Rob, at Investor Day, we talked about two kinds of acquisitions we're open to: modernizing acquisitions, which are still more on-trend brands like some of what you've seen us do. We also talked about larger synergistic acquisitions that would have more financial impact near term. I don't want to imply in any way that our strategy deals one way or the other, and that is a string of pearl strategy, and you said it's not. We're open to both; either side of that ledger makes sense for us, and whether or not there's actionability in a way that makes sense financially for us. So we've got to be in a position of readiness for either kind of deal, and I feel like we are should the right opportunities emerge. In the most recent case with Pinnacle Foods, it happened to be a modernizing acquisition.

Hi. Good morning, everyone. Thanks. One more on the M&A environment. I guess for Sean and Dave, both. On the larger synergistic deals, just curious, does the uncertainty around corporate tax reform and the effect that it's dragging on here present any significant hurdles as you've potentially tried to have discussions about that size of transaction in a disciplined way?

Hey, Matt. When we look at acquisitions, we start with the strategic rationale. So if you're talking about a synergistic acquisition, we're going to go through our acquisition criteria to make sure it makes sense strategically, and then obviously all the financial metrics make sense. Like every other company, we are all looking at what's on the table right now in terms of potential tax reform. Obviously, there's nothing solid-right. So all you can do is scenario-plan, but that is clearly not driving what we're thinking about for acquisitions. It starts with strategy and financial hurdles and then we just look at scenarios and how it could impact acquisitions as we move forward.

Okay. Great, thanks, Dave. I'm not sure if you can give any sort of guidance or additional color here, but just on the performance of Ardent Mills in the near-term outlook there, Q3 was pretty significantly improved over anything we've seen for the past 12-15 months. Should we take that as a sign that the worst of the issues that you're facing in the milling industry are now in the past? Or will there continue to be some volatility there over the next few quarters?

I think there is some volatility in that industry, but if you look at Ardent Mills for the third quarter, we had a very solid performance. The volumes increased, they seized market opportunities to gain share, and they're achieving operational efficiency with the plans they invested in last year for their infrastructure. We're seeing some of that pay off, so I'm pleased with the progress they're making.

Hey, guys. Thanks for letting me ask a question. Like many, I missed some of the prepared remarks and perhaps I missed this, but top line, I know there's been a bit of a drag from some of your past few categories and allowing the overall mixed benefits of your innovation and then net price benefits, the trade spend shine through fully. Is it safe to assume that that was still a drag this quarter? If so, can you give a sense of maybe how big it's been and what the floor looks like? When can we expect maybe some of that pressure from our optics and top line to abate?

Let me start, Jason, with as you look at the quarter, overall, we had that 70 basis points of price mix benefit as a company, really coming from our international business and price increases that we took there in the last quarter. If you look at both grocery and snacks and refrigerated frozen and you peel the onion back, we did have price realization benefits in both of those segments. So we had 50 basis points of price benefit in grocery and snacks and 90 basis points from refrigerated-frozen. We did have some offsets related to mix, and that really just comes down to that certain items had a higher average net sales per unit than the average. That's really a timing thing for the third quarter. We feel really good about the progress we're making in both our pricing and our trade efficiency, and we are seeing that this quarter may have too a little bit by the mix, but that's a timing thing.

Okay, that's helpful. And then higher order. First, you guys deserve some kudos, congratulations, for navigating this transition so well from a bottom line perspective. It's been impressive to see the EBIT growth continue in the face of some of the top line transitions. I think a lot of the questions have gotten around the idea of sort of what's next. You're running pretty hard on productivity; you're delivering quite well, you're delivering faster than expected, but the top line turns are probably going to take a little bit longer to get there and I guess one of the concerns some of us have is that maybe we enter a bit of a pause period where the top line is not quite there and the productivity well is dripping out a little bit less. It's hard without being able to talk about guidance, but can you give us a sense, sort of higher level of whether or not you think those are reasonable concerns, or whether as you look at the productivity, you still think you have ample fuel to navigate through this transition?

Jason, I feel really good about where we are. We'll obviously get into specific guidance next time, but just principally, if you think about it, when you reset your top line for a higher quality foundation, it ought to be just that. It ought to be a higher quality foundation from which you can build. And then when you initiate a new innovation program like the one that we've really mobilized and some of you got to see it directly, you layer it on top of that stronger foundation where you've taken out a lot of the things that were holding you back previously, I think it sets you up for success. That's why we at our Investor Day gave the long-term top line algorithm that we did. We believe that what we're doing this fiscal year is essential in terms of creating a foundation off of which to build; and what we're doing in Darren's area with the growth center of excellence is an important investment so we can actually lay those bricks on top of that stronger foundation. Our supply chain team has been doing an outstanding job of delivering productivity for years now, and as Dave Biegger pointed out at our Investor Day, we anticipate additional benefits in realized productivity going forward as part of our program. You put all that together, and I think ConAgra remains a very compelling investment for our investors and we've got a very solid shareholder value creation potential here.

Good morning. Thank you for the question. This is Robert Connor on for Rob Moskow. Just a quick clarifying question. You talked a lot about the innovation rolling out in the first quarter 2018. Are you actually expecting your advertising budget to increase for 2018?

Well, we're not giving guidance for 2018 today, but I have spoken on the market many times about how I think about our A&P spend. These are some other companies I work for. Our A&P budget, I think it's very robust. It's competitive and we've been in the mid-fours. It's not the kind of A&P rate that, in my mind, would require some kind of A&P rebate. Now, what we have been doing on A&P though is trying to get more effective and efficient within our existing expense. Darren's team has a very aggressive program to shift more of our A&P budget from non-working dollars to working dollars. That is happening very effectively, and then within the working dollars, we are changing the way we use A&P. Not only are we very disciplined in which brands we apply it to, but we're much more digital, social today than traditional TV. The mix of marketing tools that we use is different; it's more effective. The net of all of this is I feel like our overall A&P level is about right while it continues to get more effective.

Good morning. This is actually Lubi on for Akshay and I apologize if you've already addressed this, but I did have some of those same technical issues that some people are experiencing. But just wanted to ask a question on sales. When do you expect to fully lap the portfolio repositioning efforts that you guys are doing and how soon do you think we might be given to see positive sales growth for the total company? Just related to that, if you can talk a little bit about what the drivers of that potential sales growth might be, whether it's primarily innovation-driven or something else? Thanks.

We are not providing guidance on sales for next year or by quarter. However, I want to emphasize that a significant part of our strategy involves moving away from deep discount promotions. These promotional activities require long-term planning with customers, and they vary by customer since some have events planned further in the future than others. We will continue to reduce our reliance on these highly discounted deals until we stabilize our base, but much of the more challenging work in this area will be behind us as we conclude this year. We still have certain customers and regions who engaged in deeper discount promotions this past year, and we will gradually work our way out of those situations. The key factors to improve our top line include removing weaker businesses from our portfolio to establish a more stable foundation and reengaging consumers to choose our brand based on its qualities rather than discount levels. We're already seeing progress in this area. The sales velocities we're observing now are higher, indicating that we are successfully encouraging consumers to rediscover our brand without relying on discounts. When we combine this with new marketing initiatives and innovation, we believe we are adopting the right approach for managing a branded portfolio.

Thanks. That's very helpful. And then if I could ask a question on guidance. I think you've mentioned that your revised outlook, there are some timing; there are some benefits related to timing of certain costs. Can you elaborate a little bit on what exactly those costs are and what's causing the timing issue? Thanks.

Yes. That was related to our SG&A and as we mentioned, that our SG&A is very favorable, and that has been planned, but we've had some additional favorability, primarily from open headcount. We're filling a lot of positions, and we're in the process of doing that. So as we continue to fill them, more of those costs will come in Q4 and into next year. That's really what we're referring to there.

Well, thank you and apologies again for the technical difficulties we had. As a reminder, this conference is being recorded and will be archived on the web as detailed in our news release.