Conagra Brands Inc (CAG) — Q4 2018 Earnings Call Transcript

Good morning, everyone. Thanks for adjusting your schedules and joining us today. This morning, we will be discussing both our agreement to acquire Pinnacle Foods and our fourth quarter results. I remind you that we will be making some forward-looking statements about ConAgra Brands, the proposed acquisition of Pinnacle Foods and the expected benefits of the proposed acquisition. While we are making those statements in good faith, we do not have any guarantee about the results that we will achieve. Descriptions of risk factors are included in the documents we filed with the SEC. Also, we will be discussing some non-GAAP financial measures during the call today. References to adjusted items refer to measures that exclude items impacting comparability. Please see the earnings press release for additional information on our comparability items. The reconciliations of those adjusted measures to the most directly comparable GAAP measures can be found in either the earnings press release or in the earnings slides, both of which can be found in the Investor Relations section of our website, conagrabrands.com. Now, I will turn it over to Sean.

Thanks, Brian. Good morning, everyone and thank you again for accommodating the date change and joining our conference call today to discuss our agreement to acquire Pinnacle Foods and our fiscal 2018 fourth quarter and full year earnings. We have got a lot to cover obviously. So, let’s go ahead and get started. Over the past 3 years, we have made significant progress against our plan to transform ConAgra into a pure-play branded food company and establish a solid platform for future growth. We have built industry-leading innovation capabilities, completely overhauled our culture and unlocked significant shareholder value. The impact of these efforts is evident in the tremendous Q4 that we announced today, having delivered 2% organic net sales growth and approximately 16% adjusted operating profit growth. Clearly, our hard work is paying off with improved and more consistent performance. All of these actions have positioned us to take the next step in our evolution. Today’s announcement of our agreement to acquire Pinnacle Foods builds on the strong foundation we have established and serves as a catalyst to accelerate value creation for shareholders. It will enhance our scale by combining two growing portfolios of iconic brands and create a leader in frozen foods, while also expanding our presence in snacks. We are bringing together two highly complementary companies, with a strong combined balance sheet, positioning us to capture compelling financial benefits, including attractive synergies. Importantly, with a strong leadership team and proven capabilities driving brand building and innovation, we are confident in our ability to successfully integrate this acquisition and to build continued momentum and deliver meaningful shareholder value. Now, before I get into more detail about why we are so excited about this acquisition, I do want to take a step back for a moment and talk about where we are in terms of executing our plan and how we positioned ConAgra to make this transaction a success.

Thank you, Sean and good morning everyone. Let me begin by reiterating how excited we are about this transaction. I will start by sharing some additional details pertaining to the deal and we will then briefly discuss our strong fourth quarter and fiscal year 2018 financial performance before we open it up for Q&A.

Good morning. Thank you. Hoping to get some color on why the synergies aren’t a little bit higher than the typical 7%ish rate in food. Just wondering are the supply chain synergies in frozen not as high as maybe we expected? Is it that Pinnacle’s SG&A is already very low and efficient or maybe is there – I am hoping maybe some – there is just some conservatism in there, so any help you guys can provide there would be greatly appreciated?

Ken, let me start and then Dave add whatever color you want to add versus some of the things I have read, Ken, I think probably the biggest modeling difference is within COGS in manufacturing. So we have got 7% synergies here, which we are highly confident in. We have scrubbed every opportunity and we feel very good we can deliver this number. But I think sometimes there is a belief that when you put two companies together, you can take half of the manufacturing assets, half of the plants and consolidate them, that’s not how it actually works in practice. The example I would give you is a vegetable processing plant is not the same as a frozen food manufacturing plant. You have to process vegetables in very close proximity to the field, because of the delicacy of the vegetables, which is different than how we make say frozen meals. So I think some of – perhaps the assumptions around manufacturing assets were more aggressive than what exist in reality. The numbers we have got in here we feel very good about and obviously, it’s kind of like how we approach margins in general. We always look to over deliver, but this is the number that we believe is correct and it’s about on par with what we have seen elsewhere in the industry.

No, I think you covered it. I think it’s also important to understand that the $215 million, that’s a real synergy number. So there is no – that’s going to hit the P&L and that’s going to be favorability that you will model. We feel – as Sean said, we feel very good about that, the ability to deliver that. As I mentioned in my comments, we believe 60% of that will come by the end of fiscal year ‘20 and then the rest will phase in. And I did quote cost to achieve which are really one-time costs and then some CapEx. So we feel really good about the synergy numbers and our ability to deliver them.

Hey, good morning everyone. I guess, there is – we fielded a few questions today just about the guidance for standalone ConAgra for 2019. And so I was hoping you can help I think just relative to where I guess consensus expectations were for ‘19. It seems like it’s more or less in line, but could you help us bridge I guess a little bit about what’s happening below the operating income line?

Yes, sure, Brian. It’s Dave. Let me take a shot at that. So yes, the main reason – we are not trying to hide anything. The reason we didn’t give EPS guidance for ‘19 is exactly that, because of the transaction and the impact that could have on interest expense and shares, right, given timing of the financing. But if you step back, the big thing I think today because some analysts have factored it in, some have not, is the pension accounting headwind. So, I think we have been very clear as to what the impact of that is and how that needs to be modeled now below the operating margin line. You are right you should assume no share repurchase now.

Thanks. Good morning. Looking back a couple of years now to that Analyst Day, you laid out some long-term supply chain opportunities, including network consolidation and ingredient sourcing. Could you give us an update as to where you were, where you are now on that journey that you saw then in terms of your own COGS realization and then talk about how Pinnacle really changes that and maybe perhaps adds to that?

Yes, David, let me start with that. So, yes, we gave very specific guidance and insight at Investor Day on our supply chain operations that we talked about a realized productivity metric and we are on track with everything we laid out. Our realized productivity has been coming in at 3%, a little north of 3%. The thing that we did not call right back then, nobody called right, was inflation, right. We thought inflation was going to be in the low 2%. As I just quoted, we finished at 3.8% this year. So clearly, much more of a headwind than we anticipated at that time, but our productivity programs are tracking right on. In terms of Pinnacle, it’s better to wait till we close and have an Investor Day to get into more of that, but I think Pinnacle has clearly proven their ability to drive productivity and margin improvement.

Good morning and congratulations. So a quick question would be on, Sean, for the category overlap, is there anything that jumps off the page when you look at the two portfolios together as to what might draw some attention whether it’s in the frozen business with Hungry-Man or the chili brands?

Let me take that in reverse order. The capital loss carry-forward just so everybody is clear can only be used for preexisting ConAgra assets, so just so everybody has got that. On the other one, we don’t anticipate any antitrust issues. This transaction involves very complementary products, but in highly competitive sectors and it benefits our customers by making ConAgra an even more effective competitor.

Good morning, Jon. Thanks very much. I wanted to ask about well maybe bigger picture about the industry and your options, because it seems to me that we go back to a year ago and there will probably be some detail about your timing and extended conversations here.

Sure. Well, in terms of what we look for big, big picture when it comes to M&A, just think about what we are trying to do as a company. We are a lean company, but we are a company that’s focused on growth. And for 3 years, we have been reshaping the portfolio for better margins and better growth profile. So finding – we have been on the lookout for a while now for a larger, smart synergistic acquisition, but those opportunities tend to be fewer and farther between.

Hi, good morning. I will add my congratulations as well. I just wanted to ask you in relation to synergies, if I could. First of all, are there any explicit revenue synergies you expect from the transaction?

First, on growth synergies, nothing we have shared today assumes any growth synergies. So, we kind of gave you a preview of directionally how we are thinking about the long-term algorithm of the combined companies and both of these companies have probably among the higher long-term growth forecast as it exists already.

Hi, Sean. Can you help give a little more color on the decision to reduce the advertising line item in SG&A or just the direct-to-consumer kind of approach and push more in terms of retailer spending?

Well, I think the answer to the question is we expect that the long-term impact to our brands is positive. We view it as a positive change. For almost a year now, we have been outspoken about the marketing ROI improvement we believe we could get by moving some ineffective A&P marketing investments to retailer marketing investments.

Good morning, everyone.

Yes, Alexia. So that’s clearly our target. Right now, we are looking at a glide path assuming we would close by the end of the calendar year. By the end of fiscal ‘21, we should be pretty close to the 3.5x.

Thank you very much. Congrats from me as well. Just a broader question really, your own perspective, Sean, as to really why upon the announcement this morning both the ConAgra shares and the Pinnacle shares are obviously – have come under some near-term pressure.

Rob, I am not going to speculate as to what the market is going to do in the course of a couple of hour window. What I can tell you is I have total confidence that by combining these two companies we will only accelerate the strong shareholder value creation track record that we have been delivering.

Good morning. This is actually Cornell Burnette on with a few questions for David. Just wanted to ask you obviously when you look at the deal, some of the logic of bringing the Pinnacle Foods’ frozen assets and combining them with ConAgra seems pretty obvious, just wondered your take on maybe some of the parts of the portfolio at Pinnacle that are less obvious with ConAgra.

Yes, those two examples that you bring up are actually examples of excellent fits. We talk about our portfolio as spanning four consumer domains, frozen meals, snacks and sweet treats, condiments and enhancers and shelf-stable meals and sides.

Good morning. This is actually Lubi filling in for Akshay. I just wanted to ask a bit of a big picture question.

Yes. Lubi, I think the big picture view on what we do as brand builders, is we look externally at what is working with the consumer and then we constantly or we should be refine our portfolio and modernize our brands, so that they are meeting emerging and current consumer trends, not yesterday’s trends.

Hi, good morning. I was wondering if you can comment on how you are evaluating potential divestiture candidates across the portfolio.

Well, I think we are really – again, we don’t anticipate any antitrust issues. When it comes to divestiture strategy more broadly, we have been on the record a long, long time saying that M&A is part of our strategy and we expect inbounds and as we reshape the portfolio, we expect some outbound things.

Okay, thank you for taking the questions. Just a quick clarification for me. In terms of the pro forma leverage target of 5x that you see at deal close, it’s indicated that, that’s on a net basis.

It’s on a gross basis. So, the 5x and yes, it’s on a gross basis.

Great. Thank you. As a reminder, this conference has been recorded and will be archived on the web as detailed in our press release. As a reminder, Investor Relations is available for discussions. Thank you for your interest in ConAgra Brands.