康尼格拉食品 (CAG) 2017 Q2 法說會逐字稿

Good morning and welcome to today's Conagra Brands' second-quarter earnings conference call.

This program is being recorded.

My name is Geri and I will be your conference facilitator.

(Operator Instructions)

At this time I'd like to introduce your hosts from Conagra Brands for today's program, Sean Connolly, Chief Executive Officer; Dave Marberger, Chief Financial Officer, and Johan Nystedt, Vice President of Treasury and Investor Relations.

Please go ahead, Mr. Nystedt.

Good morning.

During today's remarks we will make some forward-looking statements.

And while we are making those statements in good faith and are confident about our Company's direction, we do not have any guarantee about the results that we will achieve.

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.

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.

Thanks, Johan.

Good morning, everyone.

Happy holidays and thank you for joining our second-quarter FY17 conference call.

We're excited to be with you this morning for our first call as Conagra Brands.

With the spinoff 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 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 plan.

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 were 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 ag company and later a global conglomerate.

Conagra Brands today is a much different organization, and 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.

But, as I've said before, 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 investment.

Moving to slide 7, 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; two, refreshing our core; and, three, the clear roles we've assigned to the brands within our portfolio via our rigorous portfolio segmentation process.

We will also, four, ramp up innovation and disciplined M&A; and, 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 drive 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 8, reflects the renewed focus we have brought to our brands.

We have grouped each brand into one of four categories -- reinvigorate, accelerate growth, reliable contributors, and then grow core and extend.

This framework guides our investment priorities particularly around A&P and innovation.

And, as we discussed at our Investor Day, it provides the lens for our SKU optimization efforts, which is really a broad-based initiative focused on eliminating a long tail of SKUs that add up to a small amount of volume and weak margins.

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 9, 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.

And we're continuing to make strides in our approach to A&P which is now more focused, consistent, and tied to ROI.

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 the 11.5% decline.

But I want to call your attention to the next line where we note the 5.5% of 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 margin 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 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 has 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 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 cost 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 and our brands, and thus we expect operating margins to fall in line with our guidance.

While we are 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 are taking a longer-term view.

We are focused on the center loin 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 are focused on is successfully expanding into on-trend categories.

The Fontera 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 Chef Rick Bayless, and the integration process is moving forward according to plan.

Turning to slide 15, as we move forward to the remainder of FY17 and beyond, we will continue to execute against our portfolio management principles.

In the second half of FY17, we will be lapping last year's pricing actions, and expect to see corresponding improvement in our top-line trends 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 FY18.

And as I just said, we will continue to chip away at the gross margin opportunity while we deliver profitable growth.

And, finally, 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 and dedicated ConAgra Brands employees who continue 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 the 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 JM Swank.

Please note that references to adjusted items refer to measures that exclude items impacting comparability and reconciled to the closest GAAP measure and tables that are included in the earnings release and in the presentation deck.

The Spicetec and JM Swank businesses, which were divested in the first quarter of FY17, 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 JM 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 cost reductions and 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 improvement in 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 FY16.

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.

And for the first half of FY17, 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 FY17.

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 FY17.

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 the 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 Spicetec and JM 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 snack segment, 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 volume.

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 product 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 pretax impairment charge to goodwill due to the impact of the weakening peso on our business in Mexico.

In our foodservice 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 foodservice snack business.

The adjusted segment operating profit increase was primarily due to a one-time inventory writedown 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 JM 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 FY17 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 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 spinoff 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 spinoff.

In addition, I will also 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 benefit 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 pretax related to restructuring plans.

Approximately $0.09 per diluted share of net expense or $61 million pretax related to extinguishment of debt, primarily related to the Lamb Weston spinoff.

Approximately $0.09 per diluted share of net expense or $44 million pretax 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 JM Swank divestitures.

Slide 24 summarizes our full-year FY17 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 FY16 P&L base which excluded the Lamb Weston and JM Swank and Spicetec results.

Lamb Weston is now included in discontinued operations and is excluded from the ConAgra Brands historical information.

However, JM Swank and Spicetec are not accounted for as discontinued operations, so those results are included in the historical financial information for ConAgra Brands.

As footnoted on this chart, if you include the JM Swank and Spicetec net sales, the FY17 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 the additional detail of the FY17 outlook with Spicetec and JM 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 shareowner value.

And our outlook for FY17 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.

(Operator Instructions)

It looks like our first question comes from Andrew Lazar with Barclays.

Good morning, everybody, and happy holidays.

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.

And to the best of our ability in tracking some of the more recent scanner data by brand, it just 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 accelerate-and-grow quadrant.

So, I just want to get a sense of, is that something that you see in your data.

And, if so, what brings that about?

And is it consistent with the expectation, obviously, that volume trends start to improve in the back half of 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 to 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 volume that those practices had embedded in our base.

And we're doing that and it is working, and 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 improved brand-building and innovation capabilities.

So, that's what we are doing and 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.

But I do want to remind everybody that this is not a flip of a switch.

This is a process and we're going to manage it over time.

But it's definitely going to benefit shareholders.

In terms of any other particulars, Tom, it's still very largely concentrated, do you want to add any color to that?

Sean, just a couple things.

As you highlighted, we are taking a very focused and disciplined approach to price the brands that were underpriced, overpromoted.

And it also includes proactively optimizing our SKU mix.

What you see is that we're upgrading or volume base to one that is less promotionally driven, higher margin.

And as you highlighted in your chart, the fundamental base sales velocity performance is improving on the portfolio.

So, when you look at Q2 in particular there's a couple things that are somewhat unique.

First, Egg Beaters -- our frozen and refrigerated segment includes Egg Beaters.

In the year ago period there was a sales benefit associated with the avian flu impact where our supply was relatively unaffected from that.

The second thing that's unique is Q2 of last year was a significant promotional period for us on our premium meals brands -- Healthy Choice, Marie Callender, Bertolli.

That's part of our trade promotion productivity, is to optimize that spending.

And we'll begin to lap those as we move into the second half of our fiscal year.

And then the third component would be supply issues.

At the beginning of the quarter we still had some residual impact from PF Chang's, recall that showed up in lower merchandising at the beginning of the quarter.

And at the end of the quarter there was an industry issue on nitrous oxide that impacted Reddi-wip.

So, overall, we're fundamentally on track, building and upgrading our volume base.

Got it.

Thank you for that color.

And then just as a follow-up would be, 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.

Thank you.

Our next question will come from Matthew Grainger with Morgan Stanley.

I'll defer back to Andrew's question.

Let me finish the point on Andrew.

Andrew, the actions we're taking in refrigerated frozen, you've got some weird things in there like the windfall benefit we had last year on Egg Beaters and things like that didn't repeat this year.

But we are discontinuing significant both activities and SKUs that have some profitability associated with it, but frankly, is fundamentally not up to our margin standards.

And we're going to continue to do that.

That's all part of resetting our volume base to create the right foundation to build off of in the future.

Dave?

And just to add one thing, Andrew, the impact of Reddi-wip, there were some costs that did affect adjusted operating profit, as well.

So, if you factor in both the Egg Beaters piece and the cost from Reddi-wip, you're pretty much about flat in terms of operating profit on the sales decline.

Matt over to you.

Thanks.

Happy holidays, everyone.

Thanks for the question.

From a supply chain perspective, if you highlighted some of the gross margin favorability being driven by productivity, 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 those benchmarks compare to where we are in the first half of this year.

And, then, on the realized productivity, how far along 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'd say that the supply chain team continues to do a great job.

They've got, as Dave Biegger pointed out at Investor Day, a very strong track record and they're not satisfied with that.

They think they can do more.

We're not going to get there overnight but we are well on our way.

I'd say we are spot on with where we expect to be.

Any other color, Dave?

Yes.

As I mentioned, about two-thirds of the gross margin improvement was driven by supply chain.

We did guide, I think our long-term guidance on inflation was 2.3%.

It's less, it's around 1% for FY17.

So, as Sean said, we're on track with the realized productivity.

We are benefiting from a pretty benign inflation environment currently, although at Investor Day we expected higher inflation in the out years.

So, we are on track.

Okay, great, thanks.

And just one more question, Sean.

In terms of the promotional environment, you're obviously still very focused on moving past some of last year's less productive activity.

But in a few of your categories like frozen meals we've seen some evidence of more competitive promotion in recent months.

So, 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.

I think you are always going to see some differences regionally.

You'll see some differences by customers in terms of behaviors in whether or not they're trying to go to more of an everyday low price or a high/low environment.

I'd say overall, since I've been here it's been fairly rational.

We'll have to continue to monitor are there pockets of irrationality.

We will defend our business as we need to because we need to continue to make sure that our market shares are 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.

Okay, great thanks, everyone.

Thank you.

Our next question will come from David Driscoll.

Good morning, this is Cornell in with a few questions for David.

The first one is just looking at where you're at so far this year.

Nice beat relative to consensus in the first two quarters.

Why hasn't maybe the top end of guidance gone up for the full year?

And if I could really hone in here, I'm looking at an operating margin of 17% in the second quarter.

I realize there's some seasonality here but the guidance implies an operating margin of 14.5% over the balance of the year.

So, it seems like a drop off from what we're running at and just wanted to know what are the factors that play into these numbers.

Let me give you my two cents on that, and, Dave, you can weigh in, too.

Clearly, I am very please with the our margin progress.

We have harvested some low-hanging fruit, we're in a benign inflationary environment and we're benefiting from some timing in SG&A as our transition created some short-term vacancies.

And, as Dave pointed out, we need to sustain these margins in the back half and bend our top-line trends to hit our guidance, and I'm very confident we will do just that.

But two months post Lamb spin, it's still early days so we're standing by our previous guidance and staying very focused on continuing to execute well.

Okay, great.

And then, lastly, just on the advertising and consumer promotion spending, I think you said there might have been a shift in that in the quarter.

So, just wondering, back half, what does A&P spending look like.

Is it flat, is it up or is it down?

And 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 were about 4.7%.

That's a very healthy level of A&P, in my book, so I feel good about that.

We've continued to find inefficiency in our previous A&P spend.

And just like any place else within 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 end market activity.

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 good A&P investment from us in the back half, without getting into granular detail there.

Okay, thanks a lot.

I'll pass it along.

Thank you.

Our next question will come from Chris Growe with Stifel Nicolaus.

Hi, good morning and happy holidays to you.

I had two questions for you, if I could.

A little bit on Cornell's question there on A&P, related to that, there's been some SG&A related spending that's being deferred to the second half of the year.

Is that A&P?

Or there's more than just A&P in that?

And maybe related to that, in the first quarter I think you mentioned maybe something around $30 million of SG&A that got pushed to the back half.

Is that still a good number that would apply to the back half of the year?

Let me give you a little insight on that.

The SG&A that we talked about that I went through excludes A&P.

So, when you see SG&A on the face of the financial statements, A&P is in that but we're talking about it separately here.

In the first half, we were favorable in SG&A.

We have open positions that we're continuing to fill.

We're building our capabilities here.

So, as we make progress in the second half there, that will clearly increase our SG&A percentage.

And then there's some important projects internally that are really back-end weighted.

So, when you look at that, we're going to be closer to the target for SG&A that we talked about at Investor Day at 10.8% of sales.

That's how we look.

It's a second half related to SG&A excluding A&P.

I think Sean covered the A&P piece of that as we look at the second half.

Okay, that's great.

Thank you.

And then just a quick question for you on mix improvement.

Just to understand, if you have positive price mix, is that mostly related to lower promotional spending or more efficient spending?

And 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 things.

One, we are 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.

And then as you look at our resources, we do apply those in our segmentation on those accelerate businesses that tend to be stronger in terms of profitability.

Chris, it's Sean here.

One other bit of perspective that I think is helpful for people, too, 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 cases, until we build a success model in the marketplace and have empirical evidence that the new innovation is going to work, we may go to a co-packer.

We do that because we don't have to commit capital up front.

Then once we've got the evidence that it's a successful innovation we repatriate it, we'll invest the capital, we'll bring it in house.

So, sometimes you've got a bit of a gross margin headwind on breakthrough new innovations in the early days until you prove it out.

But that is, we think, the right way, having done this for a long time, 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.

Thank you.

Next we will hear from David Palmer with RBC Capital Markets.

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 cut back in incremental, and that base deterioration is why the overall volume decline has accelerated.

You have the one slide, I think it's slide 11, where you show base velocity is actually accelerating.

And I'm trying to reconcile those two things.

And perhaps there's a point there about loss of distribution or SKU cutbacks that can explain the base trends and what you're trying to do.

Dave, it's Sean.

At Investor Day we talked a bit about the mastering complexity project that we are working.

We've also talked about unwinding some legacy practices.

One of the legacy practices is SKU proliferation.

Guys, correct me if I'm wrong here, but I think the quote I had at Investor Day was something like the last 20% of our volumes account for roughly 70% of our SKUs, something like that.

So, we have a lot of complexity and a lot of SKU proliferation that is not adding up to a lot of volume.

And as you might imagine, on 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.

But when you do that, as you can imagine, what remains is higher velocity stuff.

So, you see the equal and opposite effect, usually, of improvement to velocity.

And that's what we have 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?

In other words, do you see an end to this SKU rationalization drag such that we're going to see base trends start to improve sequentially from here?

You've got a mix of things going on as what I call base drivers.

When you take out SKUs, 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 to continuing to upgrade this volume base.

A lot of what we are doing on certain brands will be through this year.

There are other brands, as we talked about at Investor Day, with respect to mass and complexity that we won't even get to until next year.

I think, big picture, the way to think about it is, instead of getting overly exercised around the optics of a top-line trend, step back and think about whether or not there's real value associated with that volume to begin with, because if there's not value associated with it there's not margin associated it.

Frankly, all it's giving us is optics and that's not what we are in business for.

We're in this for value creation.

Thank you so much.

We will move on to Rob Moskow with Credit Suisse.

Hi, thanks.

This might be just another way of asking the same question, but when you get into FY18 and FY19, Sean, I think a lot of us were modeling positive sales for those two years.

But the environment is weaker than anybody thought.

And you're taking some pretty aggressive actions to upgrade your volume.

So, does the model still work to get to double-digit EPS growth if, say, sales are down in 2018?

That's really the question.

Can you still get there even if it's down?

The sales guidance we gave was really a CAGR that takes us through 2020.

So, I don't think we've ever really thought about it as a straight line.

As you all know, we have a big portfolio.

We've got to attack these things in chunks and we're making tremendous progress doing it.

We feel really good about our algorithm.

We feel good about the EPS guidance.

There will be different drivers each year depending upon how far we are in the program.

But we feel great about the guidance, including EPS, is how I'd put it.

Okay, thanks.

Thank you so much.

Our next question will come from Alexia Howard with Bernstein.

Happy holidays.

Can I ask about the percentage of sales from these products?

You talked a lot about innovation kicking in at the beginning of FY18.

Where are you now in terms of potential sales of new products either introduced in the last year or three years, however you measure that?

And where do you hope to get to over time?

And how quickly could you get there without innovation?

Historically we've been at, call it, the 9% level, roughly in that ballpark.

We've made some progress against that, so we've put a couple few points on top of that.

We call it a renewal rate.

We want to get to 15%.

But, as you might imagine, rebuilding the innovation pipeline takes longer than, say, taking out costs.

One of the reasons why we got so aggressive on costs in the early days of this transformation is we were grounded in a clear-eyed recognition that rebuilding the innovation pipe does take longer.

So, it's been important to us to get at some of these low-hanging cost opportunities early on while we repopulate the innovation funnel.

We're already doing it.

As I said, we moved it from 9% to, call it, 12%, and it will continue to ramp up from here.

Importantly, it's also got to be -- it's the proverbial fewer, bigger, better idea -- but for us that's particularly important, given our track record of proliferating so many teeny little SKUs.

We're working at that because we want shelf efficiency for every item we put out there for our customers.

Great.

And as a follow-up, you talked in the prepared remarks about portfolio changes, alluding to the possibility of divestments or using the tax assets and then maybe acquisitions, as well.

How aggressively are you going off both kinds of opportunities at present?

And what are the criteria that you're using on either side of the scale to think about what to divest and maybe what to go after?

Thank you and I'll pass it on.

Good question.

The back drop to all of it, of course, is that we are a portfolio reshaping story.

That means we need to strengthen the businesses we have.

We also need to bring in businesses that will be complementary.

And we have the unique ability to efficiently divest things if we conclude that they don't fit or they are more valuable to somebody else.

This is an important part of our value maximization strategy, is leveraging our balance sheet properly and, as is strategic, leveraging our capital loss carryforwards.

So, we're always in a position of readiness should we see something that we can say confidently makes good strategic sense and makes good financial sense.

That's just really principally how we look at it.

I don't have anything in detail to get into beyond that.

Thank you.

Our next question will come from Bryan Spillane with Bank of America Merrill Lynch.

Hi, good morning, everyone.

Just a couple of housekeeping items.

First is interest expense this quarter was about $54 million.

Is that a good run rate that we should think about going forward or is there anything unusual, any noise on the interest expense line this quarter?

Bryan, no.

Because we paid down debt during the quarter, the run rate is actually lower for the second half.

So, you should look at where we are with debt where we ended the quarter as the base to use.

In terms of where the debt is at the end of the quarter, as a base use?

That's correct.

And what rate should we be using?

I'd use 5%,.

5.5%.

Okay.

And then second question, in terms of share repurchases, I think it's $170 million year to date and you were targeting, I think, $1 billion for 2017.

Is that still the expectation we should be using going forward?

Let me just clarify that a little bit because looking at the numbers it may not be clear.

At Investor Day we announced plans to purchase $1 billion worth of shares under a new $1.25 billion authority that we initiated after the spinoff was completed in November.

So, when you look at the second quarter, there's only about half a month where we were actually repurchasing under that authority.

That was about $70 million.

So, $70 million for a half a month is the run rate on the share repurchase.

That's the plan going forward.

Okay.

And the last one, to the extent that you can help in terms of phasing Q3 and Q4 in the second half, I know it sounds like there's going to be some moving parts in terms of 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 spend in the first half that will come in in the second half.

So, any help at all you could give in terms of things we should think about in terms of phasing Q3 and Q4 would be helpful.

Thanks.

Let me just take big picture.

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 are going to bend the trend and that's how you ought to think about it.

It's not exactly linear.

There's going to be movement on all these things quarter to quarter because there's all sorts of noise down in the granules that we don't need to get into.

But obviously you're going to see a change in SG&A in the back half and you'll see an improvement on the top line.

Thank you so much.

And our next question will come from Jonathan Feeney with Consumer Edge Research.

Good morning.

Happy holidays, everybody.

Just one question on page 21 of your presentation today.

You give us an EPS allocation, which is very helpful, by the way, that EPS bridge, giving that EPS allocation for the net EPS impact of volume loss.

And I'm wondering, you multiply that out it look like $0.09, you gave us that $60 million, it's 31%-odd, which is roughly about your gross margin.

I'm trying to understand, though, within that, I would think if it were some of the lower-margin products you were eliminating, and certainly the 21% decline in incremental sales, that contribution margin might be a little bit lower.

So, how much thought and allocation went into that number?

Or is it just putting an average gross margin on it, firstly?

And, secondly, is that a good indicator maybe going forward of the kind of cost of volume loss 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 spend a lot of time on what I call bridge accounting.

Most companies do.

I've done it 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 because we have a portfolio of 55 brands that are all at different rates of change, so it really becomes a blend.

That's really how this comes together in terms of what's the overall margin impact from that blended overall volume decline.

I'm not going to make any commentary on the specific volume piece of EPS going forward.

But what I would say is the guidance we've given on gross margin improvement factors in our estimates of what the volume impact would be.

That's the best I can do for you with that good question.

Thank you so much.

Next we will hear from Jason English with Goldman Sachs.

Good morning, folks.

Thank you for letting me ask a question.

In a similar vein to Mr. Feeney's question in terms of offsets for volume, as we look at the price-mix line, it's great to see it in positive territory, for sure.

But I suppose I was just a little bit surprised that it's not a bit more robust and actually faded quarter on quarter, given that presumably you're taking out some of your lower price-mix products.

Presumably 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.

So, can you give a little bit more color on maybe what some of the offsets are and how we should think about that line, both in terms of context of your actions today as well as the forward?

Jason, this is Tom McGough.

We've talked about our pricing in three components -- inflation justified, trade productivity, and pricing in conjunction with brand quality upgrades.

So, as you think about some of the -- obviously we've had positive in terms of upgrades, trade productivity.

But there is some businesses and categories that are more pass through.

Beef and oil, eggs, dairy would be some of those.

So, on Hebrew National, for example, there's pricing reduction with commensurate reduction in cost of goods that shows up as a negative to pricing, a positive to cost of goods, and obviously a better margin.

Egg Beaters is another situation, given the industry dynamics last year with costs coming down.

So, those are some of the offsets that suppress the overall pricing.

What we really focus on is the gross margin expansion.

And that's what you see in our results, is continued progress on gross margin expansion.

And we're doing this in a very focused and disciplined way across the portfolio.

Thank you.

Our final question comes from Akshay Jagdale from Jefferies.

This is actually Lube filling in for Akshay.

I wanted to ask a question about your innovation plans.

Are you able to share anymore color in terms of what's on the docket for the back half of this year and early FY18?

And then, as a follow-up to that, if you could comment on what are some of the structural changes, if any, to the innovation process at Conagra.

Is it time to market getting faster?

Are we expecting a greater contribution in terms of incremental sales?

Just how we should think about that.

Thank you.

In terms of specific things that are forthcoming, Darren Serrao provided a pretty robust preview of some of the innovation in our pipeline, some things at our Investor Day, some things that are pretty close to hitting the market, some things that are a little farther out, some things that are going into test market.

You got a sneak peak of that, and it's pretty exciting what we are going to be able to do with brands like Healthy Choice and Slim Jim and other brands that are really ramping up some excellent innovation.

Quite frankly, it's time, because there's a lot of grumbling around lack of growth in the industry.

But, as Darren pointed out at Investor Day, when you peel back the onion and you look at it, there are clear pockets of growth.

Unfortunately, it hasn't been the big companies that have been getting after it.

It's been the small companies because they tend to be faster to market, they tend to be more externally focused.

That brings me to the second piece of your question, which is what are we structurally changing.

We are more externally focused, I would say, than we've been.

In fact, external focus is one of our Company values.

And we are determined to activate our insights and turn them into action and get our new innovation ideas to market quicker.

Historically it's been a slow slog for us to get insights, convert them into action and get them into market.

That is making progress.

We're not all the way to bright yet but very excited about some of the things that are in our pipe, and it's only going to get better from here.

Okay.

Thank you.

I'll pass it on.

This does conclude our question-and-answer session.

Mr. Nystedt, I will hand the conference back to you for final remarks.

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 are available for discussion.

Thank you for your interest in Conagra.

This does conclude today's Conagra Brands second-quarter earnings conference call.

Thank you again for attending and have a good day.