康尼格拉食品 (CAG) 2017 Q3 法說會逐字稿

Good morning and welcome to today's Q3 FY17 Conagra Brands earnings call.

This program is being recorded.

My name is Candace Griffin and I will be your conference facilitator.

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

Please go ahead and 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.

So, if you would like to learn more about the risks and factors that could influence and impact our expected results, perhaps materially, we 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, and thank you for joining our third-quarter fiscal 2017 conference call.

On today's call, I will cover a few highlights from the quarter and touch on the overall progress we are making against our strategic plan.

You will also have the opportunity to hear from Darren Serrao, our Chief Growth Officer, who will provide an update on our new innovation pipeline.

And finally, our CFO, Dave Marberger, will get into the details of the quarter and our fiscal 2017 outlook before we take your questions.

In the third quarter, we continued to make good progress reshaping our portfolio, capabilities and culture.

This resulted in a solid Q3 performance and sets us up for improved competitiveness for the long-term.

Importantly, we continued to make strides in improving our margins this quarter.

Our intense focus on cost control alongside other important margin levers like pricing, productivity and trade efficiency contributed to our results.

Equally important was our progress on innovation.

We effectively sold into customers a robust new product slate for fiscal 2018, which Darren will speak to in a few minutes.

Our team has delivered three solid quarter so far this year and we are now in position 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 beneficial timing of certain costs while our top line expectations reflect the soft near-term macro environment our industry is facing.

You have previously heard me discuss the importance of our portfolio management principles and how they continue to guide our actions.

Specifically, we have moved 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 and, in turn, consumer pull.

We are also working to eliminate lower performing, lower value SKUs that act as a headwind to margins and brand equity building.

Additionally, we are implementing a disciplined approach to A&P and innovation which is now more consistent and tied to ROI.

We continue to be aggressive at executing lean, not as a project, but as a way of life and a permanent part of our culture.

This relentless focus on cost and efficiency is the foundation of our efforts to drive consistently stronger margins and provide the fuel for profitable growth going forward.

Complementing our organic efforts is a disciplined approach to M&A.

As you saw last week, the next additions to our stable of brands will be Duke's smoked meat snacks and BIGS seeds.

If you aren't familiar with them, Duke's is a fast-growing, on-trend premium meat snack brand; BIGS is a line of premium seed snacks and partners with some of America's best-known brands to bring big, bold flavor to seeds.

We expect Duke's and BIGS will be terrific closed-in additions to our portfolio because they extend our existing meat snacks and seeds capabilities into faster growing, more premium segments.

We expect to close this acquisition this summer.

Turning to the third-quarter performance highlights on slide 7, excluding the impact of divestitures and foreign exchange, net sales were down 4.8% reflecting the beginning of our anticipated improvement in topline trends.

Adjusted gross margin increased 180 basis points to 31.6%.

This was driven by supply chain productivity, improved pricing, input costs favorability and the divestitures of lower margin businesses.

We delivered adjusted diluted EPS of $0.48 for the quarter, up 37.1% from the prior year's quarter.

This was driven by lower SG&A expenses, lower interest expense and improved profitability in the Ardent Mills joint venture.

It's worth noting that these benefits were partially offset by volume declines and the impact of the divestitures of the Spicetec Flavors & Seasonings as well as JM Swank businesses in the first quarter.

Slide 8 highlights the strong progress we are continuing to make on margin improvement.

As compared to Q3 of last year, we have driven 180 basis points of adjusted gross margin improvement behind our pricing and trade promotion discipline and strong supply chain productivity as well as some input costs favorability and the impact of divestitures.

On the right side of the slide, you can see our adjusted operating margin improvements which grew by 300 basis points compared to Q3 of last year.

Moving to slide 9, I am pleased to report that our trade efficiency and SG&A cost-reduction programs are squarely on track.

On SG&A, we have made enormous progress and Dave will talk more about this in a few minutes.

We have meaningfully changed our promotional practices to adjust pricing while investing in improved quality, updated packaging and A&P support.

We have also been using a disciplined process to examine the value every SKU delivers to our brands so that we can eliminate laggards and remove unnecessary complexity and cost.

And the value of our supply chain productivity programs is clearly coming through.

Overall, our actions have led to stronger and more consistent bottom-line performance.

But, as we have told you previously, we know there is more we can do.

We remain focused on continuing to drive the centerline of our profitability north over time.

Looking ahead, we see no major structural issues that would prevent us from delivering our long-term targets and we will continue to chip away at our margin opportunity.

While we have been relentless on cost-reduction and improving efficiencies in order to build a strong foundation on the bottom line, we know that we can't cut our way to prosperity; we've got to grow.

But we've got to grow the right way which is all about profitable volume growth and a more modern looking portfolio relative to where we were.

To illustrate the point on value over volume, the left-hand side of slide 10 shows how we been willing to walk away from lower ROI promotional activities and thus our incremental volume sales have declined as we anticipated.

I would like to note that we began to reduce our reliance on promotions during the middle of last year, so we are in the process of lapping these results.

The chart on the right shows a steady increase in base sales velocity trends demonstrating that our efforts are working to build a stronger foundation to build from going forward.

Simply put, our brands, while leaner, are presenting better and therefore turning better in a non-promoted context.

This will continue to progress from here.

Overall, our disciplined approach to the top line is beginning to bend the trend.

As you can see on slide 11, our net sales results have begun to improve, which we expected.

Clearly, the near term macro environment has softened industrywide, which has been a bit more of a headwind to our progress than we anticipated but not in a way that alters our game plan.

We remain focused on execution and continual progress.

Our process of upgrading the revenue base will give us a strong point from which to grow.

That growth will be aided by an exciting innovations slate that Darren will cover now.

Darren, over to you.

Thanks, Sean.

Good morning, everyone.

Although the food sector has been under pressure as growth rates have slowed, we remain convinced that the aggregate performance of the food industry does not reflect the underlying growth opportunities.

A more granular view, as seen in this graphic, reveals significant and accessible pockets where substantially higher growth can be realized.

We've taken a series of actions across our portfolio in order to reach these opportunity areas including the creation of a demand-based innovation and M&A program.

These efforts have helped us build a revitalized and extensive innovation pipeline which we expect to begin shipping into the market beginning this summer.

Before I get into the innovation, I'd like to spend a moment on our portfolio segmentation because it guides much of what we do including resource allocation from A&P two M&A to innovation.

You'll recall that this work accesses the relative potential of the categories and brands by considering category momentum on one axis and brand momentum on the other.

Together, the two axes provide four distinct quadrants of performance, each with their own unique challenges and opportunities.

As you'll see, our innovation pipeline aligns well to the overall segmentation priorities.

However, you'll even see some innovation in the reliable contributors quadrants reflecting an opportunity to continue to modernize strategically important brands that had been previously neglected.

We have successfully leveraged innovation to modernize and extend the Healthy Choice brand upmarket segmenting our business across the good, better, best continuum on not only moves existing consumers to more premium offerings but introduces younger consumers to the brands through these more contemporary products.

You can see this shift occurring, from the Classic Dinners business to Cafe Steamers and from Cafe Steamers to Simply Steamers.

In fiscal 2018, we will take the next step in migrating this brand upmarket through the introduction of new range of products that we are calling Power Bowls.

These new Power Bowls reflect more contemporary food values and pack more ingredient diversity and density into each meal.

We've combined antibiotic-free animal proteins, ancient grains, vegetables and dark, leafy greens, with pulses and seeds in a variety of delicious and bold flavors, all of which is served up in a bowl made from plant-based fibers.

our customers have responded very positively to this him and we are looking forward to the launch this summer.

Although Banquet resides in the reliable contributor quadrant, we are continuing to modernize and premium-ize it to improve its brand relevance, category competitiveness and performance at shelf.

This work began last year with a broad-based restage of the brand.

You'll recall that that restage significantly enhanced the taste and quality of Banquet meals while enabling higher price realization and margins.

In fiscal 2018, we will restage the Mega Meals line and introduce a new range of Mega Bowls to create a premium tier of contemporary protein packed meals.

Mega Meals are larger than the classic Banquet meals with substantially more protein and Mega Bowls adds contemporary, fast casual restaurant style options like buffalo chicken mac & cheese and chicken fajita bowls.

Although we continue to modernize and premiumize Banquet, we continue to maintain Banquet's role as a value meal within the category.

The recent acquisition of Frontera Foods gives us a strong brand within the high-growth territory of gourmet Mexican cuisine.

The business, founded by chef Rick Bayless, has been experiencing strong growth over the past three years and is firmly rooted in salsas and sauces.

However, starting this summer we expect to begin shipping two new extensions of the Frontera brand into the frozen meals category.

As shown here, we have worked with Rick to create these authentic gourmet Mexican meals in both single serve bowls and multiservice skillets.

And while I don't have time today to review all the innovation that we have slated for fiscal 2018, I want to be clear.

We believe in our brands, and our disciplined and demand-centric integration innovation program and in our ability to drive profitable growth across the portfolio.

We are just getting started so there's a lot more in the works for the years ahead.

Thank you and now I'll 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 are now lapping last year's pricing actions and expect to see further improvement in our topline 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 assets.

We expect it will also include continuing to enhance our current portfolio through a disciplined approach to M&A.

We still have a lot of work to do, but we are pleased with the progress we are making.

We are 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 for the Spicetec and JM Swank businesses we divested in the first quarter of 2017.

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

The Spicetec and JM 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 sale of Spicetec and JM 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 JM Swank businesses.

The remaining increase came from supply chain input cost reductions and 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 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-quarter 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 margin 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 every day, everywhere.

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 $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 timing on certain SG&A expenses, which are mostly related to open headcount along with some nonrecurring favorability in the area of outside 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 margin Spicetec and JM Swank businesses.

The remaining gross margin improvement came from supply chain input cost reductions and productivity gains, pricing and trade productivity, 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 & Snacks segment, net sales were $850 million for the quarter down 5% reflecting a 5% decline in volume.

Price 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 costs, partially offset by the impact of lower sales volume.

In our Refrigerated & Frozen segment, net sales were $666 million for the quarter down 6% reflecting a 6% decline in volume.

Price 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 costs 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 segments, 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 Foodservice segment, net sales were $260 million for the quarter, down 3% as a result of exiting a noncore Foodservice 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 JM Swank divestitures in the first quarter of 2017.

Adjusted corporate expenses were $53 million for the third quarter down 23% versus the 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 remain 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.

The 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 spin off at the quarterly rate of $0.20 per share.

During the third quarter, we repurchased approximately 11 million shares of stock at a cost of approximately $425 million.

Year to date third-quarter, we repurchased approximately 15 million shares of stock at a cost of $595 million.

At the 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 as 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 recognize 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, this outlook was based upon a pro forma fiscal year 2016 P&L base which excluded the Lamb Weston and JM 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 share owner 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.

All right, for those of you who are still on the line, we just learned we have 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 were 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.

So let's open it up to Q&A, operator.

Thank you.

Now we like to get to an important part of today's call, taking your questions.

(Operator Instructions) Andrew Lazar, Barclays.

Morning, everybody.

Thanks for the question.

I guess just two things.

First, it's obviously good to see the base velocity accelerating as you've pointed out for a couple quarters.

But, obviously, Conagra is still losing overall distribution points, much of which I know is by choice, even though you've begun to lap these actions.

So I guess, is it that you are finding a greater amount of ineffective SKUs than you initially thought, such that you are still reducing it?

I'm really trying to get a better sense of I guess how much more we have to go on distribution points until we start to see the velocity begin to show through more fully in the top line.

This also has implications, obviously, for how we think about organic sales in fiscal 2018.

Yes, Andrew, let me tackle that.

we are not going to get into fiscal 2018 this quarter; we'll tackle that next quarter.

But on TPDs, as we've talked before, a lot of this is exactly what we 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.

So 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 point 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 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 overhauling 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's been a couple of quarters now where you've been looking for the spending to kick in kind of 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 either in 4Q or hit 2018?

Or are we now had a structurally lower point from a relative SG&A standpoint?

Yes, Andrew.

We do have some (inaudible) so we have open headcount and we will continue to fill those, so we will see an uptick as we get into Q4 and into F 2018.

But having said that, we feel very good about how quickly we are able to cut the costs and that we are going to hit our targets earlier than we expected.

But there will be some increase into Q4 as we fill some of the headcount.

Thank you.

Ken Goldman, JPMorgan.

Hi, thank you.

Just a 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, maybe 13.5% or so.

It's really up less than 100 basis points year on year.

But, to your point, the operating margin is up over 400 basis points through the first three quarters.

So are there any other headwinds we should be aware about -- or aware of, rather, 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.

It 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 because it's going to split across the fiscal years, but we've got -- some of our new item introduction costs do hit right around the end of the fiscal year, the beginning of the new fiscal year.

So that's one of the variables that we are dealing with right now.

It's kind of why we gave the guidance the way we gave it on the top line and didn't try to thread 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 bleed across fiscal year.

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 US food companies, your shipments came in ahead of Nielsen and there's 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 may be picking up steam in the last few months?

Just trying to get a better understanding of where that gap is coming from.

You know, there's clearly been a shift to non-measured channels, Ken, but it's not -- I wouldn't put it all in 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's been widely discussed and even the warmer winter.

But we are not particularly exercised about those transitory drivers.

What we are focused on is the simple notion that kind of old as the hills and that is the fact that consumer behaviors in taste are potentially 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 are doing.

And 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, things like more snacking and more shopping, to your point, in unmeasured channels as well as things like more multicultural consumers.

So, we are tracking all this.

we are also, interestingly, seeing that the foods that are growing our premium price relative to those that are declining, meaning interestingly, quality is an important consideration in the consumer calculation around value, not just price.

So these findings, whether it's not unmeasured channels or other things, it's informing our innovation and go-to-market agenda.

And the way I think about it is in terms of the macro issues you are seeing, these are not what some might call woe is me times.

These are times that companies like ours need to be externally focused on innovation and that's what we are doing.

David Driscoll, Citi.

Great, thank you, and good morning.

Great.

Glad you can hear me.

So I had that same difficulty as the others did.

So 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 implied numbers here are something like minus 3 to minus 3.5.

Year to date revenues are down about six.

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 think that's -- we expect that to continue.

We may have some above the line slotting expenses in Q4 tied to new items.

But we are 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.

So that's what we expect and that's what's implied in our guidance.

Dave?

Yes, so, Dave, just to clarify your point, you're right, so the guidance implies that for the fourth quarter sales would be down 3.5% to get to be down 5% for the year.

So, as we said, down 5% or slightly below.

So that's where there could be some -- a little bit of difference there, but, as Sean said, we are going to continue to bend the trend, but that's how you kind of get to the number.

And then specifically in terms of the new products because there is a lot coming, the pipeline fill for these new products will occur in the first fiscal quarter of next year or will you catch some of it in the fourth quarter?

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

All right.

Last question for me is input costs.

Clearly it's been very favorable for you.

Can you just -- and apologies if you did quantify it, but can you quantify -- fiscal 2017 input costs, where it's coming in at?

And can you just give us any thoughts, just looking forward, again what I'm really getting after here is inputs -- you call it out as one of your top factors.

So just want to get a sense from you on what kind of longevity can input cost have for the Company?

David, so as we said at Investor Day for fiscal year 2017, we expected our inflation to be about 1% for the year.

That is what we are seeing.

If you look at the gross margin improvement this quarter, up 180 basis points or 110 if you exclude the divestiture, a good percentage of that was driven by overall supply chain productivity, which includes input costs reductions.

So we feel really good about this year.

We are in the process of putting together fiscal year 2018 so next quarter we'll give more specific guidance as it relates to next year.

But for this year, that 1% is what we are seeing and that's a big part of what's helping drive the favorability in gross margin.

Alexia Howard, Bernstein.

Good morning, everyone.

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 are hearing from others that retailers at the beginning of this year are asking for sharper price 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.

On the private label piece, first of all, obviously that is a category by category dynamic.

Fortunately, in our categories, on average, we don't have huge private label development, so it tends to be less of a factor for us.

In terms of promotional environment, clearly we have cut back materially on our promotional activities, but you've got to put it in perspective.

That's relative to an excessively promotional posture as a Company.

We still do plenty of promoting, still have a large trade budget, it's just more efficient and it's more practical than it was historically.

So, to the degree that we need to be competitive in our categories on promotion, we are.

We are just -- we are not out over our skis as much as we were historically.

So it's just -- it's not been an abandonment in any way, shape or form of promotion.

Promotion plays a role and it's obviously played a different role in different categories, but it's been more of a rightsizing of the way we promote, particularly around depth of promotion.

And in some brands, it's a frequency issue as well.

So, there is still plenty of promotion out there.

There are customers who continue to have more of a promotional strategy than perhaps others.

That tends to be, on average, waning a little bit, but it's still out there and some of those are regional dynamics.

Great.

And just as a follow-up, you mentioned an interest in pursuing acquisition opportunities and I think you said this for some time now.

How rich is the environment in terms of the opportunities out there and can you just remind us of what the key criteria are financially for those?

Yes, clearly, M&A will be part of our playbook, whether it's smaller 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.

Jonathan Feeney, Consumer Edge Research.

Thank you very much.

Appreciate the questions.

So, a simple question.

I don't expect you to give us gross margin by segment, but if you could give us some flavor for how -- the means by which you are coping with the volume deleverage in Frozen and -- Refrigerated & Frozen and Grocery, just those segments particularly with 5%, 6% volume declines, and yet you are beating at the profit line.

How are you -- how much of that is coping with that on the manufacturing, with manufacturing productivity and how much of that is on the SG&A side because I'm trying to figure what inning you are in this journey.

And maybe if you could tell us how that is working right now, it might give us a better sense.

Thank you.

Yes, Jon, both the SG&A programs that we been working 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 that we've had as a company, which may be a bit different from what you see elsewhere in the industry is, we planned for these volume reductions.

We planned for a pullback in promotion.

We planned 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.

And I tip my hat to them because they have done nothing short of an extraordinary job.

So we are 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 are 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.

Okay, thank you.

Rob Dickerson, Deutsche Bank.

Thank you.

Just come back, I guess, on Q4 and SG&A and the incremental spend.

Is this, 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 is toward the very end of the fiscal year.

This is a year-over-year increase on an 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 the line of questioning around how much we really should expect or how much incremental spend we should expect to see in Q4 given the margin guidance.

Thanks.

You know, Rob, maybe what would be most helpful, just to kind of describe what we are going through.

As we reset this Company, redesigned our organization and we also moved geographies, we created some vacancies and then fully recognizing that we are building new capabilities around insights, innovation, integrated margin management, etc., and that we would need to bring in some folks who are exquisitely skilled in these areas that we call differentiating capabilities.

We are very particular in terms of who we bring on to our team.

We are very patient to get the right people on the bus and we have operated that way this year, which is why we have lived with some of these vacancies.

But, we continue to hire people.

We continue to bring these people in.

That's going to continue in Q4.

It's a directional thing.

It's more of a migration, small migration than I would say any kind of a -- use the word re-base.

I wouldn't think in that regard at all.

Okay, fair enough.

And then so as we think about 2018, it seems like you're, obviously by the end of this fiscal year that you are then at a point where you are bit more comfortable with where overhead is and I think your original guidance over the next few years was that SG&A as a percentage of sales would essentially be flat so it's more -- obviously it's more of the top line operating leverage and gross margin story off of 2017.

Is that flattish SG&A as percent of sales for 2018.

That still seems completely rational.

Yes, so Rob, we'll get into more granularity on our next call for 2018.

We did at Investor Day say that SG&A as a percentage of sales would be flat over the three-year horizon at 10.8%.

So we are 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 will give you more detail on F 2018, but generally, that's the way we are looking at it, yes.

Okay, great.

And then just quick follow-up on balance sheet, M&A, buyback, I know you originally said $1 billion ASR for the year.

I'm assuming that's on track or you are on track to complete that, so Q4 would be the balance of what's left..

That's one.

And then two is just -- leverage now is trailing 12 months is about, four quarters is about 1.5 times net debt.

So as we think forward in acquisitions, I know you want them to be value added and ROIC accretive, etc., but should we be thinking more of what we've seen so far, like a number of smaller, growth year acquisitions to help you leverage your current capacity and supply chain?

Or you are essentially open to whatever creates value, big or small?

Rob, let me take the first part of that and then I can pass it to Sean.

So as it relates to the share repurchase, it is not in ASR, by the way, it's open market.

So, year-to-date, we've repurchased about 15 million shares of stock at about $600 million.

So at the run rate that we've seen for Q3, we would expect to reach our previously announced target of $1 billion for fiscal 2017 in the fourth quarter.

So that's where we are and you can see the details in the earnings release.

Sean, I'll pass it --.

Yes, on your M&A question, Rob, at Investor Day, we talked about two kinds of acquisitions, we are open to modernizing acquisitions which are similar 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 tilts one way or the other in that it is a string of pearls strategy.

As you said, it's not.

We are open to both and we are open to both and either side of that ledger makes sense for us and whether or not there is actionability in a way that makes sense financially for us.

So we've got to be in a position of readiness for either kinds of deals and I feel like we are should be right opportunities emerge and, in the most recent case with Thanasi Foods, at happen to be a modernizing acquisition.

Matthew Grainger, Morgan Stanley.

Hi, good morning, everyone.

Thanks.

So one more on the M&A environment.

This is for Sean and Dave both.

On the larger synergistic deals, just curious, does the uncertainty around corporate tax reform and the fact that that is kind of dragging on here, present any significant hurdles as you potentially try and have discussions about those types of or those -- that size of transaction in a disciplined way?

Matt, when we look at acquisitions, we start with the strategic rationale, right?

So if you're talking about a synergistic acquisition, we are going to go through our acquisition criteria to make sure it makes sense strategically.

And then, obviously, all the financial metrics makes 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 is nothing solid, right?

So, all you can do is scenario plan, but that is clearly not driving what we are 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.

And I'm not sure if you can give any sort of guidance or additional color here but just on the performance of Ardent Mills and the near-term outlook there, Q3 was pretty significantly improved over anything we've seen for the past 12 to 15 months.

Should we take that as a sign that the worst of the issues that you were facing in the milling industry are now in the past?

Or will there continue to be some volatility there for the next few quarters?

I think just by its nature there is some volatility in that industry, but if you look at Ardent Mills for the third quarter we had a very solid third quarter.

The volumes increased.

They took advantage of market opportunities to build share and they are recognizing operating efficiencies at the plants which, a year ago they were actually investing in their infrastructure.

So we are seeing some of that pay off.

So pleased with the progress they are making, for sure.

Okay, great.

Thanks again.

Jason English, Goldman Sachs.

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 has been a bit of a drag from some of your pass-through categories and allowing the overall mix benefits of your innovation and the net price benefits of 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 forward looks like?

When we can expect maybe some of that pressure from optics on the top line to abate?

Let me start, Jason, as you look at the quarter, overall we had about 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 & 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 & Snacks and 90 basis points and 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.

So that's really a timing thing for the third quarter.

We feel really good about the progress we are making in both our pricing and our trade efficiency and we are seeing that this quarter.

It was masked a little bit by the mix, but that is 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 transition.

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 are delivering quite well.

You are delivering faster than expected.

But the top line turn is probably going to take a little bit longer to get there.

And I guess the concern that 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 sort of dripping out a little bit less.

Is that -- it's hard without being able to talk about guidance but can you give us a sense or a 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?

You know, 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 at CAGNY and 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.

And that's why we, at our Investor Day, gave the long-term topline algorithm that we did is we believe did that what we are doing this fiscal year is essential in terms of creating a foundation off of which to build.

And what we are 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.

So -- and in the supply chain, 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 and realized productivity going forward as part of our program.

So you put all that together and I think Conagra remains a very compelling investment for our investors and we've got very solid shareholder value creation potential here.

Robert Moskow, Credit Suisse.

Good morning.

Thank you for the question.

This is Robert Connor on for Rob Moskow.

Just a quick clarifying question.

Are you -- you talked a lot about the innovation rolling out in first-quarter 2018.

So are you actually expecting your advertising budget to increase for 2018?

Well, we are not giving guidance on 2018 today, but I have spoken to the market many times about how I think about our A&P spend, vis-a-vis some other companies I worked for.

Our A&P budget is -- I think it's very robust.

It's competitive.

We've been in the mid-4s.

It's not the kind of A&P rate that, in my mind, require some kind of A&P rebase.

Now what we have been doing on A&P, though, is trying to get more effective and efficient within our existing spend.

So Darren's team has a very aggressive program to shift more of our A&P budget from nonworking 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 are much more digital, social today than traditional TV.

The mix of marketing tools that we use is different.

It's more effective, and the net of all of this is, I feel like our overall and P level is about right while it continues to get more effective.

Thanks.

Akshay Jagdale, Jefferies.

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.

I just wanted to ask a question on sales.

So, when do you expect to fully lap the portfolio repositioning efforts that you guys are doing, and how soon do you think we might begin to see positive sales growth for the total Company (technical difficulty)?

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.

Yes, Lubi we are not going to give guidance in terms of sales next year or by quarter, but what I do want to point out -- I've said this before is that as you think about -- a big part of what we've been doing is walking away from deep discount promotions.

Well, promotional activities are long-lead-time planning items with customers, so there is not one given quarter where we lap it and it's over.

It varies by customers.

Some customers have their events locked in out further into the future than others.

So we'll continue to titrate off of these types of super hot deals and that will go on for a while until we get it out of our base.

But, obviously, a lot of the heavier lifting in that regard will be behind us as we exit this year.

But there will still be -- we still have certain customers in certain regions on certain SKUs who even this past year have done deeper discount deals and we'll navigate our way out of those over time.

So, that's kind of a principal point around how this thing unfolds.

In terms of the building blocks to an improved top line, one is, to get some of the weaker businesses out of our base, to create a more stable foundation.

And, two, is to begin to really get -- re-engage the consumer to shop our brands off of the shelf based on the merits of the brands not based on the depth of the discount on deal.

And you're seeing that begin to happen already.

As you look at the velocities on base that we are seeing today, they are higher and what that really is indicating is that we are succeeding in reconditioning our consumer, the shopper, to re-experience our brands in a full-priced, non-merchandise condition.

And when you then layer on top of that new marketing and new innovation, we think that's the right way to run a branded portfolio.

Thanks.

That's very helpful.

And then if I could ask a question on guidance.

I think you'd mentioned that your revised outlook reflects some -- there is some timing -- there is some benefit 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, those -- that was related to our SG&A, and as we mentioned, that we've obviously -- our SG&A is very favorable and that's been planned but we've had some additional favorability, primarily from open headcount.

We are filling a lot of positions and we are in the process of doing that.

So as we continue to fill them, more of those costs will come in in Q4 and into next year.

So that's really what we are referring to there.

Okay.

Thank you.

I'll pass it on.

Thank you.

This concludes our question-and-answer session.

Mr. Nystedt, I'll hand the conference back to you for final remarks or closing comments.

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.

As always, we are available for discussions.

Thank you for your interest in Conagra.

Thank you.

This concludes today's Q3 2017 Conagra Brands earnings call.

Thank you again for attending and have a good day.