康尼格拉食品 (CAG) 2019 Q2 法說會逐字稿

Good morning, and welcome to the Conagra Brands Second Quarter Fiscal Year 2018 -- 2019 Earnings Conference Call.

(Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Brian Kearney, Senior Director of Investor Relations.

Mr. Kearney, please go ahead.

Good morning, everyone.

Thanks for joining us and happy holidays.

I'll remind you that we will be making some forward-looking statements during today's call.

While we are making those statements in good faith, we do not have any guarantee about the results that we will achieve.

Descriptions of risk factors are included in the documents we filed with the SEC.

Also, we will be discussing some non-GAAP financial measures.

References to adjusted items, including organic net sales growth refer to measures that exclude items management believes impact the comparability for the period referenced.

Please see the earnings press release for additional information on our comparability items.

The reconciliations of those adjusted measures to the most directly comparable GAAP measures can be found in either of the earnings press release or in the earnings slides, both of which can be found in the Investor Relations section of our website, conagrabrands.com.

Finally, we will be making references to Total Conagra Brands as well as Legacy Conagra Brands.

References to Legacy Conagra Brands refer to measures that exclude any income or expenses associated with the recently acquired Pinnacle Foods business.

With that, I'll turn it over to Sean.

Thanks, Brian.

Good morning, everyone, and happy holidays.

Thank you for joining our second quarter fiscal 2019 earnings conference call.

On today's call, we will unpack how we're driving consumption and growth, particularly in our frozen and snacks businesses.

And we will provide our initial perspective on, and plans for, the Pinnacle business.

There's a lot to cover.

So let's jump right in.

In terms of the Legacy Conagra brands business, we built on our recent momentum during the second quarter as we continued to gain share in key Refrigerated & Frozen and Grocery & Snacks businesses.

Given our performance to date and our expectations for the year, we are reaffirming our fiscal 2019 sales and margin guidance for Legacy Conagra Brands.

In addition to driving results in our Legacy Conagra Brands business, we completed the acquisition of Pinnacle Foods.

In the short time since we've owned the business, our team has been working hard on the integration, which is progressing seamlessly.

Later in the call, we'll share more on what we've learned about Pinnacle over the past several weeks, including our initial plans to address some of the challenges facing that portfolio.

Importantly, we believe that we have the right playbook to address these issues, and that work is already underway.

While today's comments regarding Pinnacle will be preliminary, we will have much more to say about Pinnacle at our Investor Day on April 10, 2019, in Chicago, where we plan to provide a comprehensive update on our progress, opportunities and outlook.

We hope you can attend.

Turning to the results for the quarter.

From a high level, we continued to deliver consumption growth for Legacy Conagra Brands, driven by frozen and snacks, where we have focused our efforts on brand building and innovation.

The optics of the quarter were affected by the impact of last year's hurricanes.

Also, some shipment slid from late Q2 into early Q3, which is not unusual around the holidays.

Overall, though, sales were largely in line with our expectations, and importantly, we exceeded our margin expectations.

You can see on Slide 7, our domestic retail segment continued to demonstrate the impact of the successful execution of our strategy in the form of consistent, accelerating consumption trends.

Consumer takeaway is the key driver of growth.

Our deliberate actions to invest in brand building and deliver a strong innovation slate, particularly in our frozen and Snacks & Sweet Treats businesses is driving strong year-over-year consumption growth as well as consistent improvement on a 2-year basis.

It's worth noting that we posted positive year-over-year retail sales growth in every month of calendar 2018, except for September, the month that we lapped last year's hurricanes.

As you can see on Slide 8, we continued to drive growth based on strong fundamentals tied to the strength of our brands.

Our base velocity sales and TPDs remain in fertile territory and continue to gain momentum on a 2-year basis.

To provide the proper context for this quarter's sales performance, we would like to take a quick step back and remind you of what took place in fiscal 2018.

As you may recall from Q2 of fiscal '18, we saw an uptick in demand due to the hurricanes, which increased last year's Q2 net sales by approximately 220 basis points.

So don't look at this year's Q2 growth rate in isolation.

As you can see on Slide 9, if we look at the growth on a 2-year basis, organic net sales have grown 70 basis points.

We will now turn to our segment results, starting with Refrigerated & Frozen.

Our results here tell a tale of 2 cities based on where we have applied our playbook and where we have not.

The segment overall is up 50 basis points with frozen driving all of the growth.

The declines in refrigerated reflect the fact that with the exception of Reddi-wip, we have yet to bring innovation to the marketplace.

As one of the final pieces of the Legacy Conagra portfolio to receive attention, our refrigerated products still appear on the shelf today, largely the same way they did in the '90s and it shows in the results.

However, there is a slate of exciting innovation coming to refrigerated in 2019.

And we will debut these exciting Hebrew National Egg Beaters and spread innovations at our Investor Day in April.

So stay tuned.

We've talked a lot in prior quarters about the successful implementation of our playbook in frozen.

As you can see on Slide 11, that success continues.

We are reinvigorating and leading this $5.2 billion category.

And our frozen single-serve meals continue to be the fastest-growing in terms of total retail sales.

The chart on this page demonstrates that our growth in the absolute is not only strong but it's accelerating.

This growth has been the result of our rigorous approach to modernizing and premiumizing our brands through renovation and innovation.

And the benefits are clear, we're increasing household penetration, average selling prices are moving up and promotions are moving down.

We're growing both sales and distribution and customers are benefiting via category growth and improved margins.

As you can see on the left, we have also benefited from increasing household penetration, which continues to build.

In the most recent quarter alone, we attracted 1.7 million more households to our products, which is on top of the 1.8 million added a year ago.

While we see growth coming from all age cohorts, including millennials, Gen X and boomers, our growth does over-index to younger generations.

Younger consumers are clamoring for contemporary frozen foods, but large manufacturers have been slow to move in that direction.

We've incorporated the modern food attributes millennials value into our iconic brands to reimagine our frozen portfolio.

As a result, we're capturing an outsize share of the growth among millennial and Gen X consumers.

Slide 14 emphasizes once again how the strength of our brands is allowing us to capture growth the right way.

As the chart on the left shows, given our product quality improvements, we have been able to consistently increase the price per unit in our frozen single-serve meals.

At the same time, our single-serve meals are requiring fewer promotions.

And our approach is not only having a positive impact on our results, but it's also driving category growth in frozen single-serve meals overall.

In the last 52 weeks, the category is up [$138 million], with [$184 million] of that coming from us.

Our retailers value what we're doing and they're hungry for more.

The results of our efforts in frozen could not be more clear.

Our Legacy Conagra frozen single-serve meals are the fastest growing in the industry, both in terms of retail sales and Total Points of Distribution.

This demonstrates that our proven approach to brand building and innovation is helping us gain share.

Retailers care about category growth and they're allocating more shelf space to our products because we're driving the growth in the category.

Importantly, we continue to see years of runway in frozen and expect the space to benefit from long-term demographic tailwinds.

Conagra is in a tremendous position to capitalize on this opportunity especially after the acquisition of Pinnacle Foods and its strong portfolio of frozen brands.

Turning to our Grocery & Snacks segment.

As a reminder, this segment was heavily impacted by last year's hurricanes, particularly, in our Shelf-Stable Meals & Sides businesses, which benefited from the pantry stocking behavior that typically takes place around a major storm.

If you look at just the Snacks businesses, we grew organic net sales by 3.8% during the quarter.

As a reminder, we have a nearly $2 billion Snacks & Sweet Treats business that is large but focused.

By applying the Conagra playbook, we are delivering strong and accelerating growth in this important business, including 6.4% retail sales growth in the second quarter.

We see a tremendous opportunity for that growth to continue.

At the National Association of Convenience Stores show, also known as NACS, we debuted our new approach to Snacks & Sweet Treats to our retailers.

Slide 19 shows some of the innovation we introduced, which includes new varieties and on-trend flavors and reflects our focus on optimizing price pack architecture with multiple product configurations.

Our products were well received and we expect to continue to build on the strong momentum we delivered in the quarter as these new innovations hit the market in 2019.

So we feel good about our momentum in the Legacy Conagra business.

And now we have the opportunity to build that momentum over time with the acquisition of Pinnacle.

So let's talk Pinnacle.

Our second quarter includes 31 days of Pinnacle's results.

We remain excited about the opportunities presented by the combined portfolio.

The addition of Pinnacle expands our presence in our most strategic categories, including frozen foods and snacks and brings together 2 complementary portfolios of iconic brands.

We successfully closed the transaction faster than originally expected.

And frankly, I'm glad we've taken the reins.

We've all seen the weak scanner data on key Pinnacle brands over the past several months.

And the 31 days of results we're reporting today, aren't where they need to be.

We need to bring our executional capabilities to the Pinnacle business now.

We've spent 8 weeks since close going deep on the Pinnacle business.

We now have a clear understanding of the source of the weakness in the business.

And we've started to take action.

I'm going to spend a few minutes sharing what we've learned.

I'm also going to be transparent about where we see the Pinnacle business landing its legacy fiscal year versus its stand-alone targets.

And most importantly, I'm going to speak to the opportunity that lies ahead.

Here are the key takeaways.

First, near-term issues do exist in the Pinnacle business but they are fixable and we are the right team to fix them.

Conagra has the capabilities to put Pinnacle's brands back on track and deliver for its customers and consumers and shareholders.

Second, our work in these initial weeks post-close, has revealed the opportunity to exceed our initial synergy target for the transaction.

And third, I don't want there to be any doubt, we are as excited as ever to have the Pinnacle family of brands in our portfolio.

Let's look back at Pinnacle's recent history.

Its business strength in the years since its IPO relied heavily on strong innovation and flawless execution on what Pinnacle historically referred to as its leadership brands, Birds Eye, Wish-Bone and Duncan Hines, among others.

This contributed to steady growth sustained over time.

Slide 24 shows that growth stalled on these 3 key leadership brands in 2018.

Given this, previous shared gains were reversed.

Birds Eye, Duncan Hines and Wish-Bone have all suffered sales and distribution losses this past year.

And this weakness accounts for the vast majority of Pinnacle's current challenges.

So what happened?

Simply put, innovation and execution came up short.

And when that happens, in my experience, a virtue-LESS cycle can sometimes emerge and that appears to be the case with respect to Pinnacle's leadership brands.

While there was plenty of innovation activity over the past 2 years, the results clearly show the innovation was insufficient to sustain growth, primarily because it was subpar in its execution.

With regards to execution, Pinnacle overextended new items in the same demand pools, favored high margins over high-quality and highly competitive products and missed some major consumer trends.

These missed steps ultimately undermined brand strength and pricing power, while gross productivity was insufficient to make up for operational offsets like a major product recall.

Instead of improving the products, more subpar SKUs entered the market, which led to even more inefficient SKU proliferation.

And then to try to jump-start volume, low ROI trade was infused behind price promotion.

Compounding this unenviable situation with acute cost inflation, particularly in transportation, and better innovation from the competition, and as you'd expect, the side effect of disappointing customers.

When Birds Eye, Duncan Hines and Wish-Bone delved further into the virtue-LESS cycle and brand performance stalled, customers reduced distribution.

Since then each brand has lost share to its competition.

Given these dynamics, the Pinnacle business will unfortunately under-deliver its preclose internal stand-alone targets.

On sales, we now estimate the Pinnacle portfolio will land calendar year '18 at roughly $3 billion, which is about $160 million or 5% below Pinnacle's target.

Approximately, $30 million of this miss is driven by our postclose decisions to exit some year-end promotions that we saw as extremely low ROI.

At adjusted gross margin, we now estimate Pinnacle would have closed out calendar year '18 at approximately 28%, which is roughly 230 basis points below its internal targets.

Dave will go deeper on all of this shortly.

And as you think about the balance of this fiscal year, keep in mind that historically Pinnacle's gross margin performance was lower in the front half of the calendar year than the back half.

So clearly, these results are highly disappointing.

And they mean, we're going to be putting our near-term focus on fixing the fundamentals before the business returns to growth.

And we will restore growth.

Despite recent declines in sales and distribution, base velocities have been improving as noninvestment grade SKUs are being pruned.

Most of the Pinnacle products that remain on shelves today are high quality, which gives us a good base to build from.

Let me be clear, Pinnacle's current challenges can and will be fixed.

Working collaboratively with the Pinnacle team, we are taking action to reverse these trends, we're turning off inefficient trade deals, shutting down weak innovation projects and identifying areas where focus is desperately needed.

We have also devised an action plan.

First things first, we will continue to flawlessly integrate the business.

Our people, processes and technology integrations are on track today and we will not lose focus on that important work.

Second, we will implement our value-over-volume approach on the Pinnacle portfolio with an eye on cutting weak and low-margin SKUs and redesigning trade programs for better ROI.

And third, we will leverage our proven insights and innovation capabilities to rebuild Pinnacle's volume base through innovation and renovation that modernizes and premiumizes Pinnacle's brands.

We will return these iconic brands to the desired level of performance and we will do it convincingly.

But it won't happen overnight.

Pinnacle's fiscal year was aligned to the calendar year and as a result, it had communicated much of its 2019 innovation and trade plans to customers preclose.

Fortunately, this work was built on the same weakened footing embedded in Pinnacle's 2018 initiatives.

As I mentioned, we are absolutely stopping the initiatives that we can responsibly stop, but most of our new work won't be ready to show customers until well into calendar 2019.

As a result, I don't expect a material improvement in Pinnacle's underlying trends until the second half of Conagra's fiscal 2020.

Now that you have a sense of the actions we're taking on the brand execution side of the house, let me spend a moment on our transaction expectations.

First, synergies.

In short, we see more opportunity here than we initially estimated.

Now that we've had a chance to go deeper and get more granular in areas where we just couldn't get full transparency preclose, we're quite pleased.

Dave will talk more about this during his comments.

But not only are we on track to deliver $215 million of cost synergies by fiscal 2022, we see real upside.

In fact, while the current Pinnacle weakness means, we are starting from a lower base in fiscal year 2019, more on that from Dave in a minute, we expect to over-deliver on cost synergies and hit the fiscal 2022 EPS target that drove our original EPS accretion guidance for this transaction.

Finally, we remain committed to the leverage target that we previously announced as well as a solid investment grade credit rating.

So to sum up Pinnacle for now, the deterioration in the legacy Pinnacle business over the course of calendar year 2018 means we have some hard work to do.

However, my confidence in our ability to deliver sustainable, profitable growth for investors with this acquisition is unwavering.

One, the strategic logic for this transaction remains compelling.

The acquisition provides us with iconic brands and attractive categories, including frozen and snacks.

It offers us greater scale with customers and increases our health and wellness credentials.

Two, the challenges that the Pinnacle businesses face have been largely self-inflicted due to subpar innovation and executional missteps.

And we have the right capabilities to address these challenges.

And three, let me reiterate, our transaction expectations remain intact.

In short, the implication of our assessment is one of near-term timing and not of absolute success.

Looking ahead, we will not take our foot off the gas in the Legacy Conagra business.

We will continue to roll out innovation and to drive the top line and build upon our accelerated momentum in frozen and snacks, surgically seize opportunities in Refrigerated and Condiments & Enhancers and ensure our reliable contributor businesses are competitive.

We also remain squarely focused on executing across our margin drivers to fuel growth.

And as we just discussed, we have already mobilized to aggressively apply our playbook to the Pinnacle portfolio.

We look forward to sharing a comprehensive update on our progress and outlook during our Investor Day on April 10 in Chicago.

With that, I'll turn it over to Dave.

Thank you, Sean, and good morning, everyone.

Slide 33 outlines our performance for the quarter.

As Sean mentioned, Q2 came in largely in line with our expectations for Legacy Conagra.

I'll walk through the quarter and elements of both the Legacy Conagra and Pinnacle businesses and share our perspectives on the balance of the year.

So let's jump in.

Net sales for the second quarter were up 9.7% compared to a year ago, reflecting the inclusion of Pinnacle for 31 days.

Organic net sales, excluding the effects of the sale of Trenton, were down 1.6%.

Organic net sales were impacted by both the hurricanes in Q2 a year ago and some quarter-end shipments that moved into early Q3.

For the quarter, adjusted gross profit increased 7.6% to $704 million and adjusted gross margin declined 58 basis points to 29.5%.

The addition of Pinnacle's results drove the adjusted gross profit dollar improvement.

And I'll walk you through the adjusted gross margin bridge in a moment.

In the quarter, total company A&P expense decreased to $69 million or 2.9% of net sales.

Although down from the prior year, our investment was up from 2.3% of net sales in the first quarter due to seasonality.

The year-on-year comparison reflects our continued shift from A&P investment to higher ROI retailer marketing.

Adjusted SG&A for the quarter was down 4.4% compared to the prior year and was 9.1% of net sales.

The decrease was primarily driven by lower incentive-based compensation in the Legacy Conagra business.

This included lower stock-based compensation expense due to the lower share price, which was partially offset by the addition of expenses related to the Pinnacle business.

Adjusted operating profit increased 22.3% for the quarter and adjusted operating margin was 17.5%, up 181 basis points versus a year ago.

Higher-than-expected gross margin in Legacy Conagra, together with favorable SG&A and A&P spending, contributed to these results.

Adjusted diluted EPS was $0.67 for the quarter, up 21.8% from the prior year driven by strong operating profit in the Legacy Conagra business.

Slide 34 outlines the drivers of our net sales change versus the same period a year ago.

During the quarter, organic net sales growth, ex Trenton, declined 1.6%.

Sales related to the 2 hurricanes in the second quarter a year ago negatively impacted net sales by an estimated 220 basis points.

This impact was partially offset by an increase in price mix before retailer marketing investments of 1.1%.

Total Conagra net sales grew 9.7% driven by the acquisitions of Pinnacle, Angie's and Sandwich Bros.

The sales of the Trenton facility and Canadian Del Monte business partially offset the acquisition benefits.

FX negatively impacted net sales by 40 basis points versus the prior year due to the weakening of the Mexican peso and Canadian dollar.

Slide 35 outlines the adjusted gross margin change for the quarter.

We continued our strategic increase in retailer marketing investments in the second quarter, which reduced adjusted gross margin by 40 basis points.

Input cost inflation of 2.9% in the second quarter negatively impacted adjusted gross margin another 200 basis points.

Transportation and warehousing costs were up 10% in the quarter.

We also saw inflation on packaging and certain ingredients with deflation in proteins, fats and oils.

We offset most of the inflation in the Legacy Conagra business with favorable price mix and realized productivity improvements, which improved adjusted gross margin 180 basis points for the second quarter.

Mix was negatively impacted in the quarter from higher margin hurricane-related Foodservice volumes sold in the prior year's second quarter.

Pinnacle adjusted gross margin was in line with Legacy Conagra for Q2.

Turning to Slide 36.

This outlines our net sales performance by reporting segment.

The Grocery & Snacks and Foodservice segments were both negatively impacted in the quarter by the prior year sales resulting from the 2 hurricanes.

The Grocery & Snacks organic net sales decline was partially offset by organic net sales growth of 3.8% for the Snacks & Sweet Treats business, driven by retail consumption of 6.4% in the quarter.

The Foodservice business was further impacted by the sale of the Trenton facility.

Excluding the hurricane and Trenton impacts, Foodservice net sales would have been approximately flat versus a year ago.

On Refrigerated & Frozen, as Sean discussed, organic net sales were up 0.5%, driven by continued strong performance in Frozen, up plus 1.8%, partially offset by a decline in Refrigerated of 4.8%.

Our Legacy Conagra single-serve frozen meal performance continued to be very strong with retail consumption up 11.3% in the quarter.

International segment organic net sales were up 3.9% in the quarter, driven by both volume and price mix strength.

Pinnacle delivered $259 million in net sales in the second quarter.

Moving to Slide 37.

You can see that Legacy Conagra adjusted operating profit increased 5.4%.

And Legacy Conagra adjusted operating margin came in at 16.9% for the second quarter, significantly above both year ago performance and second quarter guidance.

Pinnacle adjusted operating margin was 22%, as lower than expected gross margin was offset by better than estimated SG&A and A&P reductions.

Total Conagra adjusted operating profit was up 22.3% versus a year ago, and adjusted operating margin was 17.5% for the second quarter.

Slide 38 outlines the drivers of our 21.8% adjusted EPS improvement for the quarter versus a year ago.

We prepared the bridge to first show Legacy Conagra EPS drivers followed by the Pinnacle adjusted operating profit and net incremental capital costs associated with the acquisition.

Starting on the left, Legacy Conagra EPS growth from $0.55 to $0.68 was driven by increased adjusted operating profit along with a lower effective tax rate and lower weighted average shares prior to our equity issuances related to the Pinnacle acquisition.

The impact of increased Pinnacle adjusted operating profit, offset by higher incremental adjusted interest expense and share dilution from the debt and equity issued to finance the Pinnacle acquisition, reduced EPS to $0.67.

Even with the dilutive impact of Pinnacle, EPS of $0.67 for the second quarter exceeded the Legacy Conagra guidance of $0.57 to $0.60.

Slide 39 summarizes select balance sheet and cash flow information for the quarter.

Cash flow from operating activities from continuing operations was $251 million for the 6 months ended Q2, which was down from a year ago due to higher costs incurred for acquisitions and divestitures and higher working capital driven by the shift in the timing of AR cash collections.

CapEx for the 6 months ended Q2 was $133 million, up slightly versus a year ago due to the timing of projects.

Net debt at the end of the second quarter was $11.1 billion, representing a net debt leverage ratio of approximately 5x on the latest 12-months' pro forma EBITDA in line with our expectations.

At the end of the second quarter, our average debt maturity was approximately 9 to 10 years and our weighted average coupon was approximately 4.7%.

At the end of the second quarter, fixed rate debt was approximately 83% of our total debt.

There are no prepayment penalties on our variable-rate term loans which totaled $1.3 billion at the end of Q2, giving us flexibility to delever.

As Sean mentioned, we are pleased with the progress we've made in identifying synergies and we expect to deliver more than the $215 million in total cost synergies we previously disclosed.

As a reminder, our synergy estimates are net of additional reinvestments.

And we expect this net synergy estimate to benefit the P&L between fiscal year 2019 and fiscal year 2022.

We expect to over-deliver on our synergy targets without incurring any cash cost to achieve above the estimated $355 million.

We estimate that we will deliver approximately $20 million in synergy savings or about 10% of the originally disclosed amount for full year fiscal 2019.

As for the sources of upside, we see incremental savings, primarily in the areas of SG&A and procurement.

We are still working the details but intend to deliver these higher savings as quickly as possible.

As Sean mentioned, we anticipate leveraging the synergy upside to deliver strong EPS growth, off the estimated fiscal year 2019 EPS base, to get us to the fiscal year '22 EPS target that drove our original EPS accretion guidance for this transaction.

We will provide more information supporting a new long-term algorithm at our Investor Day on April 10.

And finally, we remain committed to our debt leverage target, which I will discuss shortly.

Slide 41 summarizes our updated fiscal year 2019 outlook for both the Legacy Conagra business and on the total company, inclusive of the impact of Pinnacle from the closing date of October 26, 2018, to the end of the Conagra fiscal year, May 26, 2019.

In the first column, you'll see that we are reaffirming our Legacy Conagra fiscal year 2019 full year guidance.

For this business, which still includes estimates for Wesson for the full year 2019, we expect organic net sales growth to be in the range of 1% to 2%, excluding the impact of the Trenton facility sale.

We also expect the Legacy Conagra reported net sales to be about 50 basis points lower than organic, due to net divestitures and estimated negative FX.

We continue to expect adjusted gross margin for Legacy Conagra to be in the range of 29.7% to 30%.

As we've been discussing, this metric is affected by our continued shifts of tail A&P investments to higher ROI retailer marketing investments.

It is also affected by an expected input cost inflation rate of 3% to 3.2% of cost of goods sold.

We continue to expect Legacy Conagra adjusted operating margin in the range of 15% to 15.3%.

For Pinnacle, we estimate net sales will be down mid-single digits for our fiscal year 2019 versus the same period a year ago.

This equates to $1.7 billion to $1.75 billion in Pinnacle net sales for the 7-month period that Pinnacle will be included in Conagra Brands for fiscal 2019.

This estimate reflects the negative consumption trends in the Pinnacle business, along with an estimated $30 million of negative net sales impact from our postclose decision to exit some low ROI price promotions that Sean discussed earlier.

We are estimating Pinnacle adjusted gross margins of 27% to 27.3% for the 7-month period of performance in fiscal 2019.

Pinnacle's input cost inflation is currently trending over 5%, with expectations for that to continue through the end of our fiscal year 2019.

The Pinnacle gross margin estimate includes a benefit of approximately 100 basis points due to certain accounting reclassifications between cost of goods sold and SG&A that we recorded as we conformed Pinnacle's accounting practices with Conagra's.

We are estimating all-in Pinnacle adjusted operating margins of 14.6% to 14.9%.

The Pinnacle reporting segment is being impacted by both intangible asset amortization expense, estimated at $17 million for the period, and an estimate of $20 million in cost reduction synergies.

Also, included in this estimate are Pinnacle-related expenses that will ultimately be recorded in total Conagra corporate expense and not the segment for fiscal year 2019.

We are also providing additional updated total company guidance today.

We are estimating an adjusted effective tax rate of 24% to 25% for fiscal year 2019.

We estimate adjusted net interest expense in the range of $390 million to $395 million.

And we estimate average diluted shares outstanding of approximately $446 million for full year fiscal 2019.

Finally, we are estimating adjusted diluted EPS from continuing operations in the range of $2.03 to $2.08, reflecting the outlook information outlined.

As we have consistently communicated, we remain strongly committed to a solid investment grade credit rating.

And our target leverage ratio is 3.5x adjusted EBITDA, which we expect to reach by the end of fiscal year 2021.

As previously announced, we expect to maintain our quarterly dividend at the current annual rate of $0.85 per share during fiscal year 2019.

We suspended our share repurchase program in the fourth quarter of fiscal year 2018.

And we will consider repurchasing shares if we are tracking ahead of our leverage targets.

Also, we have approximately $720 million remaining on our capital loss carryforward, which does not expire until the end of fiscal year 2021.

On Tuesday, we announced that we signed a definitive agreement to sell the Wesson oil brand to Richardson International.

We expect the transaction to be closed by the end of the first quarter of calendar year 2019, subject to customary closing conditions.

That concludes my remarks.

I will now pass it to the operator as Sean, Tom McGough, Darren Serrao and I are ready to take your questions.

(Operator Instructions) Our first question today comes from Andrew Lazar with Barclays.

Okay.

I guess, first off, just -- I know, Sean, that Pinnacle had its own gross margin target before the deal was announced.

And it seem to us that maybe some of this could be incremental to the Pinnacle deal synergy target that you had put out there.

So a more optimistic scenario could have led maybe closer to 10% of sales of synergies rather than the stated 7%.

Now, admittedly that was before the deal closed.

But it certainly sounded to us that you thought maybe initially that some of that Pinnacle margin opportunity could be delivered upon under Conagra's ownership.

So it certainly doesn't seem like that's the case at this point.

Is it a matter of just digging into Pinnacle once the deal closed and finding out some of the things that you mentioned?

Or I guess, just another way of asking, is the Pinnacle asset just in a completely different place than maybe you thought it was when you agreed to the deal?

Because I'm still -- I guess, I'm seeing some of the -- hearing some of the language that you're using and describing the asset and the position its currently in and we've all seen the scanner data.

But it just -- that seems far more severe, right, than I think -- at least I would have expected?

Yes, let me try to tackle that, Andrew.

There's a lot in there.

Clearly, we've coveted this portfolio for a while because of the long-term value creation potential it offers.

Unfortunately, as you know, there's only so much you can see in public company diligence, particularly when you buy a competitor.

But as you heard in our prepared remarks, we can see it all now.

And from the beginning, we took a conservative approach, both to the price we offered and our synergy commitments.

And now we are glad we did because while we are starting from a lower base, we anticipate delivering strong EPS growth off of that new base and actually hitting the 2022 EPS target that drove our original EPS accretion guidance for this transaction.

Clearly, the gross margin status within the Pinnacle portfolio right now is not where we expected it to be or wanted it to be.

But make no mistake about it, the gross margin potential for the business is still there.

Gross margin, in many ways, is a symptom of the health of the brands.

And as we kind of laid out earlier today in our prepared remarks, there are really 3 brands that are driving the vast majority of the weakness here, Birds Eye, Duncan Hines and Wish-Bone.

And those are the businesses that we've got to get on stat.

It's not going to be overnight.

We've got some work to do.

But there is not a doubt in our mind that there are -- there is significant opportunity to get those brands back to where they need to be.

It's just going to take some work.

We've got to apply -- basically, the Conagra playbook we applied to our own portfolio back in 2015, we've got to do it to Pinnacle, particularly on these 3 businesses.

Okay.

And could you just briefly remind us the initial sort of accretion target that you speak of, right, going out to 2022?

Because very admittedly back of the envelope sort of math, maybe you had suggested that a sort of possible double-digit EPS CAGR off of that fiscal '19 base would be possible to get you to where you expected to be by 2022 initially.

Is that a fair way of looking at it in terms of how we should interpret the go-forward guidance off of this lower '19 base at this point?

Yes, we'll give you the entire algorithm and the full story around not only Pinnacle but our total company at Investor Day.

But let me break this down because I think it's important to focus on the call just in terms of how we think about this 2022 EPS.

Before we bought Pinnacle, we had a base plan that excluded major acquisitions and included share buybacks.

And that previous base plan was the EPS benchmark we've looked to beat in the context of a deal.

So when evaluating Pinnacle with the assumptions we had at the time, we concluded the acquisition would deliver high-single digit EPS accretion relative to that previous base plan.

Obviously, that accretion translated to an absolute EPS number in our models.

What we're telling you today is that the starting point is lower due to Pinnacle's [near end] business weakness.

But given the synergy over-delivery, we now expect, and the business recovery, we expect to get right back to the same place at EPS by 2022.

Clearly, the year-on-year EPS growth will now be higher since 2019 is lower, so the CAGR will be higher.

The next question comes from David Driscoll with Citi.

Sean, I want to just go back over to Pinnacle here.

I mean, I've heard everything you've said, but I wanted -- I want to just try to ask a question about your 2022 targets a little bit differently.

North of 5% inflation is a very strong number.

We don't see that number very often in packaged food companies.

And it typically results in gross margin compression because it's hard to take enough price to offset that level of inflation.

You've also shown very clearly all these distribution losses.

I'm going to boil it down, I think, to what I think you're trying to tell us but I need you to course correct me.

Is this confidence that you can get to the 2022 numbers really based upon a very significant over-delivery on synergies?

Or are there some really big things that need to happen on the Pinnacle business, i.e.

sales have to really start to improve, pricing needs to accelerate dramatically?

I guess, I just want to get this out in the open, because I think people will really worry about if you have to do something heroic to Pinnacle in order to get to that 2022 goal?

Yes.

Let me start there and, Dave, you can fill in more detail on inflation and things like that.

I just want to come back to kind of a threshold point here.

The vast majority of Pinnacle's challenges reside within 3 businesses.

And I talked a little earlier around kind of what's driven the challenges there.

There is no question in my mind that we will make progress on these 3 businesses.

One of them, for example, is Birds Eye.

Birds Eye is an extraordinary brand.

It is #1 in the veggie and veggie-based meal space.

And good things are still happening within the franchise like the Veggie Made line.

But the brand architecture has become too fragmented and the spiralized space within vegetables was flat outpassed over for being too low margin.

And when the consumer is hyper-passionate about a space as they are about spiralized, you just can't opt out, you've got to give the consumer what they want and figure the margin challenge out as you go.

If you opt out, a competitor will fill the vacuum and that's exactly what happened.

The good news is as the #1 brand, you've always got the opportunity to get back in.

And if you look at the Birds Eye performance in the market over the last few years -- 5 years or so, it's been nothing short of extraordinary.

If you look at Duncan Hines, this is another good-news/bad-news story.

The good news is that Duncan Hines has gotten a fair amount of attention over the past 2 years and it's been highly responsive.

And that makes sense to me because Duncan Hines is an iconic brand.

However, the mental model at Pinnacle was to think of Duncan Hines as a cake mix brand.

And accordingly, last year's innovation was named after a portion size.

It was called Perfect Size for 1. And that cake frame of reference was highly limited.

And then, when the SKU proliferation occurred, the suboptimal execution was really exposed.

So the way that we think about this here at Conagra is, we think of Duncan Hines as sweet treat brand not as a cake mix.

We view Perfect Size For 1, not as a portion control cake but as a convenient warm sweet treat.

And had the frame of reference been different, the product design would have been different, and frankly, it would have been more appealing.

And unfortunately, the competition figured this out and it's been stealing share, so we've got work to do.

And then the third one that we pointed to was Wish-Bone.

Now this is a big category.

It's also a great brand.

But frankly, it has not benefited from enough disruptive innovation.

What has been launched hasn't resonated, for example the [EVLO] line and that will change.

And not only will we innovate within Wish-Bone, we will look at leveraging other iconic Conagra Brands as levers to disrupt the salad dressing category.

So we've got a very strong handle on all 3 of these big businesses and we've got plans that are already being mobilized [again].

And with respect to the inflation you point out, 5 is a high number, but don't forget, in veggies, we had a bad crop year this year and bad crop years do happen.

And those are transitory issues.

So you're not going to always have a bad crop year, you'll have a bad one, you'll have some good ones.

So that too shall pass.

We do have other elements in inflation that continue to be pesky like transportation that everybody is struggling with.

But the overall point I'm making here is, I do not see any need for heroic action.

What I see a need for is clarity of thinking and an excellent execution of the very same Conagra playbook that we have applied to different brands over and over again.

Dave?

Yes.

So just to build on that.

If you look at the calendar year 2018 chart that Sean showed, the gross margins are 220 basis points below the Pinnacle forecast.

Half of that miss was from the inflation on freight transportation, and also as Sean just mentioned, coming out of the fresh pack season, higher vegetable inflation.

Another part of that though, was given the volume declines that Sean's discussed on the big 3, Pinnacle attempted to add price promotions in the second half to make up for the volume.

These were not efficient programs and resulted in additional gross margin erosion.

So to Sean's point, the inflation's transitory.

We're on it.

And we're also in the process of eliminating these inefficient trade deals.

So we're confident that we're going to work through this.

But the forecast that we've put out through the end of fiscal '19, reflects the continued inflation on vegetables and us working through the inefficient trade.

The next question comes from Ken Goldman with JPMorgan.

One thing I wanted to understand a little bit better is, I understand the virtue-LESS cycle that you've talked about.

But I don't quite understand why Pinnacle's performance worsened so suddenly.

And I imagine it's largely because of the disappointed customers you talked about with shelf reset.

So there's that.

And then, I guess, adjacent to that, I understand that you can't do all of your due diligence that you want to do on a competitor but it still feels, I think, to some people I've talked to this morning, and I'll admit to me too, like the due diligence could have been better, right?

And I wanted to ask you about that because why weren't the conversations being held with the customers to see that this was going to come?

Because this feels like a really big surprise to most of us, something that maybe could have been a little bit avoided, but maybe not.

I just wanted to get your thought on that.

Yes, I appreciate that, Ken.

I will tell you that our passion for this business did not lead us to overlook anything at all.

As I already mentioned, there's only so much you can see in a public company diligence.

There were -- Pinnacle is not a brand.

It's a diverse company of brands.

And so there were obviously businesses that were up and businesses that were down, we were smack dab in the middle of diligence.

Wish-Bone as an example, was a business -- one of the businesses that was beginning to show challenges.

But as you can see in your own charts, a lot of what we're talking about here has really accelerated very dramatically in the second half of this calendar year.

So that's pretty late in the equation.

It's disappointing.

I'm not going to tell you we are not disappointed with the state of the union.

But by the same token, I will tell you we are very confident that we know exactly what to do here.

It's not an overnight trick.

This is going to be fundamentals and hard work as we've done before.

But these are very good brands.

As I just pointed out, we've got a concentration here on 3 businesses, the big one is Birds Eye.

Birds Eye was the latest one to emerge, to your question, in terms of it's really showing its weakness.

And it was for the reasons that I just described and a more active competitor there.

So these are not structural issues we're talking about here.

These are real business performance issues, but they're executional issues and they're ones that we will be on top of as we go forward.

And we're going to share with you what exactly those plans look like and what the cadence is of getting these businesses right where they need to be when we do our Investor Day in April.

Our next question comes from Steve Strycula with UBS.

Two questions.

The first would be for either Sean or Dave.

On the revenue slight miss in the second quarter for the base Conagra business, it sounds like it was a calendar shift.

Can you walk us through that a little bit more, maybe like what caught you off guard?

What business gets better sequentially?

And then I've got a follow up.

Yes.

Glad you brought this up.

Let me talk net sales because I know you all see the ramp in net sales in the second half, and therefore, it will be on your mind.

I want you to just be very clear where we stand on this.

Overall, we are very pleased with our top line strength, I think you could see from our presentation.

And I'm talking Legacy CAG here.

I think you could see from our presentation, we have been very successful innovating and modernizing our brands.

And because of the Pinnacle acquisition, we have done something out of the ordinary for us, which is provide quarterly guidance for the past 2 quarters, which is something we prefer not to do, given typical shipment volatility around quarter close.

We saw a bit of that this quarter as some of our shipments fell after Thanksgiving and into December.

So you're really talking about a small shift here really between Thanksgiving and Christmas.

And as I mentioned earlier, that is not atypical, and it can add some unpredictability to how our revenue was recognized in the quarter.

But most importantly, our consumption patterns have continued to build, which is the real story we want to stress, and that will translate to a very strong second half.

And the way to think about that ramp is this.

Our first half innovation is now hitting its stride, it's fully out there, the marketing programs are on.

And our second half slate, which includes the snacking initiatives I just showed, is very strong, and it's also very good mix.

And on top of that, the pricing that we have taken is now in the marketplace and being realized, particularly in the second half.

So all of that conspires to result in continued momentum on our top line, which we feel very good about for the balance of the year, hence the reiteration of our stand-alone legacy Conagra guidance.

Right.

And then I'm sure you'll address this at the Investor Day.

But can you walk us through, preliminarily, like how frequent are the shelves reset in some of these core problematic Pinnacle categories?

My understanding is maybe twice a year.

Clearly, the March window seems like that's probably going to be missed in terms of refreshing the innovation pipeline.

But can you speak to, from a calendar perspective, whether new product can be in place by September?

Or is this really a much deeper turn in the base business?

Well, a couple of points here.

One is, as you might imagine, when we kind of really got a handle on what was going to happen to some of these TPDs because of the weakness of the Pinnacle innovation, we have sprung into action to stop further proliferation of similar types of SKUs, but we've also sprung into action in terms of rebuilding a new innovation pipeline with the Pinnacle team and the Conagra team working arm in arm to do that.

But that's going to take some time.

It's not going to all be at the exact same window.

So it won't all be at the beginning of the second half of 2020.

Whatever we can get into the marketplace faster, we will get in.

And by the way, on TPDs and shelf sets, different categories have different numbers of MODs that are reset during the year and they happen at different times.

But just a couple of words on TPDs because I think it's top of mind for everybody.

Big picture.

The keys to strong distribution for any given brand are, a, superior innovation; and, b, the category-leading velocities that follow.

So if you think about Legacy CAG, we have industry-leading velocities in key businesses, like frozen single-serve meals, but we're actually under-skewed today, which is why we continue to grow TPDs and we see further upside from here.

Pinnacle, obviously, has had their innovation challenges at the same time and better innovation from competition.

And that's translated to TPDs losses.

We will fix that.

Another point I want to make on TPDs that you need to keep in mind as you look at TPDs, because I think it can be a helpful metric, but it also can be misleading, which is the case right now, for example, on our largest Legacy Conagra business, Marie Callender.

Let me tell you what's going on with Marie because Marie is in a very good place right now.

Recall, we did a full restage on Marie Callender this year.

We reformulated all the products for higher quality, they're higher margin.

We eliminated low-value SKUs.

We've redesigned and modernized the packaging.

We launched comfort bowls.

And we're also optimizing our trade promotion.

So overall, what we are seeing is that the brand is healthier with growing base sales, higher margin and less trade promotion.

TPDs though, are actually down, by design.

And that's because we work with retailers to get more facings on our top movers.

So if you look at Q2, as an example, on Marie Callender, we saw a velocity improvement of 7% in Q2 over last year.

And we will take that trade all day long because it results in a stronger P&L top and bottom line.

But you can't see that dynamic when you look at TPDs.

So as you talk to us, even off the call, and you're trying to understand that, let's look at TPDs but let's -- we'll try to give you the full story in terms of what we're doing strategically to drive overall better real estate, because in other words, what I'm telling you is, TPDs can be a blunt instrument, they only tell you how many items are scanned, SKUs scanned at a store, they don't tell you how much real estate a brand actually occupies.

The next question comes from Jason English with Goldman Sachs.

I want to come back, like many people, to really make sure I understand what's happening in Pinnacle.

We saw the first half of the year delivered, right?

They reported that.

And I know you mentioned that the profit contribution from Pinnacle is below your expectations this quarter.

But it looks like it flowed through at around a 22% EBIT margin, which isn't that bad.

It's just a shade light of what we were expecting.

So I look at those data points and I contemplate what you're saying about profitability on the forward.

And it sounds like the vast majority of the drop is what's happening now and what's going to be happening over the next few quarters, not necessarily what's happened sort of already through reported results.

Is that fair?

And related to that, for me to kind of bridge to your EBIT guidance, and there's a lot of guesstimate work here to kind of recalendarize the base, I have to cut profit by almost 30% year-on-year for the back half of the year, which seems very, very jarring.

Can you help walk me to what's going to drive that -- such a substantial downtick on the forward, especially when I contemplate what you're saying about pulling out inefficiency, pulling out inefficient promotions and some other things that sound like they may actually help you?

Yes, first, the outlook, I'm going to take the big picture, Jason, just to come back to the Pinnacle business and how -- I think I've talked about this in quite a bit of detail today.

But the way this virtue-LESS cycle, as I've described it, manifests itself is when your innovation is subpar, it does not show out of the gate.

It shows up eventually.

And it clearly -- the side effects of it are showing up in the back half of this calendar year, frankly very recently.

And it is manifesting itself in pretty significant distribution cuts on the 3 businesses I talked about.

As you can imagine, once you're cut, you've got a pathway to get back in, but it's not going to be with the exact same items that have just been discontinued.

You've basically got to rebuild the innovation pipe and get it back in when the products are ready and when the window is open.

And hence the amount of time it's going to take to get this thing back.

But if you look at whether or not that is executional or structural, it's clearly executional in nature.

These brands are still #1 in their categories, these -- Birds Eye is an example by a country mile.

So we've got work to do.

But we'll get it back in.

In terms of the near-term flows, Dave?

Yes.

So Jason, I understand the confusion, right, because we're -- it's a stub year because we closed October, and there's a lot here.

So let me try to break it down for you a little bit.

If you look at our quarter, that is basically the month of November for Pinnacle, and you're right, it shows a higher operating margin relative to what we forecast.

November is probably the highest single margin month for Pinnacle because they're a hot -- their margins are higher in the second half of the year than the first half.

So we're basically capturing one month where gross margins are in the 29s.

But if you look at that month, relative to the prior year month, which you don't see, it's down about 200 basis points.

So the first point is, and it's reflected on that calendar year 2018 chart, the gross margins versus prior year are trending down 220 basis points directionally.

The second piece is that, and we did say it in our comments, is that we have made some decisions to pull low ROI programs, which had an impact on sales of about $30 million.

So that is also in our forecast, right, because you're pulling volume out and you have short-term impact of doing that, but you have long-term benefit when your trade rate improves.

When you get into the sort of second half of Conagra, that's really the first half of what Pinnacle would be in their calendar year.

That's always been a lower absolute gross margin, right?

So a little bit of this is, we're cutting off of our May fiscal year, and you're seeing a forecast of gross margin that only picks up kind of the first half of Pinnacle.

Having said that, that forecast reflects coming out of the recent pack season for vegetables, inflation on vegetables.

So now that's layering into the forecast as well, plus the additional transportation inflation that will continue.

So I know it's complicated, but there's a lot of dynamics and because we cut off in May, it doesn't allow you to show the full calendar 2019 Pinnacle because it's our fiscal year.

So hopefully, that gives you -- sheds a little light on the gross margin dynamic.

It does.

That's helpful.

And for me to kind of get my model down there, I also need to take out -- one way to get there, is to take out a good chunk of the product -- the base Pinnacle productivity.

Is that reasonable?

In other words, is it possible that some of the productivity initiatives that they would have had, that could have helped gross margin, have been put on hold or have been disrupted due to this transition phase and as you look to resolve some of the other issues?

No, we're staying full steam ahead on the productivity efforts that are underway, both for Pinnacle's business and for Conagra's business.

What will happen though, Jason, is we will -- now that we've got hold of the company, our supply chain team is all over Pinnacle assets to see if there is additional value that we can add.

We actually -- we talked about our synergies today.

That's already at work there, things like applying our CPS programs, Conagra Performance System, to the Pinnacle manufacturing assets and supply chain overall.

So all of that work is underway and Dave will give you a full update on that as part of our Investor Day -- Dave Marberger when we're -- Dave Biegger, when we're together in April.

The next question comes from Rob Dickerson with Deutsche Bank.

So just a quick question on the fiscal '22 guidance, just to be clear.

So it's a -- the guidance is held still high single-digit accretive relative to the base.

Before, that would have included some buybacks.

Obviously, talked a lot about Pinnacle today, what potentially has changed now relative to diligence process and preclose.

But then you're saying the guidance is held, right?

Synergies are higher, and we expect to get the margin profile back to where it was because of the playbook that's obviously been implemented across a number of different businesses historically, and has worked well.

So if that's the case, if the excitement's there and the confidence is there and we understand the problems and we know how to address it and we have high confidence in how we're going to fix it and get it back to where it was, despite there is a lower starting point, that the endgame on the base and your -- relative to your original expectations, will probably still be similar, plus you have the synergies.

So I guess the question is, why wouldn't those expectations then be a little bit higher?

Or are you kind of just playing it safe because obviously we're '19, you were talking '22.

So a lot of time in between that, maybe you need a little bit more investment, maybe you don't but just walk me through why it would be the same and not higher, given the synergies are higher and you think you can get back to the original Pinnacle margin profile?

Yes.

Well, we -- from the EPS standpoint, Rob, we can get back there in large part because we've now gotten under the hood and we see more synergies, and we've modeled a certain cadence, very preliminary, of kind of business recovery here.

As you might imagine, between now and our Investor Day, that's the kind of work that we're going to be scrubbing, that's the kind of work that we're going to be building out for the next few years.

So as we think about this for the long haul, there is no question in our mind that there is significant opportunity here.

In fact, the scale and the combination of these 2 companies make as much strategic sense as ever.

But we've got some hard work to do short term.

And so that's what we got to deal with.

It's a good reminder to me of the importance of focus.

Our company has been laser-like focused on getting our brands right for the last few years.

Here's a portfolio that clearly is suffering right now and needs focus, and we're going to bring that focus.

And how high is up over -- in the fullness of time, we'll talk more about that later.

But we know what we've got to do here, and we are on the case.

Dave, do you want to add something?

Yes, just to add on to that, the synergies we say in the upside, these are cost synergies, right?

So the $215 million were cost synergies.

We did not build any revenue synergies into our model.

Now obviously, the business is down relative to what we had modeled, so we have to do all the things we discussed to bring that business back.

But when you talk about upside going out long term, we believe that there could be upside on revenue synergies.

That's not in the updated cost synergy number that we will have.

Okay.

Fair enough.

And then secondly and quickly just on divestments.

I know it's been a topic, right, that's come up for a couple of years since you've had the tax asset.

We just -- there was an announcement this week on Wesson.

There is no financial disclosure on that.

So any additional color we can receive on Wesson would be helpful.

And then outside of that, now that you have Pinnacle in and you've looked under the hood, is your expectation still that, well, we might try to leverage that tax asset on the Legacy Conagra piece; and on the Pinnacle piece there could be some areas we will potentially look to divest or rationalize SKUs?

That's it.

Yes, let me start off there, Rob, and turn over to Dave for more color on Wesson.

As we've said many times, we do view our capital loss carryforward as an asset, and we are open to divestitures that help us strengthen the company, enhance value.

And as you point out, the Wesson news this week is illustrative of that.

But it's not our strategy to use the tax asset just for the sake of using it.

The aim is to perpetually reshape the portfolio for stronger growth and better margins, while maintaining our investment grade credit rating, and that has not changed.

With respect to Pinnacle asset, look, the goal here is to perpetually reshape this portfolio to be stronger, right?

So it's great to have a tax asset, but if it's strategic to divest another piece of business that is a chronic drag, that doesn't have the benefit of the tax asset, that's still a possibility.

I mean, we're open to anything ultimately that maximizes value for our shareholders.

So that will always be part of our consideration set.

And Dave, on Wesson?

Yes.

So on Wesson, we have an agreement to sell the Wesson business for $180 million in cash.

As I mentioned, we expect to close by the end of the first quarter of calendar year 2019.

So assuming we close at the end of our third quarter for fiscal '19, the sale would impact our sales about 50 basis points and EPS $0.01 to $0.02 for this fiscal year.

On an annual basis, the sale would impact net sales about 200 basis points or about $0.05 EPS on an annual basis.

And just again, on the capital loss carryforward, there will be very little leakage on this divestiture in terms of the tax paid.

So if you -- if we didn't have that asset, for example, the $180 million would really be -- given the net proceeds= we'll have, would be equivalent to a transaction of about $220 million.

So that just shows you the value we have of that capital loss carryforward in eliminating the leakage.

The next question comes from David Palmer with RBC Capital Markets.

Just wanted to dig into Birds Eye a little bit because that was clearly a leader among those so-called leadership brands.

How much of that Birds Eye loss distribution is a result of shelf loss at one major retailer that happened to introduce retailer-branded SKUs?

And if that's a fairly local big reason why we're seeing the loss shelf and pain here, have we seen the biggest impact from that in the consumption data?

Or might the year-over-years in the data look even worse from now?

That is a piece of it, Rob.

I think another significant piece, as I already talked, a big piece, is this whole spiralized space, has been a very, very big opportunity, and a competitor has really taken that business at major customers.

With respect to private label in frozen over time, here's how I think about that.

As we've said before, private label makes sense in highly commoditized subcategories, but it really had never made sense or worked historically in finished meals, side dishes, enhancers, appetizers, things like that.

Every few years that I've been around in the frozen space, you will have a retailer give it a go, but it as never taken hold.

And it -- so it probably will happen again from time to time.

It's happening a little bit now in vegetables.

But the outcome is unlikely to be any different in these more -- in these less-commoditized subcategories.

Ultimately, when customers see that their store-brand advocacy is resulting in declining category sales, there is the -- there will be the exact same reversal we've seen before.

So that's a dynamic that I've seen over and over again, and it plays out the same way almost every single time.

I mean, just to be clear, have they -- has that -- have we seen the maximum impact from that in the data?

And do you see the resultant impact -- or the reversal in your velocities such that this is going to prove to be a 1-year divot because your velocities are so strong, there is almost pretty good odds that you're going to get back some of that shelf a year from then?

Well, it's customer by customer, David.

So if there is a customer right now that is taking a stronger advocacy position on a private label, you equally could have other customers that are going in the opposite direction.

So this is a never-ending dynamic that we deal with in all of our categories.

On vegetables, is a newer one [to us], and then, as you all well know, within Birds Eye, it's a vast franchise from more commoditized-looking vegetables to side dishes all the way through complete meals.

So you've got different dynamics in each of those, and they will -- they'll continue to evolve over time with pluses and negatives across the customer base and within any given customer across the mix of those subsegments.

The next question comes from Robert Moskow with Crédit Suisse.

Sean, most of the problems that you've brought up for Pinnacle are product and innovation-related.

You talked about how with Birds Eye, it had extended too far and missed some segments of the market and then you also talked about Perfect Size For 1. But a lot of those issues are very visible on shelf, I guess, if you were looking for them.

I mean, I can't see them, but -- or I hadn't seen them.

Had anyone from your team noticed these issues this year or over the past couple of years because if it's truly product issues, I guess, it would have been more visible.

And do you think it was just like this year's problem or a multiyear problem over at Pinnacle?

Well, this is, obviously, a very recent problem.

As I pointed out today, Pinnacle previously had delivered strong and sustained performance through pretty good execution on these leadership brands.

And these innovations that -- where you talked about today, did garner good trial.

So if you look at Duncan Hines Perfect Size for 1, as an example, the sales in the trial window were very strong.

So when you look at something like that, the early read on it is a positive.

But you don't ultimately know what the stickiness of an innovation is going to be until you start to work your way through several repeat cycles.

And frankly, in the case of Duncan Hines, that's exactly the thing that started manifesting itself this year along with the convergence of new competitive products coming into the marketplace that really solved for some of the gaps in the initial innovation.

So that really speaks to the Duncan Hines' story.

With the Birds Eye story, as I pointed out, the real hot piece of the category has been the spiralized space where that is the space where out of the gates as a new very novel innovation, the margin profile on that for anybody who got into the game would be lower.

And one of the key competitors was okay with that and went in and built the beachhead while Birds Eye did not.

That was a mistake, and it allowed competitor to gain some significant market share and continue to build on that momentum.

All of that is reversible, but that's the kind of thing that, as you can see in the data, has really kind of emerged as we've gone through the course of this summer.

Okay.

And then just a quick question for Dave.

Just so I'm clear on how this accretion guidance works and what base we're talking about.

First of all, is there any accretion guidance for fiscal '20, specifically?

Or we don't know that yet?

Because it sounded like the plans really don't go into place until fiscal '21.

Yes.

So we're going to -- any commentary for fiscal '20, we're going to hold off until the April 10 Investor Day because we don't want to give pieces of this thing.

We want to give the complete picture with the synergies with our plans.

And so we're going to go through all of that and get into our algorithm and cadence at Investor Day.

The next question comes from Bryan Spillane with Bank of America Merrill Lynch.

Just 2 really quick ones from me.

One, one of the questions we've been getting a lot this morning is just -- is like, is there -- are questions about whether there's a significant need to step up investment behind Pinnacle?

So was it underfunded?

So I guess, my first question is just simply, as you kind of think about that plan between now and 2022, net of synergies, is -- does it -- that also contemplate a step up in investment behind Pinnacle's brands?

I don't right now envision that, Bryan.

Again, we've spent a lot of time talking to The Street around the concepts of total marketing spend, which includes dollars above net sales and below net sales.

In my estimation, there's plenty of investment in these branded assets, you cannot see all of it in A&P.

That A&P line, as you can see, looks fairly lean.

But there's a significant amount of spend above the line.

A lot of that is different from the way we spend at Conagra trade above the line, which is really in high-quality retailer-oriented marketing programs.

There's a lot of promotional behavior here.

And as we pointed out, one of the first things we did when we closed the deal is we killed a lot of these deep-discount, highly inefficient promotion deals, it reminded me greatly of some of the bad habits we had to break at Conagra when I first got here.

It was Pinnacle chasing volume over value.

So there is inefficiency baked into the existing spending base.

We've got to extract that inefficiency.

We've got to redeploy it against high-quality brand building, product improvements, packaging improvements, brand architecture improvements, all of the stuff that we talked about.

And so I am very confident in our ability to do this because we have built over the last 4 years what I think is industry-leading analytics, insights and innovation capability.

And we're an incredibly flexible and agile organization, we flex to the work.

So it is abundantly clear now where we've got to flex to.

We've already begun that, as you can imagine, and now we've got to play it out.

Okay.

And Dave, just this quick one on the credit rating.

So is part of -- I imagine part of the discussions with the rating agencies initially in terms of your rating was giving a pass towards getting deleveraging down to the 3.5 target.

So I guess, as your starting point is lower than you originally thought, is the path important?

Meaning, if -- is there a certain level of EBITDA that you're going to have to deliver in fiscal '20 in order to maintain that investment grade?

Or is there a risk that, that might slip if you don't deliver a certain amount, even in fiscal '20?

Yes.

So as Sean and I both commented, we're strongly committed to the solid investment grade.

We're at 5x levered at the end of the second quarter, which is where we expect it to be.

So with the EBITDA up a little bit, we've also come out and have lower debt, right?

So we've maintained that ratio.

Based on our updated estimates of EBITDA and the debt pay down, we have a clear path towards the 3.5x leverage through the end of '21.

But we also have other levers to generate cash for debt pay down, for example, working capital improvement on Pinnacle is a big opportunity and then just general contingencies we build into our CapEx budget.

So we feel comfortable that we have a clear path and flexibility to manage to the target.

The last question today comes from Akshay Jagdale with Jefferies.

My question is sort of related to structural versus transitory issue, right, that the industry and Conagra is facing in the context of the fact that the markets valuing the entire industry and Conagra is structurally flawed.

So I'd like to ask 2 questions.

One related to the Pinnacle business and one related to the base business in that context, right?

So you're probably aware of our view, which is that execution is really the big problem here for the large CPGs rather than really brand equity erosion.

So with Pinnacle, I mean, there's a long history here of really good innovation, really good brand building, a very long history, and it's been best-in-class, right?

And so it seems like the markets are a little bit confused because your commentary was pretty harsh on the near-term performance.

So maybe you can give us an example of the innovation sort of not hitting the mark, right?

And how that's execution versus structural?

So that's on the Legacy -- sorry, on the Pinnacle business.

And then on your base business, which is sort of lost in all the Pinnacle focus, aren't you actually seeing the execution getting better, right?

You've executed better.

Pricing is ahead of investments on retailer initiatives.

Aren't we actually now seeing the fact that if you execute on a portfolio strategy, the brand's actually in good shape?

So help me with that, if you can.

Yes, Akshay, I don't think there should be any confusion here.

We fully agree with your statement that when you have iconic legacy brands, they're not entitled to performance, they are capable of performance.

And they're capable of performance depending upon whether or not the enterprise can innovate them in ways that drive good profitability and do a fantastic job delighting the consumer.

When you look at what we've done with our Conagra brands over the last 4 years, we have taken brands that were once iconic, that many folks had written off, like a Banquet or a Healthy Choice, we've dramatically modernized them.

We've improved the margins.

We've raised the price points to levels no one thought was possible.

And the brands are growing at audacious clips now, some of them north of 20%.

And so that's a good example of exactly what you're saying.

Pinnacle, as I've mentioned in the prepared remarks, has had equal kinds of success in the past.

But just because you're successful in any given window doesn't mean that, that brand is entitled for that success to carry on forever.

Each year, brand folks, brand companies like ours, bring new innovations in the marketplace or have the opportunity to, or they can pass and they can let their brands atrophy.

They can also innovate superior innovations or they could innovate subpar innovations.

And so clearly, the proof is always in the pudding.

I would say, my commentary was not harsh, but the results in the marketplace were harsh.

And that is what we've got to correct with exactly the things you're talking about, which is a return to superior execution on the 3 key leadership brands that we talked about today.

It means not missing big consumer opportunities like spiralized with Birds Eye.

It equally means making sure the execution is really buttoned up to communicate the benefit that is being delivered to the consumers.

So for example, Duncan Hines' Mug treats being positioned as sweet treats not as portion size cake.

These are -- may sound like nuances, but they're very important to repeat purchase and the size of the market you create through household penetration.

And that's exactly what we've got to go do.

So just one follow up related to Pinnacle.

So the issues we've seen in the marketplace, given the impending transaction and the back and forth that went about, like can't we -- given the previously 5 years of really solid execution, how much of it is just execution-related that's driven by sort of distractions, right?

Like is it a good chunk of what's happening and that's what gives you confidence that it can be reversed?

Well, that -- I'll leave the prognostication as to what the root cause of it is up to you guys.

What I'm going to stay focused on is putting all of our energy in getting these brands right where they are.

What I'm telling you is, what we're seeing is entirely executional in nature and not structural in nature.

And given that, we're going to put all our energy in getting these businesses where they need to be as fast as humanly possible.

This concludes our question-and-answer session.

I would like to turn the conference back over to Brian Kearney for any closing remarks.

Great.

Thank you.

So as a reminder, this call has been recorded and will be archived on the web as detailed in our press release.

Investor Relations is available for any follow-up discussions.

Thank you for your interest in Conagra Brands.

This conference has now concluded.

Thank you for attending today's presentation.

You may now disconnect.