康尼格拉食品 (CAG) 2014 Q4 法說會逐字稿

Good morning, and welcome to today's ConAgra Foods fourth-quarter earnings conference call.

This program is being recorded.

My name is Jessica Morgan and I will be your conference facilitator.

(Operator Instructions)

At this time I'd like to introduce your host for today's program Gary Rodkin, Chief Executive Officer of ConAgra Foods.

Please go ahead, Mr. Rodkin.

Good morning and welcome to our fourth-quarter earnings call.

Thanks for joining us today.

I'm Gary Rodkin and I'm here with John Gehring, our CFO; and Chris Klinefelter, VP of Investor Relations.

Before we get started, Chris has a few words.

Good morning.

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

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

If you'd like to learn more about the risks and factors that can influence and affect our business, plus materially, I'll refer you to the documents we filed with the SEC, which include cautionary language.

Also, we will be discussing some non-GAAP financial measures during the call today.

The reconciliations of those measures to the most directly comparable measures for Regulation G compliance can be found in either the earnings press release, the Q&A, or on our website.

Now, I'll turn it back over to Gary.

Thanks, Chris.

As we shared in our pre-announcement last week, fourth-quarter diluted EPS from continuing operations on a comparable basis was $0.55 versus $0.60 a year ago.

As reported EPS showed a loss due to impairment charges, which we will talk about in a few minutes.

Our shortfall to our expectations was driven by two key factors.

One, weaker than planned Consumer Foods' volumes.

Two, significantly lower profitability in our Private Brands operations.

As we reevaluated the current and near-term profit trends for our Private Brands business, we concluded that we will be below original estimates for several years, which is the main reason we lowered our EPS outlook for FY15 to FY17.

To state the obvious we're disappointed with these results.

We didn't live up to our expectations and the year and the quarter were unacceptable.

In my book there are no excuses for that.

I want to take the time this morning to explain the root causes of the miss and some details on the improvement initiatives underway.

There's nothing more important for me than ensuring we drive improvement in FY15.

We have tremendous amount of company-wide engagement resources and energy devoted to improving results in FY15 and beyond.

While FY14 was not what we wanted in terms of profits, our operating cash flow exceeded $1.5 billion and we repaid $600 million of debt.

Both of these items exceeded expectations and are important factors in the ability for us to succeed going forward.

We did this while continuing to pay a strong dividend, and I'll emphasize that we remain committed to the current $1 per share annual payout and a strong dividend policy as well.

At a segment level, we'll start with our Consumer Foods results.

Net sales were approximately $1.8 billion and operating profit was $177 million as reported.

That reflects a sales decline of 7% comprised of a 7% volume decline, 1% favorable price mix and 1% unfavorable impact from foreign exchange.

In Q4 our Consumer Foods volume decline was worse than the 3% to 4% decline we were expecting.

Why?

The continuing poor performance of several large brands we've discussed previously, very soft packaged food industry performance in May, and some late shifting of promotion timing into the first quarter of FY15.

As has been the case for a few quarters now, the biggest portion of our volume decline relates to a handful of brands that we've talked about before, namely Healthy Choice, Orville Redenbacher's and Chef Boyardee.

We've begun making changes with these brands to improve performance.

We're confident we're doing the right things to make an impact and we recognize the need to move faster.

We believe we will see better overall performance on the top and bottom line from this trio in FY15.

One of the softest categories is healthy meals, which obviously impacts Healthy Choice.

The frozen healthy meal segment is a big important area within frozen single-serve meals at $2.5 billion in annual retail sales comparable to the hotdog category.

This particular part of frozen single-serve meals has seen the biggest drop in sales.

There's plenty of room for better performance in a category this big by gaining share via differentiated product.

In terms of specific initiatives, we've started improving product mix meaning moving to more of our proprietary Cafe Steamers offerings and discontinuing a number of other Healthy Choice slow-moving SKUs.

Those discontinuations are contributing to the brands current volume declines and that will continue in the first quarter of FY15, but better volume performance should start to shown the second quarter.

For context, Cafe Steamers is a truly differentiated product line, has proven staying power and has good margins, so growing that specific product line is a good all-around for our results.

Moving on to Chef Boyardee, we had eliminated at the beginning of FY14 the easy-open lid on Chef Boyardee cans, and in retrospect, this was a mistake.

So, we have very recently added it back, and that inventory is now getting on shelf.

We strongly believe Chef Boyardee can do a better job with core category users by leveraging its protein content, about 16 grams in a can that costs on average about $1.

In addition, we've retooled our merchandising programs, customer by customer, to get more lift with a renewed focus on the core user.

We are seeing good growth in Chef Boyardee microwave cups, so we believe the Chef equity still has strength and are looking forward to leveraging that.

In regard to Orville Redenbacher's, our strategy over the past several years has been to grow overall microwave popcorn usage and we lost share as competitors did a better job executing in-store.

We have shifted our focus to be more competitive and to be more perfect at retail.

This is a work in progress, but we believe the strategy shift will improve our performance.

While overall volume in Consumer Foods was disappointing, we had good sales performances from some brands within the portfolio, including Bertolli frozen meals, Slim Jim meat snacks and Reddi-wip, all of which continued to respond well to our marketing spend.

In the overall frozen category, consumer buying is down but we are taking share in single-serve meals.

We continue to be a strong player there overall.

We saw good share performance, as well as volume growth during the quarter, from Marie Callender's and Bertolli.

Of course the volume declines have weighed on profits in Consumer Foods.

For the fourth quarter, adjusted operating profit of $268 million was 3% below the comparable $275 million last year.

The impact of the volume decline on profit was lessened by cost savings in excess of inflation as well as lower advertising and promotion expenses.

Looking ahead we do have confidence in stabilizing Consumer Foods volume, getting sequentially better in FY15, for three reasons.

One, we expect to see gradual improvement in those three bigger brands, that have weighed on volume, through the specific plans we have in place for each of them.

Two, we are well positioned to grow and build share in faster growing customer channels where there is significant opportunity for us.

We've been underdeveloped here, and simply capturing our fair share of these faster growing retail outlets, specifically club, dollar and fee store will provide a meaningful boost.

As we shared with you at CAGNY, we are actively innovating and designing products, packaging and promotional strategies to be a bigger part of that channel growth.

We have shifted R&D and supply-chain resources to ensure that we have the right focus on channels, and are already seeing some success with brands like Bertolli in the club channel.

Third, we see upside coming from our international Consumer Foods business.

While still a small part of our portfolio, we can see it starting to make a difference in our overall results as our global customers grow around the world.

Many of our brands do well in emerging markets, particularly in Latin America, Mexico and India.

Our focus is specific by geography and product platform to capture growth in products like tomatoes, popcorn and hot cocoa.

We have rewired our organization to get sharper and faster in our execution.

We have significantly intensified our focus on customers with stronger joint business planning.

We are fine tuning our promotions to reconnect with loyal consumers more effectively, and we're continuing to continue to drive supply-chain productivity.

When we think about other efficiencies, specifically trade and marketing spend, we have realistic expectations about growth in this segment given our center of store categories and product lines.

We balance our trade and marketing investment with all this in mind so that we're structuring our spending for an appropriate return.

We do have a number of strong brands with effective advertising.

We now have a more laser-like focus on the true effectiveness and impact of our marketing and trade spend and we will continue to fine-tune for maximum impact.

In summary on Consumer Foods, we believe the plans we've got in place will drive better top- and bottom-line performance in FY15.

Now I'll move on to our Private Brands segment, were sales were approximately $1 billion in the fourth quarter, in line with prior-year amounts.

Profits for the Private Brands were soft at about $60 million below comparable year-ago amounts.

We made significant pricing concessions in the previous 9 to 12 months that combined to drive down margins.

Those were significant investments we chose to put into this business to stabilize customer relationships and preserve a sales base as we worked through some customer service and manufacturing issues inherited from the legacy Ralcorp business.

Those were our issues not broad, Private Brand industry challenges.

It's also worth noting that some of the quarter's operating profit decline came from what I will call concentrated cost, as we made a handful of integration changes and other transitions.

We've begun the closure of three plants as part of our network optimization plan.

We've made significant distribution center changes, and we've created new supplier arrangements.

While there is cost associated with these moves they create longer-term value.

In other words this quarter add some costs that progressively lessened throughout FY15.

Looking ahead, we expect profit to improve in this segment in FY15.

We will lap most of the 2014 pricing concessions in the back half of FY15.

We've corrected the service issues.

We're regaining customer confidence, and we're beginning to win new business with the opportunity to win more business with better pricing and an improved mix.

We'll also benefit from a more efficient organization.

We believe margins will improve starting in the second half of FY15 as we lap our pricing and accelerate our cost synergies.

Let me be clear, the profit headwinds and the specific integration issues that we've been discussing for a while now are not a result of owning both a branded and private label business.

The issues reflect the fact that we've bought a roll-up company that was beginning a restructuring and that company was made up of many parts that weren't functioning together and needed fixing.

We knew there would be work to do, but underestimated the degree of difficulty and the amount of time it would take to course correct.

We've paid lots of tuition in terms of learnings.

Frankly, we've been backed on our heels, reacting, and are now in the very early stages of leveraging our strengths proactively.

We are turning this business into one that operates more effectively and has a better more sustainable marketplace footing.

This will be well worth it as we look out a few years.

We made a bold transformational move in acquiring Ralcorp rooted in our continuing strong belief in our Private Brand strategy.

It's been an intense learning experience, but in the end, the insights we've gained will make us better and stronger over time.

Rebuilding customer trust and confidence required some difficult investment choices and trade-offs.

The higher level of customer responsiveness required significant organizational rewiring.

We're confident in long-term growth opportunities for the Private Brands segment.

We're confident that our investments, designed to create healthy customer relationships and preserve a substantial portion of our sales base, will serve us well for the long term.

That said, the profit performance for this segment over the next several years will not be as strong as we originally expected.

That impacts our overall EPS commitments, as we indicated in last week's pre announcement.

But we are committed to getting back on track and accelerating growth in FY16 and beyond with productivity, synergies and organic business expansion.

Regarding synergies, we are comfortable with our original goals.

We still should generate $300 million by FY17 from the Ralcorp transaction.

We've taken that into consideration in our revised outlook.

We're confident that we will gradually improve mix, see margin expansion and spend less money and time on course correcting.

Within our Commercial Foods segment our fourth-quarter sales and operating profits were up slightly.

In Lamb Weston, which is the biggest part of our Commercial Foods business, we're dealing with a sub-optimal potato crop, but have quickly recovered volume that we'd lost earlier in FY14 due to a customer transition.

In addition we're gaining even more momentum internationally.

In fact, Lamb Weston's international sales grew at a double-digit rate in the fiscal year, as we capitalized on the international expansion of key customers.

We will continue to deal with last year's potato crop for a few months of FY15, we expect to have a very good year in our Commercial Foods business.

In our milling business, sales declined in Q4 reflecting the pass-through of lower wheat costs and the profits declined due to market conditions.

Shortly after the quarter ended, we completed the Ardent Mills transaction.

The Ardent Mills JV will allow us to take part in financial gains of a more efficient milling business without the sales volatility of a commodity oriented business in our base results.

I am very confident that this will be a long-term strategic win that will enhance ConAgra Foods' shareholder value over time.

As a reminder, we have 44% interest in Ardent Mills.

Long term, we expect good accretion from this important portfolio moves making this a financially and strategically sound transaction.

Looking ahead, we are basing our confidence in recovering in FY15, and growing beyond that, on a number of well rounded factors.

One of those is our cost reduction work that we're doing across the Company.

As we told you in February, we have committed to saving $100 million in SG&A costs by the end of FY16, and we're projecting to be ahead of schedule in FY15.

These savings are in addition to our strong productivity and synergies, which we've talked to you about before.

The SG&A savings come from what we call our effectiveness and efficiency work.

The purpose is to create an organization that's more agile in its decision making and execution, extremely customer focused and more effective in resource allocation.

When we became a bigger company with the acquisition of Ralcorp in FY13, we needed to take a hard look at how our resources were allocated and design organizations and processes that more effectively and efficiently met the needs of customers.

So this is about overall workflow and how we go to market in a way that best leverages our resources and speeds decision making with the customer as our focal point across the organization.

We've designed more effective and efficient ways to operate, leveraging our centers of expertise, which are designed to scale across the Company.

As an example, we've brought together our supply chains from across the Company as well as our research, quality and innovation team under one leader, Al Bolles.

We've done this for end-to-end alignment with better linkage across our operations.

Creating one seamless typical organization allows us to move faster, cut through obstacles, make better holistic decisions and win more with our customers.

In another leadership change, we wanted to let you know that Doug Knudsen, who lead our sales team for many years, has retired.

Many of you knew Doug from CAGNY and other events.

We thank Doug for his tireless work and commitment.

He was a key contributor to the Company for 37 years, and we wish him well in his retirement.

Taking over for Doug is Derek De La Mator, our new President of Sales for our retail selling organization.

We're excited about the capabilities Derek brings to the role.

He's spent many years in the field representing ConAgra Foods with some of our biggest customers, and was most recently inside our headquarters fine-tuning our analytics and designing improvements on our joint business planning processes.

He knows the current state of the marketplace first hand, and will help us build even more winning partnerships with customers as we go forward.

The SG&A savings and better organizational design across the Company are foundational to our year of rebuilding and an important source of confidence in our EPS outlook.

But they are not the only reason we are confident in our growth projections for FY15.

In addition -- We expect to have significant ongoing cost synergies from the Ralcorp acquisition A strong commercial business led by growth from Lamb Weston, as we lap the food service customer loss.

Plus continuation of the good international growth and a transition to a more normalized crop.

Private Brands volume growth and the beginning of margin expansion in the second half of FY15, due to numerous improvement underway and stabilization of the big Consumer Foods brands that have weighed on the results, plus a sharper focus on growing channels and international markets.

We're confident these factors will continue to benefit results in FY16 and FY17, where we plan for EPS growth acceleration due to the foundational work we're doing now.

Of course, we'll continue our debt reduction progress, all while keeping our commitment to a strong dividend, currently at $1 per share annually.

In closing, we are using what we learned in FY14 to make headway, establishing specific milestones for improvement and stabilizing the business in FY15.

We are confident in our ability to make progress due to the factors we've mapped out and have shared with you this morning.

John will share additional details now, but before I turn it over to him I want to thank you for your time and attention this morning.

We are working hard to be transparent and provide the level of detail needed to ensure you have a good understanding of our results and plans.

Now, I'll turn it over to John.

Thank you, Gary, and good morning, everyone.

I am going to touch on five topics this morning.

First, I'll start with a brief discussion of the intangible asset impairment charges we recorded this fiscal quarter.

Then, I will address fiscal fourth-quarter and full-year performance.

Next, I will cover comparability matters.

Then on to cash flow, capital and balance sheet items.

Finally, I will provide some comments on our outlook.

Let's start with our intangible asset impairment charges.

In our Private Brands segment, as a result of the continued decline in our gross margins through the second half of the fiscal year and more modest expectations relative to the timing of improvement in profit margins as reflected in our recently completed FY15 plans, our fourth-quarter impairment analysis indicated that goodwill was impaired.

We then performed additional analysis to measure the impairment and as a result the Company recorded non-cash impairment charges of approximately $605 million or $1.35 per share after tax.

This charge is principally related to the impairment of goodwill, but also includes some immaterial impairment charges related to certain brand or trademark assets in the Private Brands segment.

We also recorded additional non-cash charges of approximately $76 million or $0.12 per share after tax, principally related to the impairment of the Chef Boyardee brand in our Consumer Foods segment.

This impairment reflects the impact of lower volume and margin trends for this brand.

The total impairment charge of $681 million or $1.47 per share after tax is being treated as an item impacting comparability.

The Company believes that these non-cash charges will not impact the Company's ability or plans to execute these businesses in the future.

Next, I'd like to comment on our performance.

Overall, the fiscal fourth-quarter and full-year results were below our expectations and reflect continued challenges in several areas of our business.

First, for the full fiscal year, we reported fully diluted earnings per share from continuing operations of $0.70 versus $1.85 last year.

Adjusting for items impacting comparability, fully diluted earnings per share were $2.17 versus $2.16 in the prior fiscal year.

Turning to our fourth-quarter results, for the fiscal fourth quarter we reported net sales of $4.4 billion, down approximately 3%, driven by volume softness in our Consumer Foods segment and the impact of lower year over year wheat prices in our flour milling operations, offset somewhat by stronger volume in Lamb Weston.

For the quarter we reported a loss per share from continuing operations of $0.76 versus earnings per share of $0.45 in the year-ago period.

Adjusting for items impacting comparability, fully diluted earnings per share were $0.55 versus $0.60 in the prior-year quarter, an 8% decrease.

While Gary has addressed our segment results, I would also like to touch on a few items.

Starting with our Consumer Foods segment, where net sales were approximately $1.8 billion down about 7% from the year-ago period reflecting a volume decline of 7%, positive price mix of about 1% and about 1% of negative FX.

Our Consumer Foods segment operating profit, adjusted for items impacting comparability, was $268 million, or down about 3% from the year-ago period.

The operating profit decline reflects the week volume performance, largely offset by lower marketing and SG&A costs, including incentive compensation.

The impact from foreign exchange on operating profit for the segment this quarter was approximately $5 million.

Our Consumer Foods supply chain cost reduction programs continued to yield good results and delivered cost savings of approximately $50 million in the quarter.

For the fiscal fourth quarter we experienced inflation of about 3% as cost increases on certain inputs such as dairy and protein accelerated.

On marketing, Consumer Foods advertising and promotion expense for the quarter was $53 million down about 36% from the prior-year quarter.

In our Commercial Foods segment, net sales were approximately $1.6 billion or up about 1% from the prior-year quarter.

The net sales increase reflects stronger volume performance offset by the pass-through of lower wheat costs in our flour milling business.

The Commercial Foods segment's operating profit adjusted for items impacting comparability was $190 million or slightly above the year-ago period.

This primarily reflects stronger volumes and lower SG&A costs offset by negative price mix across the segments.

As Gary noted, subsequent to FY14 year end, we completed the formation of Ardent Mills, which included the divestiture of three flour mills at the end of FY14.

In connection with the sale of these three flour mills, we recognized a gain of approximately $91 million, which we treat as a comparability item.

The Company will also record a significant gain in connection with the formation of Ardent Mills in the first quarter of FY15.

This gain will preliminarily estimated to be in excess of $500 million, will also be reflected as an item impacting comparability.

I will say more about the impacts of the transaction on cash flow, debt repayment and future earnings in a few moments.

Our Private Brands segment delivered net sales for the quarter of $1 billion and operating profit, excluding items impacting comparability, of approximately $44 million.

The results reflect significant margin compression driven by the pricing concessions over the past several quarters, which were made to protect volume in the business.

The results also reflect unfavorable mix and higher costs related to the operational challenges we have faced.

While more than offset by the negative impact of pricing and operational challenges, we have realized over $30 million of COGs and SG&A synergies in FY14.

Moving on to corporate expenses.

For the quarter, corporate expenses were approximately $65 million.

Adjusting for items impacting comparability, corporate expenses were $62 million versus $93 million in the year-ago quarter.

The year over year decrease reflects lower incentive compensation and pension costs and the impact of efficiency initiatives.

Now, I'll move on to my next topic, items impacting comparability.

Overall, we have approximately $1.31 per diluted share of net expense in the quarter's reported EPS related to several items.

As previously discussed, we recorded $681 million or $1.47 per share of non-cash charges related to intangible asset impairments.

In addition, in our Commercial Foods segment, we recorded a gain of approximately $91 million or $0.13 per share related to the sale of three flour mills in connection with the formation of Ardent Mills and $5 million or $0.01 per share related to a gain on the sale of a non-operating asset.

Next, we recorded approximately $59 million or $0.08 per share of net expense related to integration and restructuring costs.

On hedging for the fiscal fourth quarter, the net hedging gain included in corporate expenses was approximately $14 million or $0.02 per share.

We also recorded a tax benefit of about $27 million or approximately $0.06 per share primarily related to benefits from changes in legal structure and state filing positions and the resolution of certain foreign income tax matters.

Finally, in the fiscal fourth quarter we recognized a net benefit related to historical legal matters of $10 million or approximately $0.02 per share.

Next I'll cover my third topic, cash flow, capital and balance sheet items.

First, we ended the quarter with $183 million of cash on hand and $142 million in outstanding commercial paper borrowings.

We continue to emphasize cash flow within our business and for FY14 we delivered operating cash flows of approximately $1.55 billion, better than our expectations.

On working capital, for FY14 working capital changes contributed modestly to operating cash flow.

On capital expenditures for the quarter, we had capital expenditures of $131 million versus $163 million in the prior year.

For the full fiscal year, our CapEx was approximately $602 million.

Net interest expense was $93 million in the fiscal fourth quarters versus $102 million in the year ago quarter.

Dividends for the quarter were $105 million versus $104 million in the year ago quarter.

On capital allocation, as we have noted previously, our capital allocation priority through FY15 will be the repayment of debt.

In FY14, we repaid in excess of $600 million of debt, exceeding our previous estimate of $550 million.

In connection with the formation of Ardent Mills, in the first quarter of FY15 we received proceeds from the sales of three mills and distributions from Ardent Mills, which totaled approximately $569 million or about $527 million after estimated tax liability.

As we have previously discussed, we expect to use the proceeds primarily to accelerate our debt repayment and to increase our target to approximately $2 billion by the end of 2015.

By the end of FY15, we expect to have repaid around $2 billion of debt since the closing of the Ralcorp transaction.

With a stronger balance sheet, we expect to have more flexibility in our capital allocation to consider dividend increases, share repurchases and additional growth investments.

We remain committed to a strong dividend and we will maintain our current annual dividend rate at $1 per share as we delever, however during this period we will limit our share repurchases.

This quarter we did not repurchase any shares.

While we expect limited acquisition activity in the near term as we repay debt, we will continue to prudently support the right investments for our business.

Now I'd like to share some comments on our FY15 outlook and our long-term algorithm.

First, on our FY15 outlook, we currently expect FY15 diluted earnings per share adjusted for items impacting comparability to grow at a rate in the mid-single digits from our FY14 base of $2.17.

Here are a few relevant points for FY15.

First on Ardent Mills, FY15 earnings from the joint venture are expected to be about $0.08 per diluted share lower than the FY14 comparable earnings from ConAgra Mills.

As a reminder, after the close of the transaction earnings from this joint venture will be reported as equity investment earnings.

In FY15, we will only reflect 11 months of such earnings due to the transition to new accounting periods for Ardent Mills.

I would also note that beginning in the first quarter of FY15 we expect to reflect ConAgra Mills as discontinued operations, so our reported results for prior periods will be reduced to reflect the removal of ConAgra Mills' results from such periods due to our anticipated adoption of new accounting rules.

This treatment does not affect our view of our 2014 earnings base.

In our Consumer Foods segment we expect sequentially improving volume performance and stronger operating profit performance.

This FY15 outlook also reflects modest gross margin improvement in our Consumer Foods segment driven by mix improvement and strong cost savings partially offset by inflation in the range of 2% to 3%.

The segment is also expected to realize SG&A savings from our effectiveness and efficiency initiatives.

For FY15 we expect total productivity, including synergies from the Ralcorp acquisition, to be about $200 million in our Consumer Foods segment.

We also expect a modest decrease in our advertising and promotion costs as we focused more effort on in-store execution.

In our Commercial Foods segment, excluding ConAgra Mills, which will be classified as discontinued operations, we expect this segment to reflect good sales and profit growth, led by stronger performance in our Lamb Weston business, driven by international growth, and improved margins from a better potato crop, beginning in the second quarter.

We expect that our other food service and commercial businesses in the segment will post moderate growth in FY15.

In our Private Brands segment, we expect volumes to improve over the course of the year.

At Gary noted, we are very focused on margin recovery in this segment and also expect to see gradual improvement as we move through FY15 driven by pricing and mix improvements and productivity, including synergies and SG&A benefits.

While we're disappointed in the current profitability level, we are confident that the improvements in our business execution over time will drive sustainable profitable growth.

Our outlook also reflects the expectation that cost synergies resulting from the Ralcorp acquisition will reach $300 million of annual pretax benefit by FY17.

For FY15, we expect our effective tax rate will be in the range of 34% for the full year although this rate may fluctuate somewhat quarter to quarter.

Importantly we expect to generate approximately $1.6 billion to $1.7 billion of operating cash flow in FY15, which we expect will provide us ample cash to achieve our FY15 debt repayment target.

We do expect our profit growth in FY15 to be skewed to the second half with first-quarter comparable EPS to be slightly below year-ago levels, due to several factors including; the timing of profit improvement in our Private Brands segment and for certain brands within our Consumer Foods segment; the timing of the new crop in Lamb Weston, which will benefit earnings beginning in the fall; the timing of Ardent Mills operations and synergy ramp-up; and the loss of one month of earnings from Ardent Mills in the first quarter, due to its change in accounting periods; and the increasing impact from SG&A cost reductions as the year progresses.

I reiterate that we expect EPS growth in the mid-single digits for the full fiscal year.

On our long-term outlook, after FY15, we expect comparable diluted EPS to grow at a rate in the high-single digits annually.

We also expect long-term annual sales growth in the range of 3% to 4%.

In summary, FY14 has been a challenging, transitional year for ConAgra Foods.

While we are disappointed with our financial results, we remain focused on addressing the operational challenges and ultimately delivering more consistent profitable growth over the long term.

That concludes our formal remarks.

I want to thank you for your interest in ConAgra Foods.

Gary and I, along with Tom McGough and Paul Maass, will be happy to take your questions.

I will now turn it over to the operator to begin the Q&A portion of our session.

Operator?

Thank you.

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

(Operator Instructions)

Andrew Lazar, Barclays Capital

Thanks for the question.

Two things from me.

First, Gary, as you've stated, in isolation, it's fair to say the Ralcorp acquisition hasn't gone well so far, and at the same time the core business trends have deteriorated further still.

My question is whether Management and the Board are willing, now, to take a harder look at the portfolio and make some reasoned decisions regarding where you take the business from here and what factors would play into those sorts of decisions and analysis?

I have got a follow up.

Yes, Andrew, that, clearly, good question, fair point given this year and I can completely understand where that's coming from.

Keep in mind, this year was highly unusual.

I believe that FY14 really isn't about our portfolio, it's truly about our execution.

We do have, I believe, a portfolio that can and will deliver sustainable profitable growth and generate strong cash flow.

Our portfolio has some strong categories like Private Brands.

We have got good opportunities in channels like club, dollar and C-store and we've got some real, strong growing geographies particularly on Lamb Weston international.

So we are happy with the breadth and the reach of our portfolio, but what we need to do now, now that the turbulence of FY14 is behind us, now that we are in the implementation phase of our Company-wide effectiveness and efficiency initiative is to execute.

Our focus in FY15 is on execution.

We believe that mid-single digit growth in FY15, as we stabilize, and then high-single digit growth in FY16 and beyond plus continuing to pay good dividend should make for pretty good shareholder returns.

Thanks for that.

With respect to the Consumer Branded business, I guess a lot of the reason why advertising and marketing was down in the quarter significantly was shifting a lot of that over to more promotional spend, in-store efforts and such.

Yet at the same time, obviously, the branded pace of volume decelerated pretty significantly, so it doesn't seem like whatever that process was you got the results you were looking for.

I understand there was a piece of this which was some SKUs in frozen coming out and such, but that, in theory, you would have known about when you were expecting volume to still be down 3% or 4%.

I'm really just trying to get a better understanding of what really happened there around the consumer volume piece?

Yes, let me start and then I will turn it over to Tom for a little bit more color.

To put it very succinctly, Andrew, the industry volume in response to merchandising and just overall post-Easter across the industry was very weak, so we did not anticipate that.

Then, secondarily, there was, in Q4, some late shifting of merchandising on some of our business to spill over into first quarter 2015.

Tom, any more color?

Sure, Andrew.

What I would like to add to that is what we're seeing in store and the impact that it's having on overall merchandising.

I think the challenge that many manufacturers face, including ourselves, is that there's more competition for the limited space in stores.

Certainly what we saw, what we've seen is a lower lift is a result of that.

As we think about it, there's really three components that we are focused on.

In frozen, there has been an increase of overall competitive activity.

We have bolstered our support.

We've been competitive in our programs and our market share, primarily in the premium and value segments, with Marie Callender, Bertolli and Banquet, for the fiscal year are up both in terms of volume and dollar share.

We feel like we've struck the right balance there and those our businesses that we will continue to invest in.

The second is being able to, in this environment of competition, is to find ways to break through.

There are two ways that we're doing that.

On Chef Boyardee, we've seen a lot of concurrent merchandising.

We've traditionally enjoyed exclusivity in our events.

Throughout the year, we've experimented with different approaches to get a higher lift.

We had some very positive impact with that with some customers in Q4.

We're going to be implementing that on a much broader basis throughout the fiscal year, and we will see a better impact from that.

Finally, it's just about ideas.

Where we do really, really well is when we bring those consumer insights, particularly around meal solution and easy-to-execute solutions for retailers, we win.

We see that on Hunt's, Ro Tel, many items in our portfolio.

It's a challenging environment.

We're tackling it category by category.

We believe, ultimately, we will have a positive outcome from that.

David Driscoll, Citi Research

Gary, I have two questions.

The first one relates to the Consumer Foods business and then it's going to come back to this strategic issue that Andrew was talking about.

Orville Redenbacher, in the popcorn category, when I just look at my Nielsen data, you have a fairly sizable price advantage versus the number two brand Pop Secret.

That business, according to our Nielsen data, has lost an unbelievable amount of share, 760 basis points a share, down 17% in our data.

The category, though, looks awesome.

The category is up 8%, so I can't even feel like we can give us thing credit for a tough environment because the environment for popcorn looks terrific.

The question here is not so specific about popcorn, it's just popcorn feels like the piece of evidence that says, why not take a much harder look at strategic review on the portfolio, because you're not getting the value out of this that you need to be getting.

Given where the stock is, selling some assets and buying some stock back seems to make phenomenal sense from a shareholder value creation.

Can you give us some thoughts on this?

Yes, David.

Fair question.

Totally understandable and as concerned you are on the Orville Redenbacher performance, it doesn't come close to how frustrated I am with that performance.

We need to do better there.

We have a lot of efforts in place to tackle exactly what you are talking about.

Now, to segue into your other question and what Andrew touched on as well, let me just say that we are pragmatic.

You've seen me demonstrate that in my 8.5 years here with significant transactions.

Just last week we closed on the Ardent Mills JV, so we are still believing in our portfolio.

We believe that the things we're doing will improve the performance, but we will always look through a lens of creating long-term shareholder value.

Ken Goldman, JPMorgan

Thanks for the question.

Gary, the SKU reductions in Healthy Choice you referenced, to what extent are they driven by your decision to focus on higher growth items versus the customer's decision to concentrate a bit themselves on faster turning SKUs?

I'm trying to get a sense for the risk of further SKU reductions like you saw with Healthy Choice a year ago versus what's being pulled back on your own?

Ken, that clearly understand where you're coming from on that.

That is totally us.

It's not to say that they don't have a little bit to do with each other, because velocity is what really counts.

That shelf space is valuable, but this is something we have been very proactively tackling over the last 12 months or so because we do have a very strong piece of that business, our sub-line of Cafe Steamers continues to grow very strongly because it's extremely different in the marketplace.

That continues to grow, so we are very consciously culling other sub lines and slow-moving SKUs to give more prominence and more focus to the Cafe Steamers line.

That has been a very big portion of why the volume is down.

Once we reach the kind of shelf placement that we want, I think we will start to see better performance in Healthy Choice.

David Palmer, RBC Capital Markets

Hi, Gary.

I would just simply love to understand better the sources of margin pressure on the retailer branded business?

The magnitude of each pressure?

For instance, during these calls you mentioned the need to reinvest in sales, restore the price gaps, and essentially re-bid for some portions of your business with certain retailers.

Could you talk about the magnitude of these pressures and perhaps how these drags may be diminishing in the coming quarters?

Thanks

Let me start on that and then let me turn it over to Paul, who can get more granular for you.

You know that we acquired Ralcorp because of our deep conviction in the long-term Private Brand growth, because of its relevance to consumers and customers and its under development in the US, a whole host of reasons and we still strongly believe in that.

You know that our strategy is to bring our operating capabilities, our infrastructure and our scale to a very fragmented industry, but, as you've alluded to, we have dug ourselves a hole in the first full year.

A big piece of what you are referencing is because we had execution and service-level issues that really put us on shaky ground with our customers.

Those are fixed.

Our organization is maturing, particularly on the sales front.

What that's going to do is enable us to partner with our customers, because they are gaining confidence in our reliability, our responsiveness, the capabilities we can bring.

We can be much more proactive versus as I said before that we were on our heels.

We will grow volume this year.

We will begin to improve our margins in the second half.

We will get past some of these short-term cost issues, and we will start to bring some of those cost synergies to the bottom line and accelerate our performance as we get into FY16 and beyond.

We still have very strong conviction, but we did have a whole host of issues to deal with that culminated, to oversimplify, in a lot of price concessions to stabilize.

Paul, some more color?

Integration itself was challenging.

When you have a situation where our customers are really motivated to change suppliers because we're letting them down on service and execution issues, you've got to really pull the price lever to maintain the volumes.

The good news is we're in a much more stable position.

We have fixed the service issues and execution issues, that doesn't mean we don't have a continuous improvement mindset to always look for better ways to run the business and improve.

But we are much more stable and we will drive margin improvement and top-line growth here as we go forward.

Jonathan Feeney, Athlos Research

A couple questions.

Gary, we talked on all these calls about some of the really personnel-level and management-level changes that were made in a different operating businesses for Ralcorp and how you've had to change some of those, maybe put some resources back in, some people back in, so the decisions are getting made closer to the customer.

Can you tell me what comfort you have with the team you have on the field right now there and the structure of those businesses?

Let me turn it over to Paul, because I think he can give you some real live color on that.

We reacted to the reorganization that was done right when we acquired Ralcorp.

Felt like it would be beneficial to have decision making, like you said, closer to the customer, created six business units, with general managers that are running each of those.

Yes, disappointed in our fourth-quarter results, but have confidence in the structure and the leadership team we have to improve the business and the results going forward with really intensified focus on expanding margins.

I would tell you, Jonathan, that a lot of it has to do with the customer interface.

We, frankly, have done some course correcting very recently in this effectiveness of efficiency work to make sure we that we've got deeper product knowledge on the front line.

That's something that I think we tried to go a bit too broad in the first iteration, and now we're narrowing that product focus down, because we realized just how important it is to really have the expertise at the buyer level, the front-line buyer level.

That is a pretty significant change that we have very recently implemented.

Robert Moskow, Credit Suisse

I agree that it's probably too soon to pass judgment on the marriage of private label and brand.

As you said, you've been spending the past year fighting fires.

Gary, I was wondering is it fair to say that you're also stretching some of your resources of your team more than they have in the past?

When I think about your sales function and Doug Knutson, to what extent was his time being stretched to have to deal with all these customer issues on private label?

Do you think it had an impact on the branded business's volumes falling as well, just in terms of how he spent his time?

Then, I just want to understand what Al Bolles is doing now?

He's now taking on the supply chain role.

Private label is a very complicated supply-chain function, and I want to know to the extent that he is going to be taking that role of the working capital management and all of that that's entailed?

That's a very thoughtful set of questions there, Rob, as I would always expect from you.

On the first one, in any major acquisition you're going to stretch your organization, so clearly that has happened.

But in recognizing, as we have gone through fighting so many fires, more than we anticipated, that really was the basis for this effectiveness and efficiency work, which has really given us a very granular look at all of our processes, all of our structures.

We've been extremely granular on that, and have really worked to have the effectiveness drive the efficiency.

We talk about the savings side of that initiative, but even more importantly the effectiveness side of it culminating in better resource allocation, faster decision making, more customer responsiveness, et cetera.

We clearly are in process of making some pretty significant structural changes to ensure that we can manage through.

Now, we're passed so much of the fire.

It was brutal, to be honest, on the organization in the past year.

I would say that we're well beyond that.

That's really where I think we are at.

Jason English, Goldman Sachs

You mentioned you anticipate improvement in Consumer Foods and top line throughout the year.

Can you give us a better sense of the volume growth that your guidance is predicated on for that business?

Jason, this is Tom McGough.

With regard to Consumer Food volume, what we see is sequential performance improvement throughout the year.

It's going to be driven by three factors.

Clearly, job one is improving the overall volume and share performance on our core business.

We've talked about the three challenged businesses that we have, initiatives being put in place and we should see sequential improvement on that.

The vast majority of our portfolio is actually done very well in terms of growing share.

We're going to sustain that performance.

I think what's different going into next year will be two other factors.

One, is just a new focus on winning and growing channels, whether it's club, dollar, C-stores are growing at a much faster rate than traditional grocery.

Over the last year, we have worked to customize our product packaging, merchandising programs to succeed in those classes of trade.

We are well positioned, going into FY15, to see a market improvement in our top line as a result of that.

Finally, international, while international is a smaller part of our overall portfolio, it's starting to have a more significant impact.

Our plan there is to grow with our global customers as they expand globally.

We're seeing good sales acceleration in emerging markets like Mexico and Latin America.

While it's a relatively challenging environment, we expect that our business will show sequential improvement throughout the year.

Jason, just to put a marker on that, we expect to be about flat to slightly down for the year, so we're not looking for big heroics, but we are looking for that improvement that Tom talked about.

Eric Katzman, Deutsche Bank

One clarification and then a more broader strategy question.

The $2.17 base, John, that you're using does that include or exclude the dilution from Ardent?

The $2.17 base, that's just based off of this year, so there is no dilution from Ardent in the current year.

We will be comparing next year, which will have some dilution in it, to the $2.17 set base.

This is Chris.

The mid-single-digit rate of growth that we are signing up for next year includes dilution from Ardent.

Eric, did you have a follow-up?

Gary, some of these brands like Healthy Choice and others, you've put, over the last seven, eight years, a tremendous amount of effort to rejuvenate position against the consumer.

It's been a struggle and I'm just wondering versus Andrew's point of up breaking up the Company or something, maybe another option to think about is why not, let's say, manage those businesses more for cash and use that to fund the growth in private label, which obviously you believe in, $7 billion plus investment?

Why isn't that a viable option for the business?

Eric, clearly a good question.

We have built into our guidance realistic growth expectations.

We do segment our businesses.

As we see rationale for moving things into more of a manage-for-cash mode, which we do in a number of our businesses, they move in there.

I would tell you that the fixes that we have in place on those three problem brands really are pretty tactical right now and they really have to prove their mettle with a very high bar to go get any kind of significant marketing investments from this point forward.

That's maybe a slightly different way of saying we're looking at things a bit like you are suggesting.

Bryan Spillane, Bank of America Merrill Lynch

This is actually David Lee in for Bryan.

Just had a question on the Private Brands business and some of the pricing concessions that you had taken earlier this year.

Given that this work has made progress in stabilizing some of the relationships, is there a sense or evidence or examples that the advantages of having these two businesses under the same roof is coming into play?

Are customers recognizing the higher quality and what way that's contributing to the better margin outlook for the business?

Also, my understanding was that some of these were in part due to the competitive environment, so any detail that you can provide on the overall environment will be helpful?

David, I would tell you that we've really been back on our heels this year, so there's no getting around that.

We have had to be very reactive in putting out fires and trying to basically maintain our customer relationships.

That's pretty much behind us.

We've put a lot of effort into fixing that and a lot of investment in the maintaining that business with the price concessions.

We really haven't had the ability in any kind of a big way to take advantage of what we talk about as the one plus one equals three.

We do have some specific customer examples where that has worked in combining the two, and that gives us conviction that once we can be much more proactive and have the confidence of our customers that we will be able to start leveraging those capabilities.

We really haven't seen that because we haven't been able to focus the energy on that yet.

Part of my confidence on our future in Private Brands is interaction with the customers and the combined strength of having the branded portfolio and Private Branded businesses together in those strategic discussions on things we can do from a strategic partnership.

Operator?

This is Chris, I'd like to ask that we just have one final question.

Akshay Jagdale, KeyBanc

Thanks for taking the question; I'll make it quick.

Can you -- I'm just trying to understand where and how you're going to get improved performance on private label over time?

What would be really helpful is if you could just give us some color on what categories or product groups you've seen the share loss in?

Maybe if you can comment on how -- you've lost share at the expense of margin and you would've lost more share if you had not given up pricing.

How do we get back share and improve margins from here?

That's really the bigger-picture question.

But, if you can give some color on what categories and product groups?

That would be helpful.

Thank you.

This is Paul, I'll just hit on a couple of different things.

From a top-line perspective, confidence in modest growth as we go through 2015, distribution gains, improved mix, and gaining new profitable incremental business, because we're in a much better position from a just stable, executing environment.

What will help drive earnings growth is on the operational side, and Gary had mentioned in his script, the network optimization and some plant closures, the changes in our distribution network.

These are really good projects.

It's really about taking one step back to take two steps forward.

They're increased expenses in the short term, but benefit us and position us to win long term.

We're accelerating that.

Those are good products and I can see the benefits on the long haul.

That's why were pushing through as fast as we can.

This concludes our question-and-answer session.

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

Just as a reminder, this conference is being recorded and will be archived on the web as detailed in today's news release.

As always, we are available for discussions.

Thank you very much for your interest in ConAgra Foods.

This concludes today's ConAgra Foods fourth-quarter earnings conference call.

Thank you, again, for attending and have a good day.