康尼格拉食品 (CAG) 2015 Q1 法說會逐字稿

Good morning and welcome to today's ConAgra Foods first-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 first-quarter earnings call.

Thanks for joining us today.

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

So if you would like to learn more about the risks and factors that can influence and impact our expected results, perhaps materially, I'll refer you to the documents we filed with the SEC, which include cautionary language.

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

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 will turn it back over to Gary.

Thanks, Chris.

First-quarter diluted EPS on a comparable basis was $0.39 versus $0.37 a year ago, which is ahead of where we expected to be.

During our first quarter of FY15, we drove progress in a number of areas.

First, Consumer Foods volumes strengthened.

We improved share, made sales gains in alternative channels, and posted good productivity savings.

Also, we continued to improve the underlying health of our Private Brands operations, positioning us for margin expansion and new business as the year progresses.

Within Commercial Foods, we continue to pick up new business through Lamb Weston.

We are pleased with our start to the fiscal year and we see the hard work from last year beginning to show returns.

We know that one quarter does not make a year and that there is a lot of time left in FY15.

I feel good about the underlying progress.

We continue to have a very high sense of focus and urgency against our objectives and we look forward to delivering the full potential of ConAgra Foods.

With this good start to the year, we are very confident in our full-year EPS projections.

I want to acknowledge the news I shared last month about my intent to retire at the end of this fiscal year.

The reason I'm retiring is simply that I want to spend more time on the personal side.

At this point, I've had an all-encompassing corporate job for a very long time and I'm ready to devote more time to family, friends, and outside interest.

I feel honored to have led ConAgra Foods for the past nine years.

It's been a meaningful journey, personally and professionally.

I believe the dramatic changes we've made at ConAgra Foods, in terms of the operations, the culture, and the strategies will serve shareholders well over the long term.

I'm fully engaged in achieving our near-term objectives, as well, and I'm confident that we will meet expectations.

It's very hard for me to leave this role and Company that I care so deeply about, but I believe we will be on very solid footing as we finished FY15.

Now on to segment-specific news.

Within Consumer Foods, we had a 1% decline in sales, which includes flat organic volume and flat price mix.

Clearly, the volume performance was a big sequential improvement over Q4 and came in a bit of ahead of what we expected.

Comparable profit increased 19%.

The work to get to that volume performance in Q1 was important and foundation-building.

In fact, there's a lot of work going on now to grow volume, increase share, and improve margins all across the segment, and particularly in our fixed and grow brands.

I'll touch on each of those in a minute.

But first, I want to tell you about a significant milestone.

We achieved the number one dollar share position in frozen single-serve meals during the quarter.

As you know, that's been a challenging category for retailers, but it's still very large, important, and profitable for customers and food manufacturers alike.

We believe this is still a good business.

We think the combination of deep insights, a focus on core users, and leveraging differentiating innovation can help us continue to grow.

As you know, one of our major frozen brands, Healthy Choice, has struggled in single-serve frozen meals.

It's one of our fixed and grow brands, but we are confident of our direction and focus with that brand.

As you may recall, we are moving out of slow-selling SKUs and into more of our proprietary Healthy Choice Cafe Steamers line, which has been consistently strong since its introduction in 2008.

The Cafe Steamers we have in market are showing strong growth, and we are confident of bigger second-half progress in Healthy Choice as we begin to lap some of the assortment pruning we did last year on slower selling sub lines.

Meanwhile, Q1 for Marie Callender's was particularly strong, with the single-serve dinner business up double digits in dollar and volume sales.

Marie Callender's has a long winning streak and increasing household penetration, a good testament to the quality of the food, advertising that resonates, and the focus on the core user.

Overall, in frozen, we are confident of our portfolio and its strength and are looking forward to better numbers on Healthy Choice later in the year.

Chef Boyardee, our second challenged brand, is beginning to perform better on the return to easy-open can that consumers prefer.

And our new merchandising strategy has begun to pay dividends at some of our key customers already.

Performance on Chef Boyardee is improving as we speak.

On Orville Redenbacher's, we are working through some packaging, assortment, and merchandising changes that will all go into the market late this calendar year.

We expect these changes to be meaningful and positive as we look forward.

Within popcorn, we've seen a strong quarterly performance from Act II, which benefited significantly from some simple graphics changes in the packaging.

We know this category has room for growth and we know the Orville Redenbacher's brand equity a strong.

Snacking is clearly a growth area and Slim Jim was a great performer in the quarter, growing double-digits in volume and net sales and taking share.

This is another example of a strong brand that knows its core consumer and communicates with them in a way that really resonates.

Reddi-wip is another brand that had an outstanding quarter and the key here is expanding usage occasions.

Reddi-wip's success is an example of being persistent and tenacious with a good idea, specifically, getting displays of Reddi-wip next to fruit.

We had a terrific summer season with the brand with double-digit growth in volume and sales and great share pick-up, as well.

Our intensified focus on club, dollar, and convenience stores is beginning to drive impact.

As you know, these retail outlets are growing faster than traditional grocers and we are beginning to seize our share of this growth.

We're gaining sizable distribution in club stores with brands like Reddi-wip, Hunt's, Bertolli, Swiss Miss, and Marie Callender's and we are securing new distribution for some of our brands, as well, in the dollar store format.

All in all, we are making some big strides in channels and have more room to grow.

In terms of the bottom line, Consumer Foods comparable profits increased 19%.

Productivity and other efficiency initiatives offset inflation and we continue to find ways to work much more effectively, bringing up resources to focus on growth.

Within our Private Brands segment, sales were down 2% versus last year's first quarter and comparable operating profit declined 28%, reflecting the fact that we made pricing concessions in the second half of our last fiscal year because of our customer service and quality execution issues.

While a meaningful decline, it's sequentially better than last quarter.

The good news is that we've resolved these issues and we will start lapping those pricing concessions that we had to make last fiscal year, as we get into the second half of this fiscal year.

I also want to point out that while we had to do some firefighting last year, the fixes we put in place are sustainable and provide us with a much better operating model and foundation.

We're gaining deeper, faster, and more granular visibility into our Private Brand operations, now, and because of that, we are being much more proactive on both the challenges and on the opportunities.

Having stable operations let's us begin to leverage our scale and use some important tools like SAP, which are just starting to be implemented in certain parts of the segment's operations.

Most importantly, stabilizing our operations and delivering our customers what they expect when they expect it, allows us now to compete for business proactively, not reactively, which means we have the opportunity to return to more normalized pricing and overall improved customer relationships.

By that, I mean partnerships where we are squarely focused on growth.

Let me share a bit of color now on some of our larger product lines in Private Brands, specifically snacks, bars, cereal, in-store bakery, and pasta.

We are taking advantage of snacking demand through new emulations in some of the fastest-growing snacking areas, like pretzel flats and pieces, the new bolder flavors of crackers, and we're also doing some of our own unique innovations for several retailers.

We are also a major player in the large and growing snacks nuts category.

In bars, the focus and growth of late is really on the protein and fiber bars, where we have strong emulations sold under the retail labels.

While some parts of the overall bars category growth slowed, we have a broad set of emulation and manufacturing capabilities across many different bar types and we are adjusting those resources to the areas of the category that are in the highest demand.

As you all know, the cereal category has been very soft, so this will become, we believe, more of a share proposition for us.

What we have to do is better leverage our very strong emulation capabilities and a margin structure that's attractive to retailers.

A fourth product line I want to mention is our in-store bakery business, where we make everything from bagels to artisan bread to cookies, sold in the perimeter of the store.

We have tremendous capabilities here and the growth prospects are very solid as sales in this part of the store grow.

For example, we just launched a new flavor platform for our Lofthouse Cookies that allows us to leverage our strength during holidays and expand on it year round.

Finally, a word on pasta, a category that has experienced significant pricing competition in the past several years.

This is a sizable business for us and one where we will use our state-of-the-art capabilities, particularly in operations, to rebuild our margins over time.

You can see our breadth across the store.

With our arms around the operational issues, we can work with retailers to design solutions to meet the shopper needs.

In fact, we've picked up a good bit of new business over the past six months that we are working to bring to market in the second half of FY15.

Our current projections are for modest sales and profit growth in this segment in FY15 and for growth to accelerate in FY16 and FY17 on both the top and bottom line, as we continue to get good synergies, operations continue to become more efficient, and we gain new business and distribution.

The fundamental appeal to consumers, the strategic importance and profitability of Private Brands to trade customers and value-added capabilities of the ConAgra Foods Private Brands operations make this a long-term growth vector for us.

Moving on to Commercial Foods, sales were $1.1 billion, up 2% over year-ago.

Volume increased 3%, while a comparable operating profit, as expected, decreased 9% versus year-ago.

In our biggest business in this segment, Lamb Weston potato product sales were up, primarily due to more growth in the food service channel.

Profits were below year-ago amounts.

The year-over-year profit decline reflects less profitable mix, given a loss of a large food service customer last year, which we have not yet lapped and the last quarter of last year's poor potato crop quality, both of which we've talked about before.

We will get both of those issues behind us in the fiscal second quarter as we lap the customer loss and are into the new crop.

We've diversified and strengthened our customer base since last year, so we feel good about the sales potential and our prospects going forward.

On the international front for Lamb Weston, some of our customers are facing the impact of adverse food quality news in China.

This will give us some short-term headwinds, but the long-term growth potential in developing markets will continue to be robust.

Importantly, we completed our acquisition of a Chinese potato processor during Q1, giving us the ability to process potatoes close to our fast-growing QSR customer base.

Also, Lamb Weston's newly expanded Boardman, Oregon plant had a very successful start-up recently and is running smoothly.

This plant will help us better serve the growing demand from our global customers.

Within the rest of the Commercial Foods segment, sales and profits were in line with a year ago.

Just as a reminder, we completed the Ardent Mills transaction, so we no longer have any flour milling operations in our results for continuing operations.

We will recognize our share of Ardent earnings through equity method investment earnings.

Ardent Mills is off to a very strong start.

We're excited that the start-up of that operation has gone so smoothly.

This deal will be accretive to comparable EPS in a few short years, and clearly, as a long-term strategic and financial win for us.

To wrap things up before I turn it over to John, Q1 was a quarter of important progress.

We said FY15 would be a year of stabilization and recovery and we got off to a very good start on that in Q1.

We are continuing to drive great urgency in getting more effective and efficient throughout ConAgra Foods and we're on track for the resulting SG&A savings.

This favorably impacts the performance for all of our segments.

Consumer Foods is making good progress overall in a tough environment.

There are many bright spots with our brands and the brands that have weighed on results are beginning to respond to our efforts to improve.

Private Brands is starting to stabilize, although still a good bit below our long-term expected profitability and we are operating with more confidence.

We're picking up new business, have clear line of sight to better margins, and we're moving toward our strategic vision that will capitalize on the strength of our unique portfolio.

Commercial Foods continues to be a very strategic and profitable scale business for us.

The recent short-term challenges will soon be in the past.

The more diverse base of customers we've built over the last year will help us over the long run.

We see FY15 as a more normal year in regard to the potato crop and the international growth prospects are real and sustainable.

We are pleased with our results for Q1 and we look forward, with conviction, to delivering the rest of the year.

We are also confident the work we've done will drive strong performance in FY16 and FY17, where we plan for EPS growth acceleration.

John will share additional details now.

Thank you, Gary, and good morning, everyone.

I am going to touch on four topics this morning.

I'll start with some comments on our fiscal first-quarter performance.

Next, I'll cover comparability matters.

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

Finally, I will provide some comments on our outlook for the balance of the fiscal year.

Let's start with our performance.

Overall, for the fiscal first quarter, the results were a bit better than our expectations and reflect progress against several key focus areas for FY15.

We have reaffirmed our full-year goals and continue to expect FY15 results to reflect stabilization and recovery.

Before I cover some of the details, I would remind everyone, that with the formation of Ardent Mills early in the fiscal quarter, flour milling results prior to the formation of the JV are reflected as discontinued operations.

Historical results from continuing operations reflect this change, most notably, within EPS and the results of the Commercial Foods segment.

We have provided revised numbers in the written Q&A document associated with this release.

Also, our share of earnings from our 44% interest in Ardent Mills is included in equity method investment earnings.

Importantly, we continue to use $2.17 per share as our comparable 2014 earnings base.

For the fiscal first quarter, we reported net sales of $3.7 billion, in line with the year-ago quarter.

For the quarter, we reported earnings per share from continuing operations of $0.25, versus $0.30 in the year-ago period.

Adjusting for items impacting comparability, fully diluted earnings per share were $0.39, up $0.02 over comparable year-ago amounts, reflecting stronger performance in our Consumer Foods segment, increased equity method investment earnings, and lower interest and corporate expenses, offset by lower earnings in our Commercial Foods and Private Brands segment.

Now I'll share a few comments on our segment performance, starting with our Consumer Foods segment, where net sales were approximately $1.6 billion, down about 1% from the year-ago period, reflecting flat volume, flat price mix, and some rounding.

While we have more work to do to drive consistent top-line growth, we are pleased with the progress we are making and the improvement in trends.

Our Consumer Foods segment operating profit, adjusted for items impacting comparability, was $199 million, or up about 19% from the year-ago period.

The operating profit reflects improving volume trends and lower marketing and SG&A cost.

The impact from foreign exchange on net sales and operating profit for the segment, this fiscal quarter, was immaterial.

Our Consumer Foods supply chain cost reduction programs continued to yield good results.

This quarter, cost savings approximately offset inflation of about 3%, which was in line with our expectations and was driven by cost increases on certain inputs, particularly proteins.

On marketing, Consumer Foods advertising and promotion expense for the quarter was $72 million, down 30% from the prior-year quarter, which included significant costs associated with several large new product launches.

Our Private Brands segment delivered net sales for the quarter of $980 million, down about 2% from the prior-year quarter.

The net sales decrease reflects modest volume declines, a portion of which relates to the elimination of certain low-margin business.

Operating profit, excluding items impacting comparability, was approximately $48 million, or down about 28% from the prior year.

This decline reflects the continuing but moderating margin compression driven by the pricing concessions in the prior fiscal year, as well as temporarily higher operating costs associated with supply chain initiatives.

While we still have significant margin recovery ahead of us, we are pleased with the continued progress and improved operating stability of this segment.

In our Commercial Foods segment, net sales were approximately $1.1 billion, or up about 2% from the prior-year quarter.

The net sales increase reflects about 3 points of volume improvement, partially offset by about 1 point of negative price mix.

The Commercial Foods segment's operating profit adjusted for items impacting comparability was $125 million, or 9% below the year-ago period.

The operating profit decline reflects the impacts on gross margins from a less profitable sales mix and from the poor quality crop.

As Gary noted, the transition to the new crop will be completed in the second quarter.

The gross margin decrease was partially offset by lower SG&A costs across the segment.

Equity method investment earnings were higher this quarter, reflecting approximately two months of earnings from the Ardent Mills joint venture, as well as improved profits from our international potato joint venture.

Moving on to corporate expenses, for the quarter, corporate expenses were approximately $141 million.

Adjusting for items impacting comparability, corporate expenses were $64 million, versus $66 million in the year-ago quarter.

Briefly, on discontinued operations, as I noted earlier, subsequent to the FY14 year-end, we completed the formation of Ardent Mills.

As part of the process, we divested three of our flour mills and recognized a gain of $91 million in the fourth quarter of last year.

The Company also recorded a gain of $625 million in connection with the formation of Ardent Mills in the first quarter of FY15.

These gains are now reflected in discontinued operations.

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

Overall, we have approximately $96 million, or $0.14 per diluted share, of net expense in the quarter's reported EPS, related to several items.

On hedging, for the fiscal first quarter, the net hedging loss included in corporate expenses was approximately $50 million, or $0.07 per share.

We recorded a loss of approximately $25 million, or $0.04 per share, related to extinguishment of debt.

Next, we recorded approximately $23 million, or $0.03 per share, of net expense related to integration and restructuring costs.

Finally, in the fiscal first quarter, we recognized a net after-tax benefit related to historical legal matters of $3 million, or approximately $0.01 per share.

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

First, we ended the quarter with $134 million of cash on hand and $545 million in outstanding commercial paper borrowing.

We continue to target operating cash flows of approximately $1.6 billion to $1.7 billion for FY15 and we expect this will provide us ample cash to achieve our FY15 debt repayment target.

On working capital for FY15, we expect working capital changes to contribute modestly to operating cash flow.

On capital expenditures, for the quarter, we had capital expenditures of $112 million, versus $174 million in the prior year.

For the full fiscal year, we continue to expect CapEx to be approximately $600 million.

Net interest expense was $84 million in the fiscal first quarter, versus $96 million in the year-ago quarter.

Dividends for this fiscal quarter and the year-ago quarter were $105 million.

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

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 $530 million after estimated tax liabilities.

During the first quarter, we completed two transactions related to our debt repayment plans.

First, we essentially refinanced approximately $550 million outstanding under our term loan through the issuance of two-year floating-rate notes and terminated the term loan.

In addition, we utilized proceeds from the Ardent Mills transaction to repurchase about $500 million of our outstanding long-term debt across various maturities.

By the end of FY15, we expect to have repaid around $2 billion of debt since the Ralcorp acquisition, including $1 billion this fiscal year, with about $500 million of that coming from the Ardent Mills proceeds.

As we enter [FY16], 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 intend to maintain our current annual dividend rate at $1 per share as we delever.

However, during this period, we expect to limit our share repurchases, and this quarter we did not repurchase any shares.

And 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.

For instance, during the fiscal first quarter, consistent with our global growth strategies, we acquired a potato processing facility in Shangdu, China for $93 million.

This investment accelerates our strategic plans in this important market, but it does not interfere with our other capital allocation goals.

Now I'd like to provide a brief update on our FY15 outlook.

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

Our current full-year guidance reflects our view of several key performance factors, including the following.

First, in our Consumer Foods segment, we continue to focus on stabilizing volume performance and expect a stronger year-over-year operating profit performance.

In our Private Brands segment, we expect volumes to improve over the course of the fiscal year and we are very focused on margin recovery in this segment.

While we are incurring some temporarily higher operating costs related to supply chain initiatives which will benefit future years, we do expect to see gradual margin improvement as we move through FY15, and overall, we currently expect profits for this segment to be up modestly for the fiscal year.

In our Commercial Foods segment, we expect 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 profit growth in FY15.

We also expect higher equity method investment earnings due to the contribution from Ardent Mills.

As a reminder, while we are confident that over time Ardent Mills will be accretive to our earnings, there is about $0.08 of EPS dilution included in our FY15 outlook.

Overall, equity method investment earnings in total are expected to be in excess of $100 million for the full fiscal year.

In addition, we continue to expect our supply-chain productivity benefits, including Ralcorp synergies, to exceed $350 million in the aggregate for all three operating segments in FY15.

Further, our SG&A effectiveness and efficiency initiatives will drive at least $50 million of savings for the current fiscal year.

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

Also, as a reminder, the income tax expense line includes tax on a portion of our equity method investment earnings, which are shown pre-tax.

We are off to a good start, but at the same time, we recognize there is a lot of the year left, so we are maintaining our current full-year guidance.

As we indicated in the release, we expect the remainder of this year's EPS growth to be in the back half of the fiscal year for all of the reasons you've heard us talk about before.

As such, we expect our second-quarter comparable earnings per share to be in line with year-ago amounts.

It was our strongest quarter last year, so we have our toughest lap at that point.

In summary, we are pleased with the start to FY15.

While we have a lot more work to do, we are encouraged by the progress we are seeing against the objectives we have set forth for the year.

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 back over to the operator to begin the Q&A portion of our session.

Operator?

(Operator Instructions)

Andrew Lazar, Barclays Capital.

Gary, on your last call, you guys mentioned that you expected consumer volume for the year to be flat, maybe just slightly down, for the full year and then with sequential improvement throughout the year.

So I'm trying to get a sense if that's still you're thinking because, obviously, you started out the year with flat volume, there.

If it is still the case, is it possible we'll see a step back in volume, maybe over the next quarter or two, just because of the way either comps flow or what you are doing on the merchandising plant?

Trying to get a sense how we should view that?

Andrew, I would tell you that we feel really good about the start on consumer volume.

A really intense focus on the fundamentals -- we call it Perfect at Retail -- is gaining traction and it's demonstrating its power in Consumer Foods.

So the traction is real.

Let me turn it to Tom for some more color.

Sure, Andrew.

What we expect is the foundational progress that we made in Q1, we should sustain throughout the year.

What we will be facing going into Q2 is, we're going to be executing pricing based on the commodity increases that we've seen in several of our businesses, that will create a headwind.

But overall, we expect the volume to be fairly flat for the year.

Got it.

That's helpful.

That's helpful.

Then we've heard here and there of some, let's call it smaller, frozen entree players, that are really more in the health and wellness arena, that are trying to be pretty aggressive about or expecting to get one or two full doors of placement in the freezer case at some retailers going forward.

Obviously, that would add significant pressure to the incumbent brands that are currently there.

We'll see how successful these companies ultimately are, but I'm trying to get a sense of whether that's something you see in your conversations with retailers.

Or is that a risk that perhaps is something that we should worry a bit less about given what you are doing around SKU reduction at Healthy Choice and focusing on the Steamer line?

Andrew, I would tell you we certainly do see some of that.

There's always smaller players looking to get in and that is the case in the freezer case.

But I could tell you, we've got really good feedback from our customers, that given our performance in frozen and what we've been doing to try and grow the business and obviously gain share, that it will impact us in a very immaterial way.

Our competitors will potentially feel more of that, but that really shouldn't disrupt us at all.

David Driscoll, Citi.

Gary, can you describe the current service levels to your private label customers and how things have changed over the last maybe two quarters?

Can you discuss, related to this, the process of private label contract rebidding?

How long do these contracts typically go?

Is it six months, is it a year?

I'm just trying to get a sense for what we should expect going forward on the progression and recovery of this operation?

David, I could tell you that we feel really good about the service levels in Private Brands.

It's night and day difference from a year ago.

Paul, maybe a little more?

Especially a year ago.

Seasonality, the second quarter is really an important quarter and we were working through just very significant issues.

Our service levels are where they need to be, in the 98% range.

We measure them consistently.

Big focus area for us.

The good news is our sales team isn't on their heels reacting to a bunch of issues.

We are really managing the business the way it needs to be managed.

On the color on the rebidding, I would say on Private Brands, it's part of the business.

So it's an ongoing element that we manage through.

There's different things that will trigger a rebid by category, by customer.

Our focus is on the fundamentals: building the business out the right way, developing stronger customer partnerships.

Making a ton of progress and have confidence in how things will evolve as we go through the year.

Separate question.

You guys said that the Ralcorp ConAgra savings are now expected at $350 million.

Do I remember correctly that the original forecast was $300 million?

Is this a $50 million step-up?

Can you give us any color as to the specific savings expected this year, FY15?

David, let me clarify that for you.

The two numbers are a little mixed up, there.

We continue to see the synergies from the Ralcorp deal by FY17 to be a run rate of $300 million.

The $350 million that I referred to is our total productivity for our supply chain across all of the Company for FY15 and probably subsequent years, also, is what we talked about at CAGNY last year.

So $300 million run rate by FY17 for Ralcorp synergies.

Total productivity and supply chain this year of about $350 million.

This year, and as it relates to our Private Brands business, we're probably looking at something in the range of $125 million to $150 million for productivity there.

A big chunk of that is synergies.

Very good.

It sounds like good progress.

Thank you.

I will pass it along.

Jason English, Goldman Sachs.

Congratulations on the sequential progress.

I was hoping I could understand some of the drivers of the profit erosion in private label little bit more.

When you disclosed sales growth of [1] on 3% volume decline, implicitly we're talking about 1% price growth, but you are referencing price concessions.

So how do I foot those two numbers?

Let me start with that, Jason.

We made, as we've talked a lot about, we were on our heels, very reactive last year, and those price concessions that we made are still with us.

Those are in our base.

But as we move forward, and we start to selectively manage our mix and we take some pricing on some of the new business, that starts to eat into those price concessions and that's why we've got that dynamic.

Paul?

The other element that I would mention, John referenced in his remarks, supply chain initiatives.

The picture I would paint, is it's really about taking one step back to take two steps forward.

We are changing our [dry] distribution network to optimize how do we execute there.

In the short-term that adds cost, but in the long-term, it puts us in an advantaged position to execute the business.

We are also consolidating production into certain plant, increases capacity utilization.

Again, these are expensive things to execute that hurts the profit performance in the short-term, but really positions us better in the longer-term and that's what we are driving against and that's what you see coming through.

Do you guys have a sense of the magnitude of these incremental costs that may prove transitory that you are not excluding as one-time items?

Jason, I believe they are in the range of $30 million this year.

Yes.

Akshay Jagdale, KeyBanc Capital Markets.

My first question is on Consumer Foods and the advertising promotion expense.

I know you guys had a tough lap, but what's the expectation for the year?

And Gary, since you've been on, at ConAgra, in charge, rather, you've tried to increase advertising promotion, generally, over a longer term.

Are you resetting that now to a much lower level?

What's the number for this year and what's a sustainable advertising promotion number for the Consumer Foods business?

With the lower number this year, what impact might that have on sales?

Philosophically, I'd say the most important thing -- two things -- one, last year we spent heavily on some new product introductions that didn't live up to expectations and that's out of the numbers this year.

That's a big impact.

Maybe more importantly, we're working smarter and deploying our resources more judiciously and that's really about demanding and raising the bar for our folks to say, if we are going to spend the resources, we need to see the growth that comes along with it.

Tom, maybe some more details?

Sure.

As Gary said, as with any investment we make, we have a very sharp ROI focus on allocating those resources.

Given the breadth of our portfolio, we are investing where we are going to get the highest returns.

Those include many of the businesses that Gary highlighted earlier: Marie Callender, a tomato (sic -- see press release and prepared comments, "potato") crop platform, Slim Jim, Reddi-wip.

We will continue to invest where we are getting a very strong ROI.

Overall, our FY15 spending for the balance of the year will be roughly in line with year-ago levels.

Great.

Just on Private Brands.

Are you in a position now to look at this business since it's stabilized in terms of its performance, look at it longer-term and give us some guidance in what a long-term margin profile for this could look like?

Your long-term targets imply that we should get somewhere close to double-digit segment EBIT margins on Private Brands, but is that something that's achievable?

Akshay, this is Chris.

As you know from our statements, we expect modest growth this year and for things to accelerate over 2016 to 2017.

In terms of giving a hard number, we haven't cited one.

What I can tell you is, reaching double-digits in a reasonable amount of time, long-term, is not out of the question.

Robert Moskow, Credit Suisse.

A couple of questions.

One is on the synergies for the Private Brands business, the $300 million.

I'm sure you've addressed this before, but to what extent does that entail [consolidating] the Private Brands supply chain with the Consumer Foods supply chain?

Have you announced those types of steps yet, if there are any at all?

The reason I ask, Gary, is that I'm sure that the Board in the future will continue to evaluate the role of Private Brands in the portfolio.

And as you integrate them together, perhaps you even take the step to pull them apart at some point?

And then I had a quick follow-up?

Let me just tell you that our objective is to really leverage the infrastructure that we have.

That's what we talked about when we made the acquisition and we still are aligned through the Board on that strategy.

But, John?

Just, I'd follow-up, we've done a lot of integration.

This year, for instance, a big portion of the ramp-up in our synergies is coming from procurement and it's really leveraging the buy of really common materials across all of those businesses.

Then certainly, from rolling out our manufacturing cost savings initiatives within the plants, we really are doing a fair amount of integration of these businesses and the supply chains, in particular.

The other thing you would think about is things like distribution networks and how we move product to customers.

So there's an awful lot of progress we've made there and more to come, but clearly, we are looking at a total supply chain.

Okay, so that's--

Rob, one other thing I would just mention, as you think about it on a go-forward basis, most of our competitors are pretty small in Private Brands.

When you think about total delivered cost, and ultimately, and this is going to take a bit longer, but ultimately, the total delivered cost just from a logistics standpoint of being able to combine loads and deliver is certainly going to be an advantage for us.

So that's just one other example of what we have to look forward to.

Okay.

I get it.

My follow-up was about the R&D capabilities in the private label business.

Your competitor in private label talks a lot about how they use their R&D and marketing capability to come up with ways to segment the market for their private label customers.

Gary, you gave a lot of good detail on private label during the quarter, but I was wondering, if you get these new business wins, are they asking you to leverage your R&D capability to come up with new product ideas or premium versions or is it just like you are bidding for business and you're displacing someone else?

This is Paul.

I would just describe national brand emulation as a critical part.

We have really strong capabilities, especially in the categories that we are in, as a core competency that is required for success.

Effective interaction with our customers and developing the right products.

So leveraging our total R&D capabilities across our Company is absolutely part of our total value proposition and we believe it gives us a competitive advantage.

We are leaning into it.

Frankly, back on the comments on supply chain, I would put supply chain in that same realm, and the same outlook.

It's a strong capability.

We are leveraging it to help us win over the long haul.

[Sweating] the assets, clearly important.

Getting the emulation right, that's the bread-and-butter of the business.

But clearly, our customers are really excited about our capabilities on the innovation side.

That's to come, as we go forward.

We've dabbled in that in a small way, thus far and have some wins there, but that's going to become a bigger piece of the business as we go forward, particularly, as the customers go up market.

Jonathan Feeney, Athlos Research.

I wanted to come at the margin question on Private Brands a little bit different way.

If we go back to -- forget about the run-up between -- around the time of the transaction -- but take an average of 2008 it through 2012.

If you look at the legacy Ralcorp business, pre-synergy, you were looking at excluding the branded side of that business, excluding the post-acquisition of theirs and anything related to that.

You were talking about 10% to 12% operating margins -- segment margins, and so 2% of that was corporate overhead.

So level is already higher than what you are reporting and talking about.

Then, you take another $300 million.

Significantly, 500, 600 basis points incremental in terms of the legacy Ralcorp sales to where that is.

So, I'm trying to bridge maybe where -- have competitive conditions changed that you just can't sustain those kinds of margins and so that 12%, 13% isn't attainable?

How much of this is temporary dislocation related to the problems last year and how much of this is any change in the marketplace that might have happened due to higher commodity prices, more competition from brands?

Just your thoughts on that, Gary?

This is Chris.

I'll start.

First thing I want to remind you of, is that we have taken some portion of the former Ralcorp and it exists in more than just the Private Brands segment.

So there is going to be some difficulty in drawing a trail from before and after.

That same statement also applies to our synergies.

Jonathan, all of our synergies are not just going to hit the Private Brands segment.

They're going to hit other spots.

But to get to the substantive part of your question, last year, we certainly had some unusual conditions that put us at a different level of profitability.

Right now, we are still in a period of recovering from that and so when we talk about things getting better going forward, we're not necessarily trying to cite some reference point that wasn't our Company, but we do have line-of-sight to things being a heck of a lot better than they are now.

Double-digits are not out of the question over some reasonable period of time, but to trace it back to a former entity is -- it's just not a reference point for us.

Paul?

Just a little color.

I'd start with our current margin performance is not acceptable and our focus is on improving it.

A lot of effort around the top line, working with customers and just basic blocking and tackling -- filling distribution voids, gaining new business, getting it in market, all the things we talked about from a supply chain, leveraging R&D capabilities.

So we are making progress.

There's been sequential improvement.

Feel good about the outlook, but also, acknowledge that the current margin structure is not where it needs to be.

The other one that we haven't hit on much is pricing and we are surgically pricing low-margins SKUs.

That's an element of it.

Where we were a year ago, we had to give a lot of pricing and that was just the situation we were in.

But we are fundamentally changing it and know we have to get a better outcome.

Okay.

Great.

Thanks for your perspective.

Alexia Howard, Sanford Bernstein.

Hello, Alexia?

Operator, we are not hearing anything.

Alexia?

Hello?

Hi.

You can hear me okay.

Great.

Sorry about that.

Can I ask about the progress that you're making on what you've termed the troubled brands before?

A while ago, you were saying it's very hard to recruit new consumers into those brands.

From your comments today, it looks as though they are still seeing negative sales growth.

I'm not sure how negative that is, but it sounds as though your making progress.

Was it as simple as just putting the little snap-top lids on the Chef Boyardee?

Or is there merchandising, pricing, other marketing, or innovation activity that's allowing you to see a bit of progress there?

And will we see positive growth on those brands at some point soon?

Thank you.

Sure, Alexia.

This is Tom McGough.

As you've highlighted, we've talked a lot about these brands.

We've been working to stabilize the three businesses of Chef Boyardee, Healthy Choice, and Orville Redenbacher's.

It is focused on getting the fundamentals right and being perfect at retail.

In Q1, we made very tangible progress in improving the trends.

Specifically on Chef Boyardee, it's been a combination of two factors.

Certainly, adding our easy-open lid to the product has improved our non-promoted velocities, but we've also been more effective in our in-store merchandising.

On Healthy Choice, while the nutritional segment continues to be challenging, we are transforming our product line around Cafe Steamers, which a very proprietary format for us.

It's growing at strong double-digit rates.

This is work we're going to continue throughout FY15.

Finally, on Orville Redenbacher, we will be fielding several initiatives in the latter part of this calendar year to get those fundamentals right and we anticipate improving trends in the second half.

Microwave popcorn is a category that we believe and we are confident we can grow.

You can see that in our ACT II performance, that we are posting very significant year-on-year increases in our consumption, as we've gotten the fundamentals right on that business.

So, overall, we expect to see continued sequential improvement from these brands as we progress through the year.

Okay.

Thank you very much.

I will pass it on.

There are no further questions.

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

Thank you.

This concludes our call today, and just as a reminder, this is being recorded and will be archived on the web as detailed in our news release.

As always, we are available for discussions.

Thank you very much for your interest in ConAgra Foods.

Thank you.

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

Thank you again for attending.

Have a good day.