康尼格拉食品 (CAG) 2015 Q3 法說會逐字稿

Good morning and welcome to today's ConAgra Foods third quarter earnings conference call.

This program is being recorded.

My name is Candice Skriven, 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.

Good morning.

Welcome to our third quarter earnings call.

Thanks for joining us today.

I'm Gary Rodkin here with John Gehring, our CFO; Tom McGough, President of Consumer Foods; Paul Maass, President of Private Brands and Commercial Foods; and Chris Klinefelter, VP of Investor Relations.

We also have our CEO Elect Sean Connolly with us today as well.

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

Also, we will be discussing some non-GAAP financial measures during the call today, and the reconciliations of those measures to the most directly comparable measures for Regulation G compliance can be found in either the earnings press release, the Q&A, or on our website.

I will turn it back over to Gary.

Thanks, Chris.

As you can see from the release, comparable EPS came in higher than our most recent projections, and we raised our full year outlook.

Additionally, we're on track for our debt reduction commitment.

So there's a fair amount to discuss in today's remarks, but before we get into specifics of that, I want to introduce Sean Connolly, our incoming CEO.

I couldn't be more pleased with the selection of Sean.

He sharp, seasoned, enthusiastic, and he refuses to lose.

His energy and focus will serve ConAgra Foods well, and he's making a terrific first impression here at ConAgra Foods.

I know many of you know him, and I'm confident you will enjoy interacting with him in the months and years ahead.

Sean?

Thanks, Gary.

Good morning everyone.

I'm looking forward to transitioning into the CEO role here in a couple of weeks.

I'm very excited to be at ConAgra Foods and part of this team.

This is a highly motivated organization with great brands, strong product lines and incredible people, and I believe there is a lot we can do to create value together.

Now I imagine many of you have big-picture questions about our strategy and goals.

We will get to those over time, but not today.

I will need a lot of study to get where I need to be to provide insight on this.

For now, I will just say that I'm committed to long-term value creation as is our Board of Directors.

My plan is to spend the coming months digging in and learning everything I can about our Company.

After that, we will share our thinking with all of you at an investor event when the time is right.

To be clear, that will be several months down the road.

Until then, our organization will remain focused on delivering our near-term commitments and our key business initiatives.

I look forward to working with all of you as we take ConAgra Foods to the next level.

As many of you know, I value a good dialogue with analysts and investors, and I believe in transparency and availability so that you can have a very solid understanding of our plans.

Thanks for your time this morning.

I appreciate your interest in ConAgra Foods, and I look forward to working with all of you.

Now I will hand it back over to Gary.

Thanks, Sean.

Now, let's focus on the Company's third quarter results.

I am going to briefly touch on some overall remarks about the quarter and then ask Tom McGough and Paul Maass to offer some commentary about our segments.

Given that this is my last earnings call and the fact that I'm retiring from my role officially in a couple of weeks, I think it makes sense for Tom and Paul, who are running the segments day-to-day, to offer the more detailed remarks about segment performance.

So you will hear from them in a minute.

Our third quarter comparable EPS was $0.59.

That's ahead of our most recent expectations and below our comparable EPS of $0.62 a year ago.

All of our segments ended up ahead of what we were planning when we offered our last guidance, and we also got some EPS help from lower taxes and higher joint venture earnings.

We've refined our view of the year and have taken our outlook up accordingly, and we're confident we will meet our debt reduction commitment.

We saw comparable profit growth for both Consumer Foods and Commercial Foods during the third quarter despite some headwinds that impacted us.

To state the obvious, our Private Brands segment continues to be below expectations, and our revised outlook for that segment has driven a large impairment charge.

Obviously, we're very disappointed with our Private Brands results thus far, and we're taking specific actions to improve it.

At the same time, most of the Company, the two biggest segments, are performing well and delivering on commitments.

Our Consumer Foods segment has grown profits each quarter this fiscal year, and we're gradually making progress on the top line with share gains and volume holding steady.

Commercial Foods, led by Lamb Weston, continues to make progress on both the top and bottom line as it gains new business domestically to make up for some headwinds including the West Coast port slowdown, which has impacted international sales over the near term.

But the good news is that most of the Company is on track, and Paul and Tom will give you some specific examples.

In addition to this, we remain highly focused on a more efficient organization at all levels.

That's important fuel for ongoing business growth.

But along with the progress we're making across the Company, we continue to have a challenged Private Brands performance.

While our learning curve has been steep and taken longer than planned, we're in the midst of implementing very granular initiatives to significantly improve execution.

These initiatives should help our Customer Service, customer relationships and in due time our ultimate performance.

Our initiatives will also help us manage costs more effectively.

You will hear more about that from Paul in a minute.

We expect better results from the Private Brands segment in FY16.

Now, on to more specifics by segment, I will ask Tom and Paul to offer their thoughts.

So Tom?

Thanks, Gary, and good morning, everyone.

This is Tom McGough, President of Consumer Foods.

I will begin by highlighting that we are delivering on our plans for this year, which focused on improving share, stabilizing volume, and growing profit.

We planned for a year of foundation building in Consumer Foods, and I'm pleased with our progress despite operating in a challenging marketplace.

For the third quarter, Consumer Foods posted a 2% net sales decline with flat volume, a 1% decline in price mix, and a negative 1% impact from FX.

Comparable operating profit increased 5%.

Importantly, we extended our share leadership in frozen single serve meals during the quarter, a position we first took over earlier this fiscal year.

That leadership position is driven by the ongoing sales and share growth from Marie Callender's single serve meals, a brand where we've had an effective strategy and the right fundamentals, which has enabled us to invest to grow.

Also within frozen, we successfully restate the PF Chang's brand by investing in renovating the core meal segment and introducing new appetizers and side dishes in the fall.

We are seeing very good results.

In the center of the store, we're also seeing growth in PAM and Reddi-wip, again behind the right strategies and strong fundamentals with consistent investment.

On Reddi-wip, we achieved an important milestone during the quarter.

Reddi-wip is now the number one whipped topping, outselling all frozen and refrigerated competitors.

Finally, Slim Jim continues to be a strong and consistent performer.

We are taking share and growing sales.

We are also making progress on the three big brands we've been working to stabilize this year.

Chef Boyardee continues to improve, growing volume year-over-year behind packaging improvements and effective promotion strategies.

Healthy Choice is growing dollar share in the nutritional meal segment, behind our continued focus on building Cafe Steamers.

We've added a new line called Simply Steamers, which I will say more about in a minute.

Simply Steamers is performing well and helping us to improve our margins.

Finally, Orville Redenbacher's is making sequential improvement by getting the fundamentals right, namely simplifying the packaging graphics and improving product assortment on shelves.

This is work in process as retailers will be resetting their shelves over the next several months.

It is already working in those retailers where we have fully implemented the improvements.

We've made progress on these three brands through the first three quarters, and we expect to continue, -- we expect to see continued progress into FY16.

While this is a challenging environment, there is growth in our industry.

I'd like to share a bit more about how we're positioning our brands for the long term to capitalize on the consumer, customer, and shopper trends that are driving growth.

First, as we've shared in previous conversations, we're already redirecting resources to faster-growing retail channels, and that strategy is working.

We are now outpacing the growth rate in club, dollar, and convenience channels.

We will continue investing here, getting at least our fair share of growth in this stronger channel -- in these stronger performing channels on an ongoing basis.

Second, we are addressing the consumer desire for more transparency and authenticity.

You've heard a lot about this lately as most of our industry has acknowledged the need to do more to be more relevant with today's consumer.

The good news here is we have product lines in our portfolio that epitomize simple and wholesome like Hunt's tomatoes and many others that also fit with today's consumer.

For example, Healthy Choice Simply Steamers is an example of that.

With some straightforward packaging and ingredients changes such as moving to all-natural protein and no artificial ingredients, we hit the sweet spot of what consumers desire.

The initial end-market performance of these entrees is a great sign of what we can do within this portfolio to resonate better with consumers.

Finally, we know that when people turn to packaged food, they expect convenience.

The convenience bar has been raised, and we're responding making changes easier for the consumer and shopper can mean a variety of things.

Sometimes it's about improving packaging to make it more convenient, or it might mean thinking about an entire product line differently like we did with PF Chang's.

We look at convenience from a time-strapped shopper point of view, and marketing the line of appetizers, meals and rice together as a complete meal has had very good results so far.

The take away here is that our Consumer Food business has strong strategies for growth.

These strategies direct our resources toward the best opportunities to win and leverage our capabilities well.

Before I finish my remarks on Consumer Foods, I will note that the comparable 5% earning profit growth -- 5% operating profit growth shows our productivity and efficiencies are coming in strong.

Our operating profit growth includes the fact that we had to deal with a hedging issue and the impact of an unfavorable foreign exchange rate.

Despite those external headwinds, we grew profit largely because we managed our supply chain very well and reaped the benefits of those efficiencies.

Advertising expense declined approximately $20 million in the quarter.

We are planning A& P to be up in the fourth quarter.

In conclusion on Consumer Foods, our game plan for the year was to grow share, stabilize volume, and grow profit.

We are delivering on that.

I look forward to your questions in a few minutes, and for now I will turn it over to Paul Maass for comments on the Private Brand and Commercial segments.

Thanks, Tom.

Good morning, everyone.

I'm Paul Maass, and I will first focus on our Private Brands segment where profits were well below year-ago amounts as we noted in our February update.

We are in a highly competitive bidding environment, seeing some category softness and dealing with high input costs, specifically in pasta.

We've also experienced execution shortfalls.

Those factors have negatively impacted recent results and near-term expectations for volumes, pricing, and margins.

We have reassessed the timing and slope of recovery in our Private Brands segment and concluded that significant improvement in our top and bottom line performance will take longer than we previously expected.

We are very focused on implementing significant changes to improve execution, strengthen customer relationships, and improve our performance.

We've made positive changes already with more to come.

Those changes will continue to be implemented over the next several quarters, and we expect to improve results in FY16.

Even with those improvements coming down the road, clearly our view of future performance is well below previous projections and expectations, which has resulted in the impairment.

John will say more about the impairment in his remarks.

As I look at the underlying issues in the business, there are a few things that count more than others.

The level of competitor fragmentation and capacity in the marketplace means that every dollar won in this business is hard fought.

We know that speed and agility are hallmarks of Private Brands and are key to winning.

Focusing on the distinct needs of our six business units within Private Brands is a must.

For example, what it takes to win in pasta is simply different from crackers, and the winning priorities in crackers are different from snack nuts and so on.

We are strengthening our focus and specialized capabilities, and we're leveraging our scale where it makes sense.

Scale is clearly a strength of ours, but that's obviously not been enough to win in the marketplace.

Having learned some lessons the hard way, we are better equipped to have the right processes and structure to win going forward.

We know too well that the decline this business has experienced is unacceptable, and we are in the midst of stabilizing it so the business can return to growth in FY16.

The stabilization and turnaround plan is focused on four executional areas that we highlighted a few months back.

We had just defined these focus areas then, and we have accomplished a lot in the three months in terms of rewiring processes and better defining our priorities.

First, we're further narrowing the focus of our sales teams for deeper expertise and capability, which enables decision-making closer to our customer, improves speed and reduces complexity.

In the Private Brands business in particular, we see the need for simplified processes that efficiently handle the large volume of work coming from a big number of customer-specific SKUs.

Our customers value and appreciate supplier partners who have deep product knowledge category by category and customer by customer.

This kind of focus has worked well for us prior to acquiring Ralcorp, and it can work for us again.

Second, we are beginning to improve our commercialization process by eliminating bottlenecks and getting new products on shelf when our customers expect them.

With such a large volume of work, we have to be extremely efficient in our responsiveness to customer requests for product modifications, most notably graphics changes.

We have already taken weeks out of this process, and we are looking forward to further improvement.

Third, we are establishing better and more consistent Customer Service capabilities.

While this area has been improving for some time, we are now focusing on the aspects that make the right service level end fill rates sustainable over time.

As we consolidate our manufacturing network, we are improving our execution to ensure dependable, uninterrupted supply.

As you'd expect, fill rates and on time delivery are extremely sensitive to retailers in a way that is very different than in our branded business.

We are talking about their products under their brand names, and there's no substituting another product.

So we are positioning our teams to consistently meet and exceed our customers' expectations.

Fourth, we are focused on margin management.

We are going at this in a number of ways, including improved pricing execution through better linkage of our input costs and risk management to pricing decisions and better visibility into new product and promotional effectiveness.

This allows us to leverage mix as a margin enhancer as well.

Tighter and stronger connectivity among our field, our general management, and our supply chain teams is key and will help us improve our margins.

These improvement initiatives have begun and they will continue, driving improvements starting in 2016.

Ultimately, these are significant changes that are intended to improve execution, strengthen our customer relationships, and improve our performance.

To sum up those improvement areas, these are basic foundational elements in our Private Brands business.

For us to be seen as a true value-added partner, we have to improve speed, agility and consistency.

I want to be very clear.

We are fundamentally changing the way we operate this business to succeed in the market place over time and create stronger results, but we realize this will not be a quick turnaround.

Now moving on to Commercial Foods.

Sales were up 1% compared to a year ago, and comparable operating profit increased 4%.

In our biggest business in this segment, Lamb Weston, sales and profits were up slightly this quarter.

The big news here is that we're able to drive some top and bottom line growth, despite being negatively impacted by the West Coast port labor slowdown.

That had a significant impact on our third quarter volume and profit.

We're pleased the port situation is resolved but will take a bit of time to recover from it due to the backlog of product.

Business for Lamb Weston domestically is very strong.

We've added to and diversified our customer base, and we are processing a crop that is better than last year's, which is positively impacting our earnings delivery.

Our international performance for the quarter was below a year ago due to the West Coast port slowdown.

Despite that, emerging markets are an extremely valuable part of the long-term picture.

Results for our other Commercial Foods businesses were above a year ago, and we are pleased with our performances.

These are well-run businesses with focused agendas that are consistently delivering.

Outside of our segments, we continue to see good results that are classified within equity method investment earnings.

Joint ventures are a very important component of our Commercial Foods businesses, and we are pleased with the strong results from our joint ventures this quarter and fiscal year.

With that, I will turn the call back over to Gary.

Thanks, Tom and Paul.

As you can see, there are bright spots within the Company, and it's important not to lose sight of the fact that our overall effectiveness and efficiency work is doing what it is supposed to.

This is taking place throughout ConAgra Foods and is producing the SG&A savings and productivity we envisioned, which of course plays a big role in our Company's broader goals.

Importantly, the execution related initiatives underway in Private Brands will help us stabilize and grow over time.

Our most recent results have been weighed down by our Private Brands performance, but when I take a step back, I'm extremely pleased to see the progress our team has made over the last decade.

The long-term view shows we've made good progress transforming ConAgra Foods into a true operating company with an engaged culture.

All of that also tells us that we're in a position to profitably grow on a sustainable basis over the years ahead.

Getting ConAgra Foods to this point has required significant energy and dedication from thousands of people inside the Company.

I want to thank my team, including all ConAgra Foods employees for all of the sweat equity, talent, and perseverance they've devoted to ConAgra Foods.

It means a lot to me personally and to all of our stakeholders, and it's why the Company is set up well for the future.

I also want to thank you and the rest of the investment community for the interest you've had in our Company during my tenure here.

I've appreciated our interactions and your feedback throughout the years, and I wish you all the best.

I've truly enjoyed the candid dialogue, the challenges, and good exchange of ideas that I'm sure will continue with Sean.

With that, I will turn the call over to John for some additional detail.

Thank you, Gary, and good morning, everyone.

I have several topics to cover this morning.

I will start with some comments on our fiscal third quarter performance including the additional impairment charge in our Private Brands segment this quarter.

Next, I will cover comparability matters.

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

And finally I will provide some comments on our outlook for the balance of the fiscal year.

Let's start with our performance.

Overall, the fiscal third quarter comparable results were better than our revised expectations, reflecting a strong close to the quarter in our Consumer Foods and Commercial Foods segments and a lower tax rate but also continuing challenges in our Private Brands segment.

Before I cover some of the details, I would remind everyone that the results of the ConAgra Mills business prior to the formation of the Ardent Mills joint venture in the first fiscal quarter are reflected as Discontinued Operations.

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

For the fiscal third quarter, we reported net sales of $3.9 billion, about 2% below the year-ago quarter.

We reported a loss per share from continuing operations of $2.23 versus earnings of $0.52 per share in the year-ago period.

The sharp decline in reported EPS was driven by a non-cash impairment charge that I will say more about in a few minutes.

Adjusting for items impacting comparability, fully diluted earnings per share were $0.59, about 5% below comparable year-ago amounts, principally reflecting weaker performance in our Private Brands segment and higher corporate expenses offset by stronger performance in our Consumer Foods and Commercial Foods segment.

The fiscal third quarter comparable earnings include approximately $28 million of losses related to certain index hedges.

Due to changes in correlations among commodities and these hedges, the Company changed this method of recognizing the related mark-to-market amounts.

As such, the Company has recognized approximately $28 million of expense directly to its operating segments this quarter.

Without this change in methodology, most of that expense would have been temporarily classified within unallocated corporate expense and recognized within segment results over the next few quarters.

The $28 million of expense is not identified as an item impacting comparability.

Now I will share a few comments on our segment performance.

Starting with our Consumer Foods segment, where net sales were approximately $1.8 billion, down about 2% from the year-ago period reflecting flat volume, a 1% decline in price mix, and a 1% negative impact from foreign exchange.

Our Consumer Foods segment operating profit adjusted for items impacting comparability was $282 million or up about 5% from the year-ago period.

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

Gross margins were down slightly as the benefits of pricing, mix improvement, and cost savings were offset by a mark-to-market loss on the aforementioned index hedge derivatives of approximately $21 million.

Foreign exchange had a negative impact of $17 million on net sales and about $8 million on operating profit for the segment this fiscal quarter.

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

This quarter, cost savings were approximately $70 million and largely offset inflation of about 4%.

Inflation was driven by cost increases on certain inputs, particularly proteins.

On marketing, Consumer Foods advertising and promotion expense for the quarter was $81 million, down about 20% from the prior year quarter, due in part to changes in timing between the third and fourth quarters.

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

Results were driven by a 2% volume increase primarily reflecting the increased domestic sales in our potato business.

The Commercial Foods segments operating profit was $145 million or 4% above the comparable operating profit in the year-ago period.

The operating profit increase principally reflects the benefits from increased domestic volumes and the improved quality crop in Lamb Weston offset by lower international volumes including the impact from the West Coast port labor dispute.

Our Private Brands segment delivered net sales for the quarter of $1 billion, down about 5% from the prior year quarter, driven by a 7% volume decline resulting from execution shortfalls and pressures from both branded and private branded competitor.

Operating profit excluding items impacting comparability was approximately $37 million, down 44% from the prior-year quarter.

This decline reflects the weak volume performance and margin compression driven by supply chain execution challenges and lower overhead absorption.

The performance and our outlook for the balance of the fiscal year also reflect additional margin pressures from rapid increases in several key commodity inputs, particularly tree nuts and durum wheat.

Given the segment's recent poor performance and continued execution challenges, particularly the issues that we experienced over the last fiscal quarter, we have reassessed the nature and extent of the executional challenges across all elements of this segment, as well as our estimates of how long it will take for our recovery plan to positively impact the financial performance of the businesses in this segment.

Due to the significant shortfall in the profit and cash flow performance in our Private Brands segment and our significantly lower expectations relative to the timing of improvement in cash flows in this segment over the next several years, we have updated our goodwill impairment analysis.

As a result, we recorded non-cash impairment charges of approximately $1.3 billion or $1.2 billion after-tax.

These charges are principally related to the impairment of goodwill but also includes some small impairment charges related to certain brand or trademark assets in the private brand segment.

The additional impairment is driven by the significant change in our performance outlook and reflects the fact that the underlying discounted cash flow evaluation models are very sensitive to changes in near-term cash flow and growth assumptions.

Notwithstanding the setback in our private brand segment this year, we continue to believe that we will see improvement in the margin structure of this business going forward as we improve our execution especially related to Customer Service, pricing and margin management, and as we complete supply chain initiatives that are driving some higher costs in the near term.

Moving on to corporate expenses.

For the quarter, corporate expenses were approximately $50 million.

Adjusting for items impacting comparability, corporate expenses were $51 million versus $29 million in the year-ago quarter.

The increase versus last year's third quarter reflects a shift in timing between quarters for some expenses and higher benefit and incentive accruals this year.

Equity method investment earnings were higher this quarter due to the addition of the earnings from the Ardent Mills joint venture.

Next, I will move on to items impacting comparability.

Overall, we have approximately $2.82 per diluted share of net expense in the quarter's reported EPS related to several items.

As previously discussed, we recorded $1.3 billion or $2.81 per share of non-cash charges related to goodwill and other intangible impairments in our Private Brands segment.

On hedging, for the fiscal third quarter, net hedging gain included in corporate expenses was approximately $6 million or $0.01 per share.

Next, we recorded approximately $22 million or $0.03 per share of net expense related to integration and restructuring costs.

Also in the fiscal third quarter, we recognized a tax benefit of $3 million or approximately $0.01 per share related to favorable adjustments of prior-year federal income tax credits.

As a housekeeping detail, I will point out that our comparable EPS of $0.59 excludes the $0.01 benefit to GAAP EPS resulting from the requirement to use weighted average basic outstanding shares to calculate EPS when there is a loss.

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

First, we ended the quarter with $137 million of cash on hand and $436 million in outstanding commercial paper borrowings.

We are targeting operating cash flows of approximately $1.55 billion for FY15, down modestly from our previous estimate due in part to higher projected year-end inventory levels related to certain crop based inputs and higher costs for certain raw material inventories.

We still expect to have ample cash to achieve our FY15 debt repayment target.

On capital expenditures for the quarter, we had capital expenditures of $116 million versus $133 million in the prior year quarter, and for the full fiscal year, we now expect CapEx to be in the range of $500 million, somewhat lower than our previous estimate.

Net interest expense was $80 million in the fiscal third quarter versus $95 million in the year-ago quarter.

Dividends for this fiscal quarter were $107 million versus $105 million in the year ago quarter.

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

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.

We have repaid slightly over $600 million to date this year including $500 million from proceeds related to the Ardent Mills transaction.

We remain committed to a strong dividend and intend to maintain our current annual dividend rate at $1 per share as we delever.

While we continue to limit our share repurchases, this quarter we did repurchase about $38 million of shares.

And while we expect limited acquisition activity in the near term, we will continue to evaluate investments to strengthen our performance.

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 in addition to debt repayment.

This quarter, we did announce plans to add production capacity to support growth in our Lamb Weston Meyer joint venture in Europe.

This expansion will not require a capital contribution from the partners as it will be financed by the joint venture.

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

For FY15, we now expect diluted earnings per share adjusted for items impacting comparability to be in the range of $2.15 to $2.19 per share.

This is slightly higher than our recent estimate as we have passed along some of our third quarter over delivery that was made possible by a lower tax rate.

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

Continued good execution in our Consumer Foods and Commercial Foods segment.

In our Private Brands segment, we expect volumes and profits to be down year-over-year, reflecting challenges we have discussed and our reassessment of the timing and pace of improvements in volume and operating margins in this business.

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

As a reminder, while we are off to a good start and remain 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.

Equity method investment earnings in total are expected to be in the range of $120 million for the full fiscal year.

Overall, while we still have more work to improve the performance in our private brand segment, we have made good progress against key initiatives in many areas in our business in FY15, including Consumer Foods, Commercial Foods, corporate and SG&A expense control, and our Ardent Mills joint venture.

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?

Thank you.

(Operator Instructions)

It looks like we will take our first question from Andrew Lazar with Barclays Capital.

Good morning, everyone.

Good morning, Andrew.

Welcome, Sean, great to hear from you again.

And, Gary, really wishing you all the best moving forward.

Thank you.

I guess two questions for me, if I could.

First, Sean, this may not be a question you're prepared to answer really just yet, but you will tell me if that's the case.

I guess, if we had asked you in maybe prior roles that you've had in food -- Campbell, Hillshire and such -- realizing this may ultimately be a very different outcome as it relates specifically to ConAgra -- trying to get a sense of what would your thoughts have been regarding the marriage, if you will, of private label and brands under the same roof because there's still obviously quite a bit of investor skepticism around the pairing.

And then I've just got a follow-up.

Well, I appreciate the question, Andrew; and I appreciate that you all have many questions for me about how we're going to create value going forward.

Clearly, being just a few weeks in to ConAgra Foods here, I'm in the early days of learning, and I've got a lot more work to do.

So, I'm not in a position today to give you the kind of perspective that you're seeking, but I do look forward to engaging with you down the road, and sharing that perspective, because I will have it.

For now, just know that I do see tremendous opportunity to create value here at ConAgra Foods, and I am really happy to be part of the team.

Got it, understood.

And then, Paul, I realize ConAgra won't give full-year 2016 guidance really until next quarter.

The private brands margin I think around 3.7% was maybe the lowest since ConAgra's owned it.

Are we able to say maybe at this stage though that this is the bottom on margins for this unit?

Or do you think visibility is still sufficiently murky that we can't quite say that yet as we think out to 2016, specifically in private brands?

Thanks very much.

You bet.

I would say we're clearly disappointed with where we're at, and we do intend to deliver profit growth in 2016.

And that's what we are all focused on doing.

Thank you.

You bet.

We will move now to David Driscoll with Citigroup.

Thank you, and good morning.

Good morning, David.

Gary, thanks for everything.

We really appreciate it, and good luck with your retirement and future activities.

And, Sean, welcome back.

Thanks, David.

So, guys, boy, a game-changing event yesterday with Kraft and Heinz.

And, Gary -- Sean, I don't know what you want to comment or not, but, Gary, gosh, you've been at this a long time.

You started at ConAgra; it was a decentralized structure.

Your first action was to turn ConAgra into -- I think the annual report said One -- turn it into one entity.

I feel like the ZBB actions, and the elimination of so much internal cost structure, as executed by Heinz, 3G and others, is astounding.

The numbers yesterday just blew everybody away, in terms of the kind of value creation, and the stock proved it.

Gary, how do you respond to the cost-cutting efforts that the Company has taken so far?

And why aren't there just dramatically larger efforts that ConAgra could employ, just given the size of the Entity?

And, again, from where you started when it was decentralized, to then it comes together in this one unit -- it feels like we're going the other way with ZBB right now.

I hope that was somewhat clear.

Yes, David, understood, and you know from a lot of the discussions we've had in the past, and from the results, that we have generated pretty significant savings from our supply chain and SG&A functions year after year.

And the continuous improvement in efficiencies of our operations is a way of life for us.

So, I think we've been at that for a long time, put a lot of points on the board, and I expect the future will hold the same.

Sean, can you make any comments here, even from your past experiences?

Well, in principle, I don't comment on other companies in our industry, so I'm sure you understand I don't have a lot to add here.

I just -- I think for those of you who know me, you know I'm a big believer in a lean enterprise because that ultimately creates a strong bottom line, and fuel for growth.

I think that's just a philosophical view.

Beyond that, I don't have a lot to add.

Okay, well, we look forward to your more detailed comments later on.

Thanks, everyone.

Thanks, David.

We will move now to Jonathan Feeney with Athlos Research.

Good morning; thanks very much.

Good morning.

A detail-ish question, but we haven't talked about synergies for a while with the private brands business.

But in light -- you did mention that you changed some assumptions which triggered this writedown this morning.

And I'm wondering -- I think we had last heard about synergies in the $300 million range by 2017.

I think that was about 18 months ago, and correct me if I'm wrong about that.

Did those assumptions change as part of the writedown?

And can you give us a rough sense where in the segment reporting those synergies would tend to sit at this point?

Thank you.

Yes, Jonathan, this is John Gehring.

Let me cover that.

First of all, I would say we have been delivering the synergies that we set out to deliver.

Obviously, we are not getting those to the bottom line.

And obviously, what that implies is that just our base business execution has deteriorated.

And that's what's really, I think, reflected in the impairment, and how long it's going to take us to turn that around.

So, I think we still are on track to drive out the costs, and probably, as we started out, we said about two-thirds or three-quarters of that was going to be in the COGS area and supply chain, and that's still the case.

And an awful lot of that is being realized in procurement areas.

So, I'd say we've made good progress on the SG&A.

We continue to make good progress in supply chain, but we've got to get the base business stabilized, so that more of those synergies drop to the bottom line.

Thank you, John.

If I could just follow up though, I'm trying to understand what segment -- private brands, consumer, commercial -- how would those synergies split?

Are they overwhelmingly in one, or are they even across the three?

I'd say the lion's share of them is still sitting in private brands, and I don't have the number in front of me.

The consumer has benefited over the last couple of years from some of the scale, particularly in the procurement areas.

But I would say probably two-thirds are still sitting in the private brands area.

Great, thank you.

And if I could just get one last question in for Gary, before -- and, Gary, thanks for everything.

I guess, as you look back over the past 10 years, just philosophically, with gross margin being a tradeoff between pushing for market share and price, and a lot of changes in commodities over that time.

From the time that you joined 10 years ago, my guess is you had a vision of growing gross margin maybe a little bit more so than has happened.

Can you comment about -- why shouldn't -- and forget about the private brand side of the Business -- just the branded side of the Business carry higher gross margins at ConAgra?

And what were some of the surprises maybe on the road to that, that maybe you could give us some learnings about the job that Sean faces?

Yes, I think that's a good question, Jonathan; and we are always looking to improve our margin structure.

We had a spell -- I can think of three or four years of very dramatic inflation that was tough for all of us to manage through.

But I think the balance between driving for productivity on the supply chain side, as well as SG&A, has served us well.

And I think, to Sean's earlier comment, operating in a lean fashion is what's really required in an industry that, frankly, is not a high growth industry.

It's one which is a very large landscape, and we have to battle for share.

So, I'm pleased that we've been able to, certainly recently, start to make some forward progress on the share front.

But it's always going to be a balance.

But continuing down the productivity front is really important because that's what gives us the fuel to grow.

We will move now to Ken Goldman with JPMorgan.

Gary, best wishes from me as well; and, Sean, welcome back.

I have a question, and a follow-up, if I can.

ConAgra's tried to turn around private brands for many quarters now.

I think, by the Company's own words, hasn't necessarily been successful yet.

So, how do we get confidence that this latest effort will finally, I guess, be the one that solves the riddle?

I'm sure -- we can see you're talking about some legitimate changes being made.

But when I'm an outsider, and I hear that one of the key differences will be faster graphics changes on packages, I will be honest, that doesn't really excite me that much.

So, any color there would be helpful.

Yes, let me start by saying, clearly, we are not where we want to be with the private brand business.

It's obviously been disappointing for all of us here at ConAgra.

This has been more difficult and taken longer than we anticipated and planned.

However, I think we all firmly believe we can improve our performance by focusing on what we can control, which is our execution, and we're firmly committed to making those necessary changes.

So, a little more color, Paul?

Yes, Ken, bottom line, we do need to improve our own execution.

You're asking: What do we really mean by that?

And simply put, I'd say we are changing the way we are running the Business, focusing on the four areas I described in the formal comments: narrow product focus with deep expertise in each business, improving commercialization speed, consistently meeting our customer service expectation, and most importantly, expanding our margins.

These are basic things that are required to win in private brands, and we've -- I think it's really important we've stayed really close to our customer.

They've given us plenty of actionable feedback regarding what we're doing right, and what we're doing wrong.

We've been really granular in our assessment, and we have a clear understanding of the root causes of the challenges.

And we're committed to executing all of these changes in the whole overall turn-around effort.

So, I appreciate what you're saying, but I'd just reiterate that we're committed to it, and we have confidence we will grow profits in 2016.

Thanks.

I will just let it go there.

I realize we're running a little long.

Appreciate it, guys.

Thanks, Ken.

Our next question comes from Eric Katzman with Deutsche Bank.

Hi, good morning, everybody.

Good morning, Eric.

Gary, it's been a pleasure.

Sean, welcome back.

So, I guess, just a quick detail question: With the impairment, should goodwill expense be significantly lower?

I guess it's been running, since the transaction, at, call it, $100 million to $110 million?

Is that going to switch to being much lower now?

No, Eric, actually the impairment of goodwill -- goodwill is not an asset that we amortize.

So, really, the impairment is going to have very little impact, if any, on our amortization expense going forward.

Okay, I will follow up.

And then, I guess, maybe Gary and Sean, you could both address this, more of an industry question.

Some of the other companies have recently talked about seeing somewhat better category trends sequentially.

As you look at the last couple of months, are you seeing it?

And what do you attribute it to -- better macro, or the industry starting to get the product lines better aligned with the changing consumer?

And I understand it's modest, but we're certainly all hoping it happens.

Yes, Eric, I would just start by telling you we see it clearly on the away-from-home side.

And you know that we've got a very large, scale-advantaged food-service business, anchored by Lamb Weston.

And we are clearly seeing that happen here in North America.

On the consumer front, Tom, you're seeing what?

Generally speaking, as we look forward, we see it to be an industry with nominal growth that's primarily defined as a market-share battle.

And our focus is on the things that we can control -- fixing the fundamentals within our portfolio, investing in our businesses.

While there are some macro things that we believe should provide some tailwinds -- lapping the SNAP reductions, certainly lower gasoline prices ultimately provide additional income -- we're not really counting on those to be a part.

We're really focused on the things that we can control, and we've made very good progress in building our share in very big and important categories.

Thank you.

We will move now to Alexia Howard with Sanford Bernstein.

Good morning, everyone.

Good morning, Alexia.

So, Gary, been great working with you; and, Sean, simply welcome back.

I want to echo that.

So, just one question: There was some discussion earlier about the improvements in the innovation that you're seeing in Chef Boyardee, Orville Redenbacher, and Healthy Choice.

I remember about a year ago, Gary was saying we've been trying to recruit new consumers into those brands, and it's just proving a bit challenging.

How are you measuring the return on investment in that innovation and product development in there?

How can you be sure that the money that you're throwing in to those brands now is really going to drive value creation over time?

Thank you, and I will pass it on.

Alexia, this is Tom McGough, and I feel -- let me frame up the answer to your question around this.

Fundamentally, we believe in brand-building, and we build brands -- and we believe that that's best done when brands are what we call A&P ready.

Clear consumer insight, an effective strategy to win in the marketplace, and solid fundamentals in the business.

And we are investing in those brands that are A&P ready.

Brands like Marie Callender, Reddi-wip, Hunt's, Slim Jim are just a few, and we see the impact from those.

As I've talked about formally, we've captured the number-one share in our largest single category, which is frozen single-serve meals.

And even on a brand like Reddi-wip, we now claim the category lead, not only in refrigerated but also in frozen.

So, we see a real impact, real return when we invest behind the brands that are A&P ready.

Those businesses that you highlighted were businesses that we had to do some work to get them to be ready to make further investments.

We focus on the fundamentals, we've stabilized and even growing some of those businesses.

And throughout this year, we focused on the insights, the strategy, the fundamentals.

As we move in to our fourth quarter and into FY16, we have more brands that are A&P ready.

Our A&P in Q4 will be up, and we expect to invest more in FY16.

So, this has been a foundational year, getting those right.

We see impact when we have those factors all lined up, and that's our general approach of how we make investments in our portfolio.

Thank you.

We will move now to Akshay Jagdale with KeyBanc.

Good morning, and good luck, Gary, and welcome back, Sean.

So, my question is for Sean.

So, one way to look at your fit with ConAgra or something that investors have talked about is you obviously have a very, very strong branded background, but on the private-label side perhaps not as much.

Can you just talk about, from your perspective, why this role is a good fit for you personally?

And perhaps maybe comment on the fact that you haven't had as much experience in private brands, and why that shouldn't really matter in this case?

Well, Akshay, I think you know I've been doing this for about 23, 24 years now.

And over that time, I have managed all sorts of businesses, from branded businesses to commercial businesses and private branded businesses.

So, I'm very comfortable here at ConAgra Foods with the businesses we've got.

It's very familiar to me, and that's why I'm enjoying myself now, going deep on each and every aspect of our operations, so I can get back to you all in the coming months with an assessment of what I see.

What I can tell you with conviction is: I am here at ConAgra Foods because I see a tremendous opportunity to create a lot of value over time.

We have tremendously strong assets, and we've got a highly motivated team.

So, overall, I'm very excited to be here, and I think we can put some points on the board.

We will take our next question from Credit Suisse's Rob Moskow.

Hi, thank you, and best wishes, Gary, and good luck, Sean.

So, my question actually is for John Gehring.

When I saw the release today, and the comment that all three business units delivered results just a little bit better than you thought when you did your pre-announcement, I mean, I guess it's good, but it was only two weeks left in the quarter when you had your profit warning.

And it's just strange to see all three units doing better than you thought with so little time left in the quarter.

And for Sean to execute, the visibility into the operations is going to have to be good.

The systems are going to have to be good.

So, maybe you can just give us a little more color on what changed in those two weeks that surprised you on the upside.

Thanks.

Appreciate the question, Robert.

Obviously, day in, day out, we're trying to forecast our Business as best we can.

And I don't want to quibble with the time frames.

I would just note that we had not yet closed the third period of the quarter, which is also the biggest period of the quarter.

So, the timing of the release versus the date of the information we have is a little bit off.

But nonetheless, I think the things I would point to is, first of all, about $0.02 to $0.03 of the overdelivery was driven by the lower tax rate.

And that's just really a function of -- in the third quarter, at the end of the third quarter every year we reconcile our prior-year provision to the actual final tax return.

That's just something that happens late in the quarter.

So, we are unable to predict that, until we get through the work.

So, that's probably $0.02 to $0.03 of it.

I think the other pieces were really, in the consumer business, again, the last period of the quarter was the biggest, and it finished stronger.

And then I'd say the other element is in the commercial business, and Lamb Weston in particular -- their domestic volumes came in strong.

But I'd say they also had a little bit of upside in terms of what we were assuming around the port issue, and how much throughput we would get, which has obviously been a challenging thing to predict over time.

So, we clearly are working every day to get tighter on our ability to forecast the Business.

But we did have a few things come to us for the last month of the quarter that created a little bit of volatility.

Thank you.

We will take our next question from Bryan Spillane with Bank of America.

Hi.

Good morning.

Thanks for taking the question, and best to both, you, Gary, and Sean.

John, just a question for you: Free cash flow or cash from operations guidance is down a little bit.

But I guess if I did the math right, you have to generate about $800 million or so of cash from operations in the fourth quarter, which is a lot higher than the fourth quarter last year.

And I think looking back, even most fourth quarters over the last bunch of years.

So, can you just talk a little bit about some of the moving parts in 4Q that get us to that cash from operations?

Are there any -- I don't know, I guess, discrete or one-time items that help it?

Just trying to get a shape for whether or not we can forecast a similar number for next year, or whether or not there's some one-time things that are helping this year?

Thanks.

We will obviously get to next year at a different time.

Clearly -- our fourth quarter is always a very strong quarter for cash generation.

I would -- without having a lot of details in front of me, clearly our inventory levels are much higher going in to the fourth quarter.

And while we expect them to still be higher at the end of the fourth quarter, the amount of the inventory we will liquidate over the fourth quarter is going to be higher this year.

I also think, if you look at probably our accounts payable and some of the accruals, I would expect that we will have more progress and contribution from those in the fourth quarter, as well as -- I also believe our tax payments year over year are going to look different also.

So, there are a number of moving pieces there within the pieces outside of earnings.

But, again, I would remind everybody that we've typically had very strong cash generation in the fourth quarter.

This does conclude our question-and-answer session.

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

Thank you.

Well, just as a reminder, this conference is being recorded, and will be archived on the web, as detailed in our news release.

And, as always, we are available for discussions.

Thank you very much for your interest in ConAgra Foods.

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

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