康尼格拉食品 (CAG) 2019 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Conagra Brands Third Quarter Fiscal Year 2019 Earnings Conference Call.

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

At this time, I would like to turn the conference over to Brian Kearney, Director of Investor Relations.

Please go ahead, sir.

Good morning, everyone.

Thanks for joining us.

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

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

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

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

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

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

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

We will also be making references to Total Conagra Brands as well as Legacy Conagra Brands.

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

Finally, we will be making references to pro forma net sales for Pinnacle.

Pro forma net sales refer to results for Pinnacle Foods prior to the acquisition that have been adjusted to align with Conagra's fiscal calendar.

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

Thanks, Brian.

Good morning, everyone, and thank you for joining our third quarter fiscal 2019 earnings conference call.

There's a lot to cover this morning.

We have strong Legacy Conagra results to discuss, a positive Pinnacle integration update to share, deleveraging to discuss and a preview of our April 10 Investor Day.

But the most important takeaway from everything Dave and I will discuss today is what these results mean: the Conagra Way to profitable growth delivers.

The impact of our unwavering commitment to the Conagra Way over the past several years has been consistent progress, most recently resulting in the continued strong momentum in core Legacy Conagra Brands during the third quarter, particularly in our leading frozen and snacks businesses.

We are now aggressively applying this approach to Pinnacle, and it's working to keep the technical integration on track as well as driving a reinvigorated innovation lineup.

As we said in Q2, we expect that innovation to lead to improved Pinnacle trends in the second half of fiscal 2020.

It also enabled us to gain traction on delevering.

In the short 5 months since closing the Pinnacle transaction, we've reduced debt by $685 million.

Overall, we are confident we will deliver quality long-term growth at Conagra, and we'll share our robust innovation pipeline and new long-term financial algorithm on April 10 along with details of the increased cost synergy opportunities that we see.

Before I get into the quarter, let me talk a bit more about the Conagra Way.

We'll unpack this even further at Investor Day, but this playbook is our bedrock, and you've seen us execute it for several years now.

The Conagra Way to profitable growth is relentlessly principle-based and firmly grounded in the consumer.

It advocates that growth is essential and that we cannot and will not cut our way to prosperity.

It acknowledges that our ability to build strong brands requires differentiated capabilities, particularly those that fuel innovation, areas like demand science, precision marketing and omni-commerce.

And the Conagra Way recognizes that our success requires a highly disciplined approach to portfolio management, which you've seen us execute consistently for the past 4 years.

Importantly, our disciplined approach is repeatable and scalable.

It built our healthy and growing frozen and snacks businesses and serves as the basis for how we're approaching the rest of our portfolio, including Pinnacle.

We're confident about how we do things around here because it works.

We don't take shortcuts.

We do things the right way, a way that best positions us for maximum value creation over the long haul.

So let's talk more about the results the Conagra Way delivered in Q3.

First up is the Legacy Conagra business.

We continued to deliver good consumption growth in our Legacy Conagra segments in the quarter with strong trends on both a year-over-year and 2-year basis.

As you can see on Slide 8, Legacy Conagra's domestic retail segments had another good quarter.

Q3 growth in our legacy segments was, once again, based on solid fundamentals tied to the increasing strength of our brands.

Our retail sales and base velocities remained in fertile territory and continued to gain momentum on a 2-year basis.

Turning to our segment results.

Refrigerated & Frozen was up 240 basis points in the quarter with frozen again delivering terrific growth, 490 basis points.

Refrigerated was down, but as I mentioned last quarter, apart from Reddi-wip, we have yet to renovate these brands and bring new innovation to the marketplace.

Refrigerated is one of the final pieces of the Legacy Conagra portfolio to receive attention, but the work is well underway, and you'll see exciting new products on store shelves in 2019.

But turning back to frozen.

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

As you can see on Slide 10, that success continued in Q3.

We've reinvigorated and continued to lead the frozen category, and our fundamentals remain strong in the quarter with improvement in consumption trends, TPDs and base sales velocity.

Our approach is having a positive impact on our results and importantly, it's also driving category growth in frozen single-serve meals.

Our rigorous approach to modernizing and premiumizing our brands through renovation and innovation has delivered impact for Conagra and for our customers.

While we began our innovation journey in frozen more than a year ago and went broader and deeper in frozen in fiscal 2019, we have even more on the way.

In fiscal '20, we expect to have our most robust and powerful slate of innovation in this segment yet.

The team has done a lot of great work to develop a strong multiyear pipeline of innovation across our Legacy Conagra frozen brands and across refrigerated brands like Hebrew National, Egg Beaters and Reddi-wip.

Turning to our Legacy Conagra Grocery & Snacks segment, we have more positive news to report.

The snacks business grew by 8.2% during the quarter.

This tremendous growth validates our recent investment in the business.

Looking at our snacks business in more detail on Slide 14.

The growth we delivered in Q3 came with contributions from every key snacking vertical: popcorn, meat snacks, sweet treats and seeds.

On a 2-year basis, retail dollar sales for our Legacy Conagra snacking portfolio were up an impressive 14%.

Dissecting the snacks growth, which we've done on Slide 15, you'll see that while TPDs were down, base velocities increased significantly.

In other words, our growth in snacks during the quarter was driven by bringing terrific products to market that consumers wanted.

Those products were in high demand and moved off shelves very quickly, and growth through improved consumer pull is sustainable growth.

Of course, TPDs have been an important metric in assessing brand health historically, but TPDs are not always a helpful barometer of brand vitality.

As an example, look at the Slim Jim results.

Slim Jim is one of our healthiest brands and is driving strong snacks growth, but Slim Jim's TPDs declined nearly 18% year-over-year as we optimized our assortment.

With that data point alone, you'd think the brand was struggling, but it was not.

Velocity was up more than 28%, and the net result was a retail sales improvement of more than 7% in the quarter.

Our Slim Jim business became stronger by increasing shelf inventory and facings on our best-selling, fastest-moving items and by pruning low-velocity SKUs.

These actions led to higher sales for both Conagra and our customers, and TPDs did not tell the story.

We saw the exact same dynamic on Swiss Miss in Q3, and I share this because it's a good reminder that TPD optimization does not always come through TPD growth.

I'm very excited about the innovation that we've deployed across snacks in the last year and even more excited about the impact of that innovation, but we're not even close to being done.

To the point I highlighted earlier regarding Refrigerated & Frozen, our innovation and renovation machine is humming, and we have a terrific multiyear pipeline built out for the brands you see here.

I won't go further into it now.

You'll have to wait until Investor Day.

So in summary on Legacy Conagra, we feel very good about our momentum.

We're pleased with the results we delivered in Q3 and are confident that with the Conagra Way, we'll continue to deliver.

Turning to Pinnacle priorities on Slide 18.

It's been a short 5 months since we completed our acquisition of Pinnacle.

We've accomplished a great deal in that time, with much more to come.

I'll spend a few minutes covering each of our focus areas: integrating the business, reinvigorating Birds Eye, Duncan Hines and Wish-Bone via innovation, and deleveraging.

First, let's talk about the integration.

I couldn't be happier with our progress on this front so far.

We've said all along that the similarities between Legacy Conagra and Pinnacle made the combination of our 2 companies an obvious opportunity.

And the fact that we've been able to quickly align our organizations and deliver our integration work plan to date is evidence of how well the 2 companies mesh.

To put a finer point on it, work transitions are on track and processes are being aligned.

Systems integrations are well underway, with key milestones being hit.

And importantly, we captured approximately $12 million of cost synergy in Q3, which paces ahead of our expectations.

We continue to expect to overdeliver the $215 million of cost synergies we previously announced and we'll share more detail on refined cost synergy opportunities next month.

Thank you to the entire Conagra team across Legacy Conagra and Pinnacle for all their terrific work to date on the integration.

We've also been spending time in Q3 undertaking a concentrated effort to begin deploying the Conagra Way to the Pinnacle portfolio.

And first up is our proven value-over-volume philosophy.

We are starting the process of cutting slower-turning and lower-margin SKUs while redesigning Pinnacle's customer investments for better ROI.

Retail sales and TPDs continued their downward trends in Q3, but base velocities improved, as shown in the chart on the right.

Noninvestment-grade SKUs were the ones being pruned in the quarter, and that means that the Pinnacle products remaining on-shelf are higher quality and generating consumer takeaway.

As we did with our Legacy Conagra business several years ago, we're creating a stronger foundation on which to build.

While we won't be happy until total retail sales begin to turn in the Pinnacle portfolio, we are confident that the value-over-volume process underway gives us that stronger foundation.

As we introduce future innovation slates into the market, the net result will be more profitable, sustainable growth.

And to be clear, our Pinnacle-related work is incredibly focused.

Right now, it's all about strengthening Pinnacle's big 3: Birds Eye, Duncan Hines and Wish-Bone.

Pinnacle historically referred to these brands as leadership brands and with good reason.

However, in the second half of last year, each of these businesses struggled with executional issues.

These challenges hurt sales and profit, representing the vast majority of Pinnacle's drop-off on each.

While recent performance in these great brands has been below historical norms, as we discussed last quarter, we're confident that we can reinvigorate them through great innovation.

And Q3 brought the beginning of our implementation of focused action plans for each brand.

First, let's talk about Birds Eye.

Birds Eye is an iconic billion-dollar brand, previously the largest in the Pinnacle portfolio and now the largest in the Conagra portfolio.

Recently, however, the Birds Eye brand was slow to respond to key consumer trends, opting out of innovating in important growth pockets.

That is changing.

The differentiated capabilities that come with the Conagra Way include a well-developed innovation muscle and the know-how to identify and capitalize on consumer trends.

Applying these capabilities to Birds Eye means that we're not only opting in to the innovation opportunities in this key category, but opting in, in a big way.

Here, again, we've already built a multiyear pipeline of innovation and renovation that will deliver a sequenced deluge of new Birds Eye products.

We'll share a lot more in April.

Now let's turn to Duncan Hines.

While Duncan Hines' recent results have been disappointing, it faces a different situation than Birds Eye.

Recall the Duncan Hines brand actually did a fair amount of innovation over the past 2 years.

The brand moved into broader snacking with a very innovative idea for mug cakes.

With this innovation, the Pinnacle team was clearly heading in the right direction.

However, the execution of that innovation was not up to our standards.

Inefficient SKUs proliferated while competitors entered the space with a more provocative execution, generated better velocities and gained share.

And that new innovation from the competition caused Duncan Hines to suffer.

The good news is that we see the solutions here as straightforward, even if they'll take a bit of time to cycle into the marketplace.

Slide 23 shows how deploying the Conagra Way to Duncan Hines is leading to a restage of the product with simplified branding, a larger size impression, an optimized SKU range and an upgraded product with the simple addition of the hero ingredient consumers want: frosting.

And finally, let's talk about Wish-Bone, where the situation is again unique.

In the summer of 2018, Wish-Bone's labels were updated, but unfortunately, the execution came up short.

Despite a more modern design, the labels did not effectively communicate the flavor variety, and variety communication is absolutely essential in salad dressing.

Take a look at the picture on the left.

The modernized label communication was flawed, and sales velocities declined quickly and considerably following the label change.

Fortunately, this issue has an obvious fix.

The right side of Slide 24 shows our updated label.

It prominently features the dressing variety, again, a simple solution but one that will take a bit of time to cycle into the marketplace.

After it does, we believe that consumer takeaway for this iconic brand will improve.

Overall, the health of the big 3 Pinnacle brands is critically important, and you can be assured that our teams have spent the last 5 months incredibly focused on each of them.

There is definitely more work to do and it will take some time for customers to add our new innovation into their shelf resets.

Again, as we said in Q2, we expect innovation to lead to improved Pinnacle trends in the second half of fiscal 2020.

But the point I want you to take away today is that we have dug into what exactly ails each brand, and we are squarely on top of the solutions.

But top line growth isn't our only focus.

We're also focused on improving margins across the Pinnacle portfolio and generating more cash from each $1 sold.

Over the last several years, we've built capabilities that address each of the margin levers noted on Slide 25 and deployed them across the Legacy Conagra portfolio.

And now we're focused on getting Pinnacle's gross margins back on track with solid realized productivity above our cost synergy initiatives, margin-accretive innovation, improved pricing capabilities, a better brand mix, a better channel mix and trade optimization.

In other words, we're intensely focused on infusing the Conagra Way into Pinnacle.

Part of this is simply ensuring that our newest team members, those from Pinnacle, understand the fundamentals of our approach.

I've always said that the cultures at Conagra and Pinnacle have many overlaps, particularly with respect to our common embrace of a lean and agile culture, and that's still my belief.

But we also approach some things differently, and we're excited to share our Conagra processes and tools, particularly those that drive innovation-based growth, such as demand science, precision marketing and omnichannel selling.

I'm proud of how our combined organization is working together in the short time since the completion of the deal.

Shifting to our balance sheet.

I'm very pleased with our disciplined focus on deleveraging in the last 5 months.

We're committed to a solid investment-grade credit rating.

And as I said earlier, in a little less than 5 months since closing the transaction, we've already reduced debt by $685 million.

We expect leverage ratios to improve over time as we increase our EBITDA growth from both the realization of cost synergies and the application of the Conagra Way to the Pinnacle portfolio.

We will also continue to prioritize debt reduction in our approach to capital allocation.

I want to be clear that while we always view our portfolio with a lens towards optimizing growth and returns, we do not expect to need to make any additional divestitures in order to hit our leverage target.

Looking ahead, you can be certain that we will not take our foot off the gas in the Legacy Conagra business, and we've already mobilized to aggressively apply our playbook to the Pinnacle portfolio, and we'll continue to work to return those brands to growth.

Finally, we remain squarely focused on executing our margin-enhancing capabilities across the entire company.

As you probably gleaned from my remarks so far, we've got a great Investor Day coming up in a few weeks.

As I mentioned earlier, we will be going into depth on the Conagra Way, how it has benefited Legacy Conagra and how it's being applied to Pinnacle to build long-term sustainable growth.

And while we've previewed a couple of the innovations we've been working on, there is a full slate of new products on deck that we will show you.

We'll also be sharing additional details on our Pinnacle action plan now that we've identified and begun to address the issues at hand.

This will include a sneak peek of some new Pinnacle innovations that we'll be bringing to market.

And finally, we will be providing updates to our financial algorithm, including new data on cost synergies.

We hope that you will be able to join us in Chicago on April 10.

We're confident that the future here at Conagra is one of long-term profitable growth.

Our Q3 progress contributes to that confidence, as does the long-term opportunity we'll share on April 10.

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

Thank you, Sean, and good morning, everyone.

I'll walk through the quarter and elements of both the Legacy Conagra and Pinnacle businesses.

With approximately 2 months left in fiscal 2019 and the sale of the Wesson oil business now complete, I will also share our perspectives on the balance of the year.

Slide 31 outlines our performance for the quarter.

Net sales for the third quarter were up 35.7% compared to a year ago, primarily reflecting the acquisition of Pinnacle Foods.

Organic net sales, excluding the effect of the sale of Trenton, were up 1.9%.

Organic net sales growth was largely in line with our expectations, driven by the strong performance of our Legacy Conagra domestic retail segments, which when taken together, exceeded 2.5% organic growth in the quarter.

For the quarter, adjusted gross profit increased 30.5% to $781 million, and adjusted gross margin declined 115 basis points to 28.9%.

While we continued to make good progress in driving Legacy Conagra realized productivity and price/mix, Pinnacle's gross margin of 26.2% in the quarter reduced total company gross margin.

In addition, the shift from A&P expense to above-the-line brand-building investments with retailers reduced gross margin by approximately 100 basis points.

I'll walk through the adjusted gross margin bridge shortly.

In line with that shift, total company A&P expense decreased 13.9% to $67 million or 2.5% of net sales in the quarter.

Adjusted SG&A for the quarter was up 23.4% compared to the prior year and was 10.1% of net sales.

The increase was driven by the addition of Pinnacle expenses, partially offset by synergies and lower incentive compensation expense due to a lower stock price compared to the prior year period.

Adjusted operating profit increased 47.5% for the quarter, and adjusted operating margin was 16.3%, up 130 basis points compared to the year-ago period, exceeding expectations.

Adjusted EBITDA increased 35.9% to $554 million from $408 million a year ago.

Adjusted diluted EPS was $0.51 for the quarter, down 16.4% from the prior year.

I will review the drivers of Q3 EPS performance in a moment.

Slide 32 outlines the drivers of our net sales change versus the same period a year ago.

Organic net sales growth ex Trenton of 1.9% reflects a 120 basis point increase in Legacy Conagra volume.

Total price/mix contributed 70 basis points, as favorable price/mix of 210 basis points was partially offset by increased brand-building investments with retailers of 140 basis points.

Total Conagra net sales grew 35.7%, driven by a 34.3% net benefit from the acquisitions of Pinnacle and Sandwich Bros., the divestiture of the Canadian Del Monte business, and our exit of the Foodservice business produced in the Trenton facility.

FX negatively impacted net sales by 50 basis points versus the prior year.

Slide 33 outlines our net sales performance by reporting segment.

The Grocery & Snacks segment grew reported and organic net sales by 2.9%, driven by continued excellent performance in the Legacy Conagra snacks business.

Net sales of snacks increased 8.2% in the quarter, led by strong in-market performance by Orville Redenbacher, Act II, Snack Pack, Slim Jim and Duke's.

The Refrigerated & Frozen segment continued its momentum in the third quarter with reported net sales growth of 3.3% and organic net sales growth of 2.4%.

The acquisition of Sandwich Bros., which closed in the third quarter last year, added 90 basis points to the net sales growth.

Volume grew 3.5% behind strong growth across the frozen portfolio, including Marie Callender's, Healthy Choice, Banquet, P.F. Chang's and Frontera.

The International segment's organic net sales were down 90 basis points in the quarter, as favorable price/mix was more than offset by volume declines, concentrated in certain global export markets that benefited favorably in the prior year quarter from hurricane-related shipments.

Foodservice organic net sales declined 60 basis points in the quarter as the segment continue to execute its value-over-volume strategy.

These benefits can be seen in the strong Foodservice profitability metrics I will review shortly.

Page 34 shows Q3 and implied Q4 net sales for Pinnacle versus a pro forma prior year number adjusted for Conagra's fiscal calendar and accounting policies.

For Q3, Pinnacle net sales reflects a mid-single-digit percentage point decline versus the comparable year-ago period on a pro forma basis.

As expected, overall consumption declined during the quarter, driven by Birds Eye, Wish-Bone and Duncan Hines.

We also exited low-ROI promotions.

Additionally, the segment's year-over-year performance was negatively impacted by this year's later Easter holiday season.

To help you better understand Pinnacle's net sales on our fiscal calendar, we have included estimated Q4 Pinnacle net sales versus a pro forma prior year.

We have also included additional pro forma sales detail in the appendix of today's presentation.

Moving to Slide 35.

You can see that Legacy Conagra adjusted operating profit increased 10.3%, and Legacy Conagra adjusted operating margin came in at 16.5% for the third quarter, significantly above year-ago performance.

Note the 326 basis point improvement in Foodservice adjusted operating margin for Q3 versus the prior year as the segment executes its value-over-volume strategy.

The Pinnacle segment's adjusted operating profit totaled $130 million.

This performance was above expectations due to lower SG&A and approximately $12 million of synergies realized during the quarter, which were delivered ahead of schedule.

The Pinnacle segment's adjusted operating margin was 18.2%, or 15.6% when including the $19 million of adjusted Pinnacle general corporate expenses that have been accounted for in the company's total corporate expenses and not in the Pinnacle reporting segment.

Total Conagra adjusted operating profit was up 47.5% versus a year ago, and adjusted operating margin was 16.3% for the third quarter, up 130 basis points.

Slide 36 outlines the adjusted gross margin change for the quarter.

As you can see, realized productivity and favorable price/mix improved gross margin 260 basis points, more than offsetting inflation during the quarter and covering the increase in continued investments in brand building with retailers.

A gross margin of 26.2% on Pinnacle reduced overall Conagra gross margin 100 basis points versus the prior year.

Slide 37 details Pinnacle's adjusted profit margins by comparing performance this quarter to the most comparable Pinnacle Foods quarter a year ago from their earnings release, which was Pinnacle's first quarter of calendar year 2018.

Pinnacle's Q3 adjusted gross margin declined 100 basis points versus this prior year comparison.

Certain Pinnacle expenses were reclassified from cost of goods sold to SG&A to conform to Conagra's accounting policies in the third quarter.

Without this reclassification, Pinnacle's Q3 gross margin would have been down approximately 200 basis points.

Headwinds to gross margin came from inflation on crops, packaging and transportation; increased business investments; and unfavorable volume mix and absorption.

These headwinds were partially offset by continued realized productivity in the Pinnacle business.

As Sean mentioned, we are deploying the Conagra Way to improve Pinnacle gross margins moving forward, and we'll discuss this more at Investor Day.

Pinnacle's adjusted operating margin, which was not impacted by the accounting reclassification, was flat year-on-year.

Operating margins benefited from SG&A favorability and $12 million in synergy capture.

These tailwinds offset gross margin declines and an increase in transaction-related amortization.

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

The bridge shows Legacy Conagra EPS drivers, followed by Pinnacle adjusted operating profit and the incremental capital costs associated with the acquisition.

Starting on the left, Legacy Conagra EPS performance was driven by increased adjusted operating profit, which was offset by lower pension and post-retirement nonservice income due to reduced asset return assumptions related to fully funding the pension plan last year.

EPS was also reduced by lower adjusted equity method investment earnings from our Ardent Mills joint venture as well as a higher Q3 adjusted effective tax rate of 24.3% versus 19.7% a year ago due to the prior year rate impact of passing tax reform.

The impact of increased Pinnacle adjusted operating profit, offset by higher incremental interest expense and share dilution from the Pinnacle acquisition financing, reduced EPS by approximately $0.08.

Slide 39 summarizes select balance sheet and cash flow information.

Cash flow from operating activities from continuing operations was $745 million for the 39 weeks ended Q3, down versus the prior year.

This decline was all realized in the first half as Q3 cash flow was up versus Q3 in the prior year.

CapEx for the 39 weeks ended Q3 was $236 million or approximately 3.4% of net sales for the same period, in line with our expectations.

In the quarter, we paid a dividend at an annualized rate of $0.85 per share.

Gross debt was $11.1 billion at the end of the third quarter, a reduction of $435 million versus the end of Q2.

Net debt at the end of the third quarter was $10.8 billion, and the net debt leverage ratio was approximately 4.9x on the latest 12 months pro forma EBITDA, in line with our expectations.

Since the end of the third quarter through today, we have paid off another $250 million in debt.

At the end of the third quarter, our average debt maturity was approximately 9 years, our weighted average coupon was approximately 4.7%, and total fixed rate debt approximated 83%.

As of today, our variable-rate term loan balance has been reduced from $1.3 billion at the end of the second quarter to $600 million.

We remain committed to a solid investment-grade credit rating and achieving our leverage ratio target of 3.5x debt to adjusted EBITDA by the end of fiscal '21.

As Sean noted, we do not expect that any additional divestitures will be required for us to achieve our target leverage ratio.

We believe that any further divestitures could accelerate our timetable to achieve the target ratio.

Slide 40 summarizes our updated fiscal year 2019 outlook for both the legacy Pinnacle segment and total Conagra inclusive of the impact of Pinnacle from the closing date of October 26, 2018, to the end of the Conagra fiscal year on May 26, 2019.

The updated organic net sales growth guidance removes Wesson for the entire fiscal year.

All other metrics include Wesson's actual results only for the time period the business was owned and now exclude expected results for the remainder of the fiscal year.

We expect organic net sales growth ex Trenton to be approximately 1%.

We expect Pinnacle reported net sales to be within the original net sales guidance range, and we've now tightened that range to $1.71 billion to $1.73 billion.

Our guidance on profit metrics is changing to reflect our ongoing real-time A&P optimization.

We now expect adjusted gross margin for total Conagra to be below the previously provided range of 29.3% to 29.6%.

Again, the primary drivers of this are the continued brand-building investments with retailers, along with increased cost of goods sold investments to support product and packaging innovation and higher inflation on the Pinnacle business.

Despite the lower gross margin, we expect adjusted operating margin to be above the range of 14.9% to 15.2%, driven by a more favorable SG&A expense as well as faster synergy capture.

We are reaffirming our expectations for the effective tax rate, and we now expect total company net interest expense to be favorable and below the prior range of $390 million to $395 million as we have reduced debt ahead of our forecast.

We have no change in our expected full year share count.

We are also reaffirming our guidance range for adjusted diluted EPS from continuing operations of $2.03 to $2.08.

We expect our improved operating margin and lower interest expense to offset the EPS impacts of the Wesson divestiture and lower-than-expected equity method investment earnings.

Finally, we expect to exceed our prior synergy target of $20 million for fiscal 2019, and we are reaffirming our expectation for transaction-related amortization.

As Sean mentioned, we will provide an update on synergies at Investor Day.

Slide 41 provides a bit more detail on the organic net sales growth guidance.

As I noted before, our prior guidance included Wesson for the full year.

We are now excluding Wesson from our revised figure.

By removing Wesson, our year-to-date organic sales growth increased by 20 basis points.

Based on our performance through Q3, our guidance of approximately 1% organic net sales growth for the fiscal year, excluding Wesson, implies organic net sales growth of approximately 1.7% for the fourth quarter.

That concludes my remarks.

I will now pass it to the operator.

Sean, Tom McGough, Darren Serrao and I are ready to take your questions.

(Operator Instructions) The first question will be from Andrew Lazar of Barclays.

This may not be the time or venue for getting into too much detail on fiscal '20 as of yet, but I guess -- obviously, a key question we continue to get as folks are still uncertain if Conagra still needs to sort of take a step back in fiscal '20 before moving forward.

I think on the December call, Sean, you talked about over-delivery on synergies from Pinnacle that kind of keeps you on target for your fiscal '22 EPS target that drove the initial accretion guidance.

And given this is now coming off, I guess, a lower fiscal '19 base, it obviously seems a bit difficult to hit that target if it all has to come in fiscal '21 and '22.

I guess it would seem that some progress on EPS is needed in fiscal '20 to sort of be on track for that.

And I'm just trying to get a sense of, even if it's broadly, am I thinking about that in the right way?

All right.

Got it, Andrew.

Well, you're correct, we don't give next year's guidance on our Q3 call as we've yet to review our final plan with our board.

But clearly, '20 is going to be an important year for us and the building blocks for our '20 are clear.

We expect momentum on Legacy Conagra.

We expect a trend bend on Pinnacle as we get into the second half.

We expect strong synergy capture and, of course, we expect robust deleveraging.

At this point, that's about what I can give you, but you're right as well with your comments on '22.

We do expect to get to a strong place.

I would add it's not just on the back there of higher-than-expected synergies.

It's also the recovery of the Pinnacle business through strong innovation per the comments we had just a few minutes ago.

Got it.

Okay.

And then just on the Pinnacle margins in the quarter, that came in quite a bit better than we modeled.

Maybe to get to even if it's the high end of Pinnacle's full year margin target, it would suggest, I guess, 4Q margins would be significantly lower than what we saw in 3Q.

And I guess if that's right, I'm trying to get a sense of what would drive that, and I guess is that really -- do you see it as sort of a low point for Pinnacle at this stage?

Yes, Andrew.

It's -- when you look at Pinnacle and you convert them from the calendar year to the Conagra fiscal, the gross margin that they will deliver on the business has always been lower in the sort of first half of their calendar versus the second half.

So because we're the May fiscal, Q3, you see lower gross margins and then the same thing with Q4.

So there's a seasonality aspect to that, so you can expect to see gross margin being down a bit, which is pretty typical for their seasonality.

I think as we communicated in the second quarter, inflation has been a big impact on Pinnacle, but also the planned pricing that they had wasn't executed, and then they increased pretty significantly the trade promotion to try to get the volume going again off of the lost TPDs.

So we've been working through these dynamics.

We have our team working with the Pinnacle team.

And so we feel like we're going to make progress.

But it's going to take some time to get on the inflation, but we're working through that.

Just to add one thing, one additional point to that, Andrew.

So to Dave's point, there -- our gross margins on the Pinnacle piece of the business will vary quarter-to-quarter, just consistent with historical norms.

But make no mistake about it, the absolute gross margins on the business right now are not where they should be, nor are they where they will be.

But I think the bigger point on that is that in our industry, gross margin expansion really comes down to brand health.

When innovation is strong, consumer pull is strong.

And when consumer pull is strong, elasticities of demand are low.

When elasticities of demand are low, manufacturers have more pricing power, and then more pricing power can lead to expanding margins.

In other words, all paths lead back to doing a great job for the end consumer, which is really what the Conagra Way is all about.

The next question will be from Steve Strycula of UBS.

So a quick question as a follow-up to Andrew's question, maybe taken from a different angle.

If consensus is for next year roughly $2.17 in earnings, do you think that adequately reflects the first half/back half dynamic where I would imagine, you're still wrapping a lot of Pinnacle investment and distribution losses in the first half and then maybe things -- you have a little bit of wind in your sail for the back half?

Is that directionally a fair way to think about it?

And does -- at a high level, do you think consensus presently reflects that?

Well, I don't want to comment on consensus currently because if I do, then that's kind of the equivalent of giving fiscal '20 guidance or directionally giving guidance.

But I do understand the interest in Pinnacle recovery timing because, as you can imagine, we're quite interested in it as well.

So let me give you just some perspective on that because I think it's important perspective.

First off, I want everybody to know, this is quite a bit different with regards to Pinnacle turnaround than what had to be done when I got to Conagra 4 years ago in terms of degree of difficulty.

That was a much heavier lift.

The focus here with respect to Pinnacle is on executional issues on 3 brands.

Now we do have to capture -- recapture lost distribution points, but we have done that on many brands over the last several years by applying the Conagra Way.

Growth always comes down to great innovation from great brands, and that's what we do.

The trend will bend as we get into the back half of fiscal '20, and it will get stronger from there.

Beyond that, TPD strengthening on Pinnacle will be category-specific and brand-specific and customer-specific.

We have made, as I mentioned earlier, huge progress on building new innovations on the big 3. We'll share more with you at Investor Day, and we are working, as you might imagine, with customers to get them into the shelf resets as quickly as possible.

Now obviously, different customers have different windows and it also does vary by category.

And as you might imagine, we are pushing for as fast as possible timing, given the attractiveness of these new innovations.

But in total, we don't expect to see real inflection until the second half of fiscal '20 with respect to Pinnacle top line trends.

And as a quick follow-up, Sean, I appreciate your comments that Conagra's culture is not to cost cut its way to prosperity, but how do we think about the modest reduction to the gross margin outlook in today's guidance?

It seems like there's further rotation out of A&P into trade investment.

Is the cost of growing in your current footprint just higher than it was before for the industry as a whole?

Or how should investors really interpret it?

Yes, sure.

Not really.

As you can see in Dave's bridge, the gross margin's a function of both Pinnacle as well as the A&P shift.

I think big picture, we believe in brand building through effective programs that create consumer pull.

We also want to do it efficiently.

So accordingly, we apply a lot of analytical muscle to identify waste and then redeploy those funds to better brand-building alternatives.

So clearly, we have identified a lot of inefficiency in A&P and a lot of opportunity with retailers, which really should not surprise anyone, given the customer sophistication we see these days.

We are frankly agnostic to where we deploy marketing investments as long as they build brands effectively.

And we'll go much deeper on how we do this and why we do this on Investor Day.

But I think the big point is, overall, investment is staying pretty stable.

It is moving from below the line to above the line, but these A&P reductions are not being dropped to EBIT.

That's the key point, nor are they being put into price discounting.

They are truly going to brand-building investments with retailers and much more effectively and efficiently than they were doing previously with some antiquated marketing practices below the line.

The next question will be from Ken Goldman of JPMorgan.

It's Tom Palmer on for Ken.

Can you give us an idea of the magnitude of the Easter shift on sales in the third quarter for Pinnacle?

I'm hoping to better understand how much of the improved growth rate indicated in the fourth quarter guidance is because top line fundamentals at Pinnacle are starting to stabilize.

And how much is related to that shift?

Yes, Tom, I would say probably about 1.5 percentage points in this quarter would be timing that will shift to next quarter.

Okay.

And then another one on fourth quarter sales line.

So you're going up against the tougher year-over-year organic sales growth comparison in the fourth quarter relative to last year.

Your guidance calls for a comparable organic sales growth rate.

So what do you see as the key drivers of this growth?

Are there certain key products that are accelerating from distribution gains or new product launches?

Just anything to call out to kind of support that growth as you go against that tougher compare.

Sure.

With respect to Q4 legacy CAG, it's really about momentum in frozen and snacks, and you saw we had very good momentum there in the third quarter, as well as some very strong programming that we have planned in nonmeasured channels.

So as we look at our forecast, that's really what's going to deliver that Q4.

And we feel very good about the programs that are in the marketplace.

The next question will be from David Driscoll of Citi.

The first one is super short.

Sean, I think you said this, but I just want to be super clear.

Are you reiterating your 3-year synergy guidance that was given at the time of the Pinnacle deal?

You did it last quarter, but I think to Andrew's question, you sort of did it, but I just want to be clear that you still believe in the accretion.

Yes.

I -- on synergies, because you just used the word synergy.

We baked -- what we said last quarter was we're going to beat the synergy number.

We'll have more detailed color for you on that in a few weeks.

With respect to strong EPS performance through '22, yes, we expected last quarter that we would have strong EPS performance through '22 and basically get to roughly where we wanted to get to all along anyway.

We still see that.

And as I said last quarter, we're going to get there from a lower base.

We won't get there on a straight line, but we will get there.

And we'll get there through a combination of higher-than-expected synergies and profit and margin recovery on the Pinnacle business while continuing to do what we expect with the Legacy Conagra business.

And I did mean the accretion; synergies just being a component of it.

Thank you for the clarification.

Second question for me is on your price/mix, total company price/mix, 0.7%, but the retailer investment's a big number, 1.4 points of investments with those retailers.

How do you see the pricing environment?

You were clear on multiple points in your script about what strong brands can do for you in terms of margins and pricing, but just today's report, 0.7 points.

When I just look at that aggregated number, it looks okay, but I would like to hear how you interpret this and think about that retailer investment.

Do you just add it back and look at the 2.1 points of price/mix and say that, that is the better indicator of how well your brands are responding to the need for pricing?

Yes.

I think it's a better indicator, but you also have to keep in mind, too, David, what we're doing here is really refreshing and premiumizing the portfolio.

So a big driver for our entire company is just massive contemporarization through innovation.

And when we do that contemporarization through innovation, we bring premiumization.

We bring higher price points and, ideally, higher gross margin percentages.

So I pointed out last year as a good example on our frozen business, we basically restaged the entire frozen business with more premium products.

And much of the pricing we got through there was through that premiumization and just total overhaul of the business.

There are other categories where we do it the old-fashioned way and we just take inflation-justified list price increases.

Most recent one of those is tomatoes, which is a business where we've experienced significant inflation on canned tomatoes.

We knew that it would take a while for our competition to follow, but in Q3, we took pricing anyway.

It suppressed our sales a little bit on that business, but now we're seeing the kind of competitive response we expected all along, and that's the right decision for the long haul.

So we're going to continue to get pricing a variety of ways.

I think everybody's kind of in that ballpark these days.

But in our case, since we had so much refreshing to do in the portfolio, probably more of it than you see on average has been coming through this pretty wholesale innovation play that we've been driving.

And Dave, can I just ask one clarification to one of the numbers on top line?

So in the year-ago period, there was an effect from the hurricanes and shifting of inventories or shipments between quarters.

Was that a benefit in this quarter?

And can you quantify it?

Yes.

So David, it was really in the Grocery & Snacks reporting segment.

We had -- if you kind of parse that, we had snacks, which basically ship to consumption as we showed strong 8% basically consumption in shipments.

On the grocery side, there was a little bit of a bump because we did ship above consumption in the quarter in grocery.

So there was a little bit of a benefit there, about 50 basis points year-on-year on that.

But I think the one thing that Dave mentioned before, too, is you see some of the negative results in International.

International actually benefited in the year-ago quarter from hurricane shipments as some of the protracted problems happened in the island, so that actually represented a headwind in this quarter and speaks to the decline that you see in the International piece.

So you've got a bit of different noise in different operating segments.

But I guess, overall, the net top line performance has been pretty consistent with what we expected.

And overall, over time, we genuinely -- generally usually see shipments and consumption operate very, very closely together with little spread.

The next question will be from Rob Dickerson of Deutsche Bank.

Sean, I just had a question about really the optimization piece of the strategy.

If you go back and look at what you did with Conagra, really legacy frozen portfolio, first, you saw some distribution weaknesses -- or sorry, distribution weakness and then velocities improved, but then we also started to see after that a distribution gain.

So if we step back and just think about only Pinnacle, what we're seeing, as you said, in parts of the snacking business, TPDs may have come off, right, but velocity started to improve, which is a positive.

But when you think about the overall portfolio with Pinnacle and you speak with the retailers, I'm assuming that's really just like the first piece of the broader strategy, which is improve the portfolio, improve the velocities and then go back and get the distribution and then grow the margin.

So just kind of any color as to kind of how you think about that longer-term strategy to get back to distribution gains with better velocities?

Yes.

This -- you are spot on.

And we're going to spend a fair amount of time kind of walking you through how this works, you can call it the Conagra Way, because it is -- it's very process-oriented.

It's very principle-based.

It's very repeatable and scalable and it basically -- the philosophy behind it says, "Hey, you've got to have a solid foundation in the marketplace on which to build." So step 1 is the value-over-volume strategy and it does create that solid foundation.

Then you layer very provocative, high-velocity innovation on top of that and you support it.

And if the product is designed the right way, you get good repeat, so it does become a virtuous cycle and that is really the model that we tried to get in there.

And it starts with a very clear-eyed assessment around what's in the marketplace and is it fully competitive versus the other stuff consumers could buy.

And when businesses kind of run into executional challenges or they take their foot off the gas on innovation, it's not surprising to find that what's in the marketplace is not always fully competitive, and you have to deal with that, and that's exactly our approach.

Okay.

Super.

And then just quickly on the retailer investments, and I realize it's always a sensitive topic to kind of get into exact examples, but just given I feel like you've spent a little bit more in the trade for a while, but sort of the theme continues to evolve in that area.

Can you just give any incremental color as to kind of exactly what you do?

Right, I mean, I think I know what you do, but kind of just to clarify…

I think the easiest way to describe it, Rob, is kind of what is and what was.

What was in the old days, you'd go to customers as a manufacturer with a bag of money, and most of that money went into price-based merchandising events.

Now those could be very, very inefficient just rollbacks on the shelf.

That was kind of the bottom-feeder merchandising event.

Then there was end-aisle displays.

That was kind of next up.

And then there were the combination of in-store flyers plus displays, and those usually got the best lifts.

And over time, what we saw is that young consumers were less and less responsive to price-based discounting.

They wanted more than a cheap price.

They wanted higher quality.

They didn't care if our Banquet Salisbury Steak was $0.88 if a Banquet Salisbury Steak was the last thing that their stomach craved.

So these lifts dropped, at the same time, retailers began to become much more sophisticated because after all, they sit on a couple of important things.

One is a massive amount of high-quality consumer data that allows targeting and personalization of marketing message.

The other thing that they have is scale.

So even today, as an example, we are seeing big retailers starting to realize they have major buying power when it comes to traditional marketing services like advertising.

In some cases, much more buying power than manufacturers of their own right.

So they are increasingly becoming a high-effectiveness, high-efficiency conduit to the consumer.

And so as we agnostically look at deploying brand-building marketing, all we really care about is who's the best conduit to deliver high-impact, high-efficiency brand-building activities to the consumer?

And it is absolutely becoming clear that the customer is becoming a better and better conduit for effectiveness and efficiency in brand building year in, year out.

And if you look at the assets that they sit on between things like scale as well as data, it shouldn't be really surprising to anybody.

Very different from historical mental models, but clear empirical evidence that it's more effective.

The next question will be from Alexia Howard of Bernstein.

So we were talking a little bit ago about the consistency, I guess, on the consumer takeaway data versus the reported data in grocery and refrigerated.

I'm curious about the frozen area.

This quarter, you reported 4.9% organic net sales growth in the frozen area.

I think on the next page in the presentation, the consumer takeaway data this quarter was 2.6%, so there was a positive gap.

Was that a onetime inventory rebuild?

We've heard some companies talk about extension of payment terms.

Just curious about what's driven that and whether it can continue going forward.

Maybe it's nonmeasured channels.

Very good question, Alexia.

A little bit of it's nonmeasured channels, but as I mentioned last quarter, there were some shipments that slid from late Q2 into early Q3, which is not unusual at all around the holidays.

So for example, Marie Callender dessert pies, that's an example of a business where we saw some shipments slide around the holidays.

And that's why we had kind of -- we try not to give quarterly guidance on top line because we can't exactly control when these shipments leave the docks and when they're received by customers, especially when you've got major holiday events going on, on things like pies.

But that's a piece of it.

I think the bigger point in Q3 was that consumer takeaway and the underlying fundamentals were quite strong, and that does include, to your point, very strong performance in unmeasured channels.

So overall, we were quite pleased, not just in frozen, but with what we saw in other areas as well.

The next question will be from Robert Moskow of Crédit Suisse.

This is a question for Dave.

Dave, I think on the last call, you talked about having contingency plans for CapEx in relation to hitting debt targets longer term.

I didn't hear anything about the CapEx guide this year.

Is it unchanged?

And maybe you could put a number.

And then just broadly speaking, it seems like Pinnacle does need some investment in growth -- in growth CapEx for coming up with carbohydrate substitutes, and that requires some capacity.

So how can I reconcile those 2 things?

Or is it possible to do everything while reducing CapEx?

No -- good question.

And so let me be clear, when I talk about managing CapEx, in no way am I talking about cutting investment that's going to drive the business.

When I make a comment like that, I'm clearly talking about just managing the timing of CapEx.

That's normal kind of management of investment that I've done my entire career, and every company does.

So I just want to be crystal clear on that point.

Our CapEx year-to-date is about 3.6% of net sales.

We've said between 3% and 4% would be kind of our rate.

So I think we can kind of assume that it will stay in that range for the fiscal year.

So -- but they're really kind of the key drivers there, but we are making investments in the business.

We're doing it now.

We're going to continue to do it, and we're going to manage our cash at the same time.

So we're on target there.

One other thought on that, Rob, too, as well.

We have existing capabilities and capital in place that we have leveraged to drive innovation on Legacy Conagra that has excess capacity and can be readily applied to some of the Pinnacle brands.

For example, Birds Eye is a -- it's clearly our biggest brand, and it is a business that historically was not able to get into the world of single-serve.

And we have industry-leading single-serve capability, and there are some very unique aspects to that.

That's turnkey.

So we can apply that pretty quickly in a capital-efficient way and drive growth and, ideally, margin accretion.

You haven't said much today about carbohydrate substitutes, but it was a big part of your comments in December, how that was what Birds Eye missed.

Are we going to hear more about that in April?

Or is it kind of something that gets pushed back longer because of co-packing needs?

No, we'll talk quite a bit in April about not only Birds Eye but really the rest of the company, but as -- when I referred in my comments today around opting out of very important consumer growth sites and dig sites, clearly, the big one on Birds Eye was the spiralized piece.

And that's just an area that the leading brand in the category has to be in.

So you should assume that that's coming from us, and we'll have more to say about that in a few weeks.

The next question will be from Jason English of Goldman Sachs.

A couple of questions.

First, it's great to see some of the Pinnacle Foods innovation already.

Can you give us a sense on when we should start to expect to see some of that show up at retail?

Yes, that's really the point I was making earlier, which is we -- number one, we did really put the pedal down to build this innovation out.

And it has been, for me personally, just incredibly impressive to see what the team has done so quickly.

Just because we've designed it and built it doesn't mean it's ready to start showing up in the scanner data because it's not on the shelf.

And so our job is to try to get in on the shelf as quickly as possible.

That's sometimes easier said than done because customers do plan out their innovation pipe oftentimes a year in advance, sometimes they go 18 months in advance; and there is an element of, hey, get in the queue to do this.

That said, because we're talking about brands like Birds Eye, which is really a juggernaut and an industry leader in the category, we're not talking that far out.

We're working to get our products into these planograms as soon as we can.

Some customers, we'll try to shoehorn in sooner, some will come later.

But it will be category-by-category, customer-by-customer.

But in total, my expectation is that we won't see a material bend in the trend until the back half of fiscal '20, and it should get stronger from there.

Okay.

And I wanted to come back to Andrew Lazar's question on Pinnacle Foods margins because I don't think I was fully sated by the answer.

If I've done the math correctly, the implicit EBIT margin in the fourth quarter for PF is 9%, which is quite a big sequential stepdown, right?

And I heard your messaging on gross margins, but the messaging there didn't seem to suggest that we would see such a dramatic drop in gross margin.

So my takeaway is there must be something else going on.

A, is my math right?

And b, what is -- if there is something else going on, what is it?

And should we be bracing for that sort of exit rate for this year to be the entry rate into 2020?

Yes, Jason, this is Dave.

I'm not quite getting the -- did you say 9% operating margin, is that what you said, for Pinnacle?

Yes.

Yes, that's...

Yes, so not quite that low.

You'll see gross margin come down a bit from where we are in Q3 from what I described earlier, but we're north of your number on operating margin.

And ladies and gentlemen, that will conclude our question-and-answer session.

I would like to hand the conference back over to Brian Kearney for his closing remarks.

Thank you.

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

The Investor Relations team is available for any follow-up discussions that anyone may have.

Thank you for your interest in Conagra Brands.

Thank you.

Ladies and gentlemen, the conference has concluded.

Thank you for attending today's presentation.

You may now disconnect your lines.