Good morning, and welcome to today's ConAgra Foods First Quarter Earnings Conference Call. This program is being recorded. My name is Jessica Morgan, and I'll be your conference facilitator. [Operator Instructions] At this time, I'd like to introduce your host from ConAgra Foods for today's program; Sean Connolly, Chief Executive Officer; Dave Marberger, Chief Financial Officer; and Johan Nystedt, Vice President of Treasury and Investor Relations. Please go ahead, Mr. Nystedt.

Good morning. During today's remarks, we will make some forward-looking statements. And while we are making those statements in good faith and are confident about our company's direction, we do not have any guarantee about the results that we will achieve. So if you would like to learn more about the risks and factors that could influence and impact our expected results, perhaps materially, I'll refer you to the documents we filed with the SEC, which include cautionary language. Also we will be discussing some non-GAAP financial measures during the call today, and the reconciliations of those measures to the most directly comparable measures for Regulation G compliance can be found either in the earnings press release, Q&A or on our website at investor.conagrafoods.com, click Financial Reports & Filings, then Non-GAAP Reconciliations. Now I'll turn it over to Sean.

Thanks, Johan. Good morning, everyone, and thank you for joining our first quarter conference call. This will be our last earnings call as ConAgra Foods as we anticipate completing the Lamb Weston spin-off this fall prior to the holidays. As you've probably seen by now, we announced the timing of dedicated Investor Days for each business. Lamb Weston's will be held in New York City on October 13, and ConAgra Brands will be held on October 18 here in Chicago. Our teams are hard at work preparing for these meetings, and we are excited about the opportunity to take you through a deeper dive on these businesses and why we believe they will create significant value for investors as separate pure-play public companies. Each company will share more details, including financial outlooks and capital allocation priorities at these events. We are confident you will see the unique opportunities available to both companies and why each is well positioned to seize them. Now on to the state of the business and our first quarter results. Once again, it was a very busy quarter at ConAgra as we continue our disciplined and methodical approach to enhancing focus, expanding margins, improving efficiency, energizing our culture and ultimately, creating value for our shareholders. We still have a lot of work to do, but we are pleased with the progress that we have made to date. At a high level, we saw strong results from both Lamb Weston and our branded consumer businesses. On Lamb, we once again saw what a terrific business this is. Sales were up, margins were up and profit was up. The team is looking forward to sharing much more about this jewel of a business on October 13. On our branded consumer businesses, we also made terrific progress. Here, we…

Thank you, Sean, and good morning, everyone. Before I get into my comments, I would like to say how energized I am to be part of this organization and leadership team. I look forward to getting to know many of you and the investor community in the weeks and months ahead. I will address several topics in my comments, including our new reporting segments; a recap of our 2017 fiscal first quarter performance; a summary of items impacting comparability, including some brief comments on goodwill impairment, cash flow, capital allocation and the balance sheet; and some brief comments on our upcoming Investor Day. As we outlined in the release, we now report our business results in five segments. They are Grocery & Snacks, Refrigerated & Frozen, International, Foodservice and Commercial. The Grocery & Snacks, Refrigerated & Frozen and International segments were previously included in our Consumer Foods segment and Foodservice was previously included in our Commercial Foods segment. Upon the completion of the Lamb Weston spin, the commercial segment will include only the historical results of JM Swank and Spicetec through the divestiture date, and the Lamb Weston results will be reclassified to discontinued operations for all periods presented. Now I will provide some comments on our performance for our fiscal 2017 first quarter. Please note that references to adjusted earnings or operating profit referred to measures that exclude items impacting comparability. Overall, net sales for the fiscal first quarter approximated $2.7 billion, down 5% from the year-ago quarter. The divestiture of JM Swank and Spicetec and the negative impact of foreign exchange accounted for approximately 2 percentage points of the net sales decline versus the year-ago quarter. We reported diluted earnings per share from continuing operations in the fiscal first quarter of $0.42 compared with $0.38 in the prior…

Just two questions on gross margin, if I could. In the quarter, gross margins expanded about 200 basis points and recognizing pricing and trade spend discipline and some input costs favorability were some key drivers, I guess, was any of this due to maybe some supply chain initiatives that may have been taken but not maybe yet talked too publicly? Or is more of that on-the-come, so to speak? And I then I've just got a follow-up.

Well, we'll talk quite extensively, Andrew, about our plans with supply chain when we get to Investor Day. But on gross margin, obviously, there are a number of different things that are contributing to the gains we are seeing and the gain -- the size of the gains do vary quarter-to-quarter. But the important fact is that, over the past two years, we've made tremendous progress at gross margin and operating margin, and you saw that again this quarter. Quarter-to-quarter, the progress may vary due to a number of factors, but what I'm focused on is that we continue to move the centerline of our profitability north over time, while reducing the standard deviation around that centerline. On supply chain, look, first of all, clearly, the overall goal of our collective efforts is value and margin maximization. And supply chain productivity programs have always been, and will continue to be, an important component of that. And as Dave Biegger will share at our upcoming ConAgra Brands Investor Day, strong productivity has been a legacy strength at ConAgra, and you saw some of that also this quarter. We do have a strong track record of continuous improvement in terms of network optimization, procurement, T&W, et cetera, and now that we're upgrading our volume base and reducing low-margin business, we are providing a better foundation to build off of, as we plan for future margin accretive innovation. And Dave has obviously brought a fresh perspective around how to sustain that strong historic supply chain performance and build on it even further, and he'll share those views in a few weeks.

Got it. And that leads into my next one, which is based on some of the filings of Form 10s and such, it shows that ConAgra Brands will have a or does have a gross margin that is certainly substantially -- despite the progress, right, substantially lower than the large cap peer group. And I guess, I'm just curious, and I know you'll talk more about this in couple weeks, but is there any, I guess -- or how much of that gap, let's say, with the group do you see as maybe structural? Or any reason that this gap, I guess, can't be significantly narrowed over time? And is it something we'll hear more about perhaps at the Investor Day?

Yes, it certainly will be, and if you picked up on one of the comments I made, Andrew, in my prepared remarks, if you look at our branded businesses in the U.S. as an example, you've seen margin improvement of about 700 basis points versus the same quarter two years ago. So clearly, we believe and we demonstrated that we can do the things necessary to expand those margins and by no means do we think our work is done. We will continue to chip away at that, and we'll do it using a number of different factors. And we talked about those factors but, hopefully, investors are getting a sense of how relentless we are in terms of pursuing margin expansion.

And we'll take a question now from David Driscoll with Citigroup.

I wanted to ask just a little reconciliation on the quarter itself. So the timing issue was, I think, you said $30 million, so that's something like $0.05, and then the lower tax rate was maybe worth another $0.04. So is it correct that maybe if you think about this quarter, let's say, a $0.54, it's still a very solid beat over your original guidance, but those two other effects are notable. Is that -- do I have those correct?

Yes. That's correct on the $30 million, David, with the SG&A and the tax rate is actually higher because of the impacts of the sale and the impairment.

Sorry, versus the estimates that were going into the quarter is what I'm getting at for how we were modeling this. But okay, fine. And then as you look forward here, the -- is there any comments that you can give us on dyssynergies? Really, Sean, your comments are so very positive, but I always wonder if when breaking these things up, isn't there just fundamentally a dyssynergy number that's got to be overcome? And would just appreciate, I know this is maybe in advance of the big Analyst Day, but is there anything you can do to help us because we've got to put numbers out today for the forward forecast and would appreciate any comments on the dyssynergy computations.

David, the strategy that we've been undertaking to transform this portfolio, we've been at it now for a while, and we have anticipated that you will have some things that flow back against you. It's one of the reasons why we moved so aggressively on the $300 million efficiency program right out of the gate is because we wanted to stay out ahead of this stuff. Similarly, it's the same reason our supply chain team is aggressively trying to get out ahead of any absorption benefits that we might lose when we pull back on volume. So we try to look around corners. We try to anticipate it and then we try to stay ahead of it. So with respect to ConAgra Brands, sure, there will be some modest stranded as we go ahead and step through these things, but that's part of the reason why you see us getting so aggressive on costs. Lamb is a standalone company, and you'll see the details on that in the Form-10. And obviously when you set up a standalone company, you're going to incur some unique costs for doing that but obviously, we strongly believe the benefit of having Lamb as an independent pure-play company with its great performance and growth prospects is really the story there. That's a terrific equity, and we can't wait to tell investors about the story in a few weeks.

We'll take a question now from Rob Moskow with Credit Suisse.

Sean, I was -- in your prepared remarks, you said a lot about trying to get away from the highly priced sensitive consumer by walking away from a lot of these promotional programs, and I think that makes a lot of sense. I think one of the challenges you might have at the Analyst Day is, the perception of the portfolio of ConAgra is that a lot of the brands are targeted towards price-sensitive consumers that they are value brands. In your work on those brands, have you found kind of like a segmentation within those consumers that X percent are really price-sensitive for Chef, for example, but Y percent are very loyal. And do you have any insight for us on that that could help us?

Yes, I'll make a brief comment, Rob, and then I'll turn it over to Tom McGough to add some color. But when we're talking about these incredibly, what I'll call, price-obsessed consumers who really only buy on prices, it's not a large percentage of the user base. I mean, there is plenty -- way more brand loyal users in the user base in brands like Banquet. The issue is catering to that small group that is super price-sensitive has an unwanted effect on the balance of the business. So we've got terrific brands. And keep in mind, you've got millions and millions and millions of households out there that make $50,000 a year that need good value and -- but they are incredibly brand loyal households as well. Tom, you want to add anything to that?

Sure. What I'd add is, we will provide data that splits our volume base across loyals and switchers, and the vast majority of our consumer base are those consumers that are loyal that buy their purchases based on the strength, the benefit, the features of our products. I think what Sean highlighted is that, by focusing on incremental volume to trade promotion, we're subsidizing the purchases of those people that would normally buy us at full retail price. And our focus on trade is trying to improve the ROI on those merchandising events. So at the end of the day, we will have a stronger consumer base with a higher percentage of loyal consumers, and we will drive margin improvement through the trade productivity that we will invest in those attributes that those consumers are looking for over time.

Ken Goldman with JPMorgan has our next question.

In looking at the SG&A reduction, I know you talked about how some of it was temporary. I'm trying to get a sense though of how much of the remainder of that, right, is still the majority of that reduction that's not being deferred to later in the year, we can think of as maybe permanent. So maybe could you help us break out some of the drivers of that reduction, may be roughly bucket headcount reductions versus A&P savings, things like that? And I guess, as a carload to that, in terms of the amount that was pushed out of 1Q, I think you said $25 million to $30 million, could we model all of that being in 2Q? Or should we spread that throughout the year, as we look ahead?

First of all, Ken, I'll start, and Dave, if you want to add any color, go right ahead. The SG&A program that we've been focused on is a $200 million program, that is not an A&P program. That is a structural SG&A program. And we are, obviously, making great progress against our $200 million goal. Yes, we are tracking a bit of schedule but also some of what you are seeing, as Dave mentioned, is timing. And we're going to get into our outlook in terms of how it will flow going forward in a few weeks when we get to our Investor Day for ConAgra Brands. But the way I'd think about SG&A or for that matter, any inefficiency opportunities, we got our targets, we're making good progress on our targets, and we'll always continue to look for more pockets of inefficiency because it just gives us more fuel for growth.

And Ken, let me call on that.

Okay.

Just so if you look at SG&A and you have to work through all the adjusted items, right, so if you look at the total SG&A, if you look year-on-year, we're down about $75 million for the quarter. And as I said in my remarks, about $30 million of that is really a timing that will come in, in later quarter. So that's where -- $40 million to $45 million is really the incremental kind of run rate, if you will, for the quarter for that. As you know, we started the savings in fiscal '16 really in the Q3 and 4, so Q2 will be another big incremental quarter, and then it'll start to wrap in the second half of this year where the increases will be less. But by the end of this fiscal year, we'll be 85% to 90% complete in terms of the total $200 million reduction plan.

Okay, that's helpful, Dave. Quick follow-up, if I can. On Lamb Weston, you decided to load it up with a decent amount of leverage. Is that the natural result of wanting ConAgra Brands to have a squeaky clean balance sheet, maybe for M&A? And I'm a little confused about the decision to spin it off without a permanent CFO in place, it's a little unusual. That's not about anyone in particular, I like John, I'm just not sure how much confidence investors are going to have in whatever path is, I guess, outlined at the Analyst Day given that there is a new CFO coming in a few months later. So maybe you could help us understand the decision-making there?

Yes. Let me try to be helpful there, Ken. With respect, first of all, to the Lamb leverage, the ConAgra Board has been squarely focused on how to maximize total value, and this is top of mind when thinking about decisions like leverage. And as you'll see at Lamb's Investor Day in a couple of weeks, it is an extremely strong business with excellent cash flows, and we are quite confident that it will continue to thrive. Beyond that, we're going to hold off until the Investor Day to get into details on things like capital priorities. With respect to the Lamb CFO, I think the big picture here that I don't want investors to lose is, we are making excellent progress rounding out the Lamb management team. You're going to learn more about these folks here in short order as well as populating the Board with seasoned veterans that are really going to help this company get off, I believe, to a flying start. We are very far along in terms of the CFO search process. I don't want to get into the details of that process or our motives publicly for obvious reasons, but with the Investor Day just a couple of weeks away, we are very fortunate to have John Gehring help us get things launched. And for those of you who weren't tracking with Ken's comments, you might have missed the -- in this morning's announcement that John will be the Interim CFO here over the course of the next couple of months, as we stand Lamb up. But again, we'll have more to talk about on our permanent CFO in the not-so-distant future.

Our next question comes from Bank of America's Bryan Spillane.

Just two quick ones for me. First, and I might have missed this, but the effective tax rate in the quarter once you've excluded all of the one-time items, just -- what's the clean sort of effective tax rate?

The clean effective tax rate, 33.5%.

Okay. And then the second one for you, Sean, is just -- as you're going through this process of reducing the -- your promotional activity and taking that the volume hit that comes with that, velocity starts to slow. And sometimes when velocity slows, it starts to compound on itself. So can you talk a little bit about just what you are doing? What the circuit breakers are just to make sure you don't get yourself into a situation where you've got the sort of the volume base right but it's hard to restart some velocity because of where the momentum is? And I guess, related to that, just could you confirm, it sounds like with advertising and marketing may be down in the quarter, you're still going through this process of resetting volume at a time where there's going to -- you're not really maybe necessarily fully supporting the brands with the advertising you tend to?

All right. There's a lot there. Let me try to hit the key points there. First of all, what we're doing it's a bit like if any of you have ever remodeled a house, it's a bit like that. The process is a bit messy, but if you want to get to the desired outcome, you got to go through the process. And this is a transformation that we're undertaking here, and our approach is to value profitable growth, not any growth but we do keep a close eye on markers to make sure that the business is in control and doing what we plan. So as an example, if you get into the scanner data and you peel it back, you'll see obvious things that you should expect such as baseline trends being significantly different from promoted trends. And then furthermore, if you get into baseline velocities, you will see that our baseline velocities are, in fact, quite stable. You will see TPDs going back, but you'll see TPDs going back because we, along with being very focused on price, have infused into the marketplace over a number of years a long tail of low-margin, nonproductive SKUs of multiple sizes that we are -- frankly, they had no value, so we've to get them out. Our customers appreciate that. It's part of being good category managers. And then the key is to continue to support the items that are moving at strong velocities, contemporizing them, refreshing them and then adding to them with new innovation and then ultimately proper marketing support. Now with respect to your question of marketing support in the quarter, yes, A&P was down. Some of that is timing because we do want to align our A&P spend with planned in-market actions like innovation launches and key promotions, things like that. So some of its timing, but some of it is just good discipline and getting rid of nonworking or attempted working marketing that just, frankly, wasn't. And that is you see -- and also buying better. Your GRPs were up 7% in the quarter on a fewer dollars, so the impact was reasonably respectable. And I think it's important that we keep that kind of support out there while we're taking some of these promotion items, so we can really evolve the conversation with our consumer to be about something other than price and that's we're doing. We'll talk about this quite extensively along with things like portfolio segmentation strategy in a few weeks at our Investor Day.

We'll move now to Alexia Howard with Bernstein.

Two questions. Firstly, on the volume declines. You talked a lot about how a lot of that's deliberate given the actions that you're taken to improve the quality of revenues. Are you able to tell us if you haven't taken those actions, what the underlying volume decline would have been? And further, are you able to tell us roughly what proportion of overall volumes are associated with these consumer segments that you're really not that interested in? So volume is the first one. The second question is we're hearing from a number of places that retailers, particularly large retailers, are beginning to demand more reinvestment in price and promotional activity, which seems to be the opposite direction from where you're going. How do think that's going to play out in 2017? And are you confident that you can sort of hold your ground without losing distribution?

Sure. Alexia, I'll take the second one first. On the notion that some retailers may be asking for more promotion, quite frankly, that tends to vary fairly meaningfully by category depending upon what a retailer's objectives are with particular categories. In general, our customers are asking us for growth and innovation. They want to see us evolve our brand so that we're not competing on price, so that we're competing on quality measures. You see customers giving more and more real state to these challenger brands that have modern food attributes like natural, organic, premium. These are the things that consumers are demanding, and this is what many of our retailers in our categories are prioritizing. And it's precisely why we're evolving the businesses that we own as well as adding new businesses that are complementarity like Frontera, Blake's and others like that. With respect to our volume piece, let's go back to the point in my prepared remarks, I think, that really describes it best. This is a -- our actions are broad-based but the volume decline, when you add it up, is incredibly concentrated. And in our case, it was in our six brands, each of which has its own story as to what we're doing and why we're doing it. But if you use Banquet as an example because that's the biggie, here's how to think about Banquet. The bottom line is locking a brand into a $1 price point for decade. It's just not a good business decision because it puts relentless pressure on margins and in turn, food quality. And at the same time, it retrains our Banquet loyalists to buy on deal. So the change was long overdue. And while the topline optics can be ugly until you wrap a year later, it's up over 300 basis points, the business and grows margin, which is excellent news. Now we've got to continue to support the business with levers other than price. And that's what we're going to do, and that's what our customers are counting on us to do.

We'll take a question now from Akshay Jagdale with Jefferies.

This is Lubi filling in for Akshay. First question is just on the consumer brands businesses. If you can comment on advertising expense this quarter, just trying to understand the different pieces of the -- setting the profit outperformance this quarter. So how much was -- advertising expenses were down during the quarter? And how should we think about that going forward?

A&P was down in the quarter, as we talked. GRPs were up so impact was up, but we spent less money. We will move -- some of those dollars are moved into the remaining quarters for the balance of the year, as we talked. But it'll -- a piece of it was timing and a piece of it was just improved efficiency.

We'll move now to Mario Contreras with Deutsche Bank.

Sean, you mentioned in your prepared remarks that there were some good outperformance from the supply chain team in offsetting some of the over head absorption from the volume declines. Can you talk a little bit more specifically about how they're able to go about achieving that? And then related to that, how were the volume declines tracking versus your expectations going into the quarter?

Yes. The supply chain team at ConAgra has been doing a great job for a long time. I don't know how much we've talked about the capabilities that we've had with investors, but we intend to do that in a few weeks. And we've had very strong gross productivity performance historically, and we're continuing to work to not only sustain that but to find new ways to build upon that, and we'll outline that here coming up in a few weeks for you. With respect to the volume overall, it's pretty consistent with what we expect. And if you just go back to our last couple of quarters, I've tried to be very transparent around not only our strategy, but the implications of our strategy and the notion that it's not always pretty to look at but it's important that we go through this if we're going to get to a different place. And -- but we feel like we're squarely on track.

We'll take a question now from Jonathan Feeney with Consumer Edge Research.

Sean, a lot of what you've done had obviously made tremendous improvements to the value proposition. And I'm wondering, how much of -- you talked about these, your price seeking, your value only consumers, how much of this is a change in the consumers, say, over the past three or four years where maybe the strategies that were good four years ago are less relevant today? And how much of this is just you bringing a fresh set of eyes and a new methodology to the business? And I asked because maybe that -- those trends continue and it's actually maybe it's a little bit of -- it's a great time for -- I shouldn't say it's a great time, it's a much improved time for lower and middle income consumers right now with falling gas prices and wage gains. And I wonder if maybe just that improvement is helping you realize this pricing and maybe better-than-expected results?

The way I'd think about it, John, is when the consumer looks at a brand, the brand is going to communicate something to them. For a long time, our brands communicated deal. We are a deal brand and interestingly, even low income consumers are very interested in a brand communicating with them on other means. For example, there were -- there was a period of time in our past where our PAM business was heavily promoted and the only trick in the book that we turned to was dealing. But if you look at consumer trends in oil over the last few years, you see that the oils have changed, it's moved to things like olive oil, things like coconut oil. So instead of competing on PAM on price attributes, we've evolved the PAM business, and we've got olive oil PAM. We've got coconut oil PAM. These are relevant modern-day attributes that changed the discussion with the consumer to be about something that they value and they will pay more for and not about deep discounting. That's just one example. We'll talk about more examples at our Investor Day, but that's exactly what we need to do to get really the loyalty up on our business, get our prices up and build our overall brand strength to make it as modern as it can be.

Our final question today will come from Todd Duvick with Wells Fargo.

It's actually Michael Walsh filling in for Todd. Sean and Dave, you've been consistent in publicly stating your desire to retain an investment grade credit rating. And earlier, you mentioned that as well. You also mentioned debt reduction, and I know ConAgra Brands will get a $675 million payment from Lamb Weston with the spin. You're going to lose a chunk of EBITDA. Can you just talk about how much debt reduction you expect going forward? And do you have any type of leverage target that you would manage your balance sheet to?

Yes, thanks for the question. With respect to balance sheet questions, we're going to get into that in earnest in a few weeks at Investor Day. But with respect to ConAgra Brands, big picture as we've said and as you pointed out, as we intend to continue our commitment to being rated investment grade, we'll continue to a balanced capital allocation philosophy with strong dividend and a willingness to buy back shares and an appreciation for smart, value creating M&A. All of those things are fair game, which is not a departure from where we've been but rather very consistent. But we'll get into more details here on that in a few weeks.

This concludes our question-and-answer session. Mr. Nystedt, I'll hand the conference back to you for final remarks or closing comments.

Thank you. As a reminder, this conference is being recorded and will be archived on the web as detailed in our news release. As always, we're available for discussions. Thank you for your interest in ConAgra.

This concludes today's ConAgra Foods First Quarter Earnings Conference Call. Thank you again for attending and have a good day.