Good morning, ladies and gentlemen, and welcome to the ConAgra Brands third quarter fiscal year 2019 earnings conference call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [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'll also be making references to total ConAgra Brands as well as Legacy ConAgra Brands. References to Legacy ConAgra Brands refer to measures that excludes 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 10th 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 five 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 10th 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…

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 two 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…

Thank you, Mr. Marberger. We will now begin the question-and-answer session. [Operator Instructions] The first question will be from Andrew Lazar of Barclays. Please go ahead.

This may not be the time or venue for getting into too much detail on fiscal '20 as of yet, but I guess that's 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 -- 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?

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 that we had just a few minutes ago.

And then just on -- the Pinnacle margins in the quarter came in quite a bit better than we modeled and 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 would 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 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 TPD. 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 that, Andrew. So today'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. Please go ahead.

So, a quick question as a follow-up to Andrew's question may be taken from a different angle, if consensus is for next year at 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 act -- 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 four 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 three brands. Now we do have to capture -- recapture the 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 cut -- 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? Thank you.

Yes, sure. Not really. As you could see in Dave's bridge, the gross margin is 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. Please go ahead.

It's Tom Palmer on for Ken. Thanks for the questions. Could 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. So, I would say probably about 1.5 percentage points in this quarter would be timing that will shift to next quarter.

Okay, thanks. Thanks for the color there. And then another one on fourth quarter sales line. So, you're going up against a 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 non-measured 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. Please go ahead.

The first one is super short. Sean, I think you said this, but I just want to be super clear. Are you reiterating your three 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. 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 is 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 OK. 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 just by 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 is kind of in that ballpark these days. But in our case since we had so much refreshing to do with 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.

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?

So David, it was really in the Grocery & Snacks reporting segment. We had -- if you kind of parse that, we had snacks which basically shipped to consumption as we showed strong 8% basically consumption and 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 -- you see some of the negative results in International. International actually benefited in the year ago quarter from hurricane shipments and some of the protracted problems happened in the island. So that actually represented a headwind this quarter and speaks to the decline that you see in the International piece. So, there's -- you 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 genuine -- 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. Please go ahead.

So, 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 -- sorry distribution weakness and then velocities improved, but then we also started to see after that distribution gains. So if we step back and just think about only Pinnacle that we're seeing, as you said, and parts of the International business, TDPs may have come off, right, but velocities start 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 want to -- 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 basically the philosophy behind it says hey, you've got to have a solid foundation in the marketplace on which to build. So, step one 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 try 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 in the exact examples. But just given I feel like you've spent a little bit more in the trade for a while, but kind of the theme continues to evolve in that area. Can you just give any incremental color as to exactly what you do? I mean I think I know what you do, but kind of just to clarify.

I think the easiest way to describe it -- the easy way to describe it, Rob, is kind of what is and what was. What was in the old days, you'd go to customers and -- 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 our 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 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. Please go ahead.

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 one-time inventory rebuild? We've heard some companies talk about extension of payment terms. Just curious about what's driven that and whether it could continue going forward, maybe it's a non-measured channel. Thank you.

It's a very good question, Alexia. A little bit of it is non-measured 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 desert pies, that's an example of a business where we saw some shipments slide around the holidays and that's why we get 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 in 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 Credit Suisse. Please go ahead.

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 CapEx for coming up with carbohydrate substitutes and that requires some capacity. So, how can I reconcile those two 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 could kind of assume that it will stay in that range for the fiscal year. So -- but they're really the kind of 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 leverage 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 brands 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 -- some very unique aspect 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 about -- today about carbohydrate substitutes, but it was a big part of your comments in December how you -- 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 lot more to say about that in a few weeks.

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

A couple of questions. First, it's great to see some of the Pinnacle Foods innovation already. Can you give us a sense of when you -- 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 it 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 here to do this. That said, because we're talking about brands like Birds Eye which is really a juggernaut 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 will try to shoot one 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.

And I wanted to come back to Andrew Lazar's question on Pinnacle Food margins because I don't think I was fully sated by the answer. If I've done the math correct, I think the implicit EBIT margin in the fourth quarter for PF is 9%, which is quite a big sequential step down, 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, it's 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.

Okay. I'll revisit our math and follow up if necessary.

Okay.

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.