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Edited Transcript of CAG earnings conference call or presentation 22-Sep-15 1:30pm GMT

Q1 2016 ConAgra Foods Inc Earnings Call

OMAHA Sep 23, 2015 (Thomson StreetEvents) -- Edited Transcript of ConAgra Foods Inc earnings conference call or presentation Tuesday, September 22, 2015 at 1:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Chris Klinefelter

ConAgra Foods Inc - VP of IR

* Sean Connolly

ConAgra Foods, Inc. - CEO

* John Gehring

ConAgra Foods, Inc. - CFO

* Tom McGough

ConAgra Foods, Inc. - President of Consumer Foods

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Conference Call Participants

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* Andrew Lazar

Barclays Capital - Analyst

* David Driscoll

Citi Research - Analyst

* Ken Goldman

JPMorgan - Analyst

* Jason English

Goldman Sachs - Analyst

* Jonathan Feeney

Athlos Research - Analyst

* Bryan Spillane

BofA Merrill Lynch - Analyst

* David Palmer

RBC Capital Markets - Analyst

* Eric Katzman

Deutsche Bank - Analyst

* Alexia Howard

Sanford C. Bernstein & Co. - Analyst

* Rob Dickerson

Consumer Edge Research - Analyst

* Rob Moskow

Credit Suisse First Boston - Analyst

* Chris Growe

Stifel Nicolaus - Analyst

* Diana Chu

Barclays Capital - Analyst

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Presentation

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Operator [1]

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Good morning, and welcome to today's ConAgra Foods first-quarter earnings conference call. This program is being recorded. My name is Jessica Morgan, and I will be your conference facilitator.

(Operator Instructions)

At this time, I'd like to introduce your host from ConAgra Foods for today's program. Sean Connolly, Chief Executive Officer, John Gehring, Chief Financial Officer, and Chris Klinefelter, Vice President of Investor Relations. Please go ahead, Mr. Klinefelter.

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Chris Klinefelter, ConAgra Foods Inc - VP of IR [2]

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Good morning. During today's remarks, we will make some forward-looking statements. And while we're making those statements in good faith and are confident about our Company's direction, we do not have any guarantee about the results that we will achieve. So if you would like to learn more about the risks and factors that could influence and impact our expected result, perhaps materially, I will refer you to the documents we filed with the SEC, which include cautionary language.

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

Now I will turn it over to Sean.

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Sean Connolly, ConAgra Foods, Inc. - CEO [3]

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Thanks, Chris. Good morning, everybody. I'm glad to be with you on our second call together. As you know, we've been digging deep since I joined ConAgra Foods earlier in the year. And we are aggressively pursuing the right course of action to maximize value creation for our shareholders over time. While we still have plenty of work in front of us, we're clearly on the move and making tangible progress.

When I last spoke to you on June 30, I made the point that our Company is all about long-term value creation. You should consider that a permanent part of our mentality that will not change. So as I have said before, we will always be open to any realistic actionable path that will create significant value for our shareholders. At the same time, we have a base plan, which is in and of itself a very promising path to value creation. As you heard on June 30, it is centered on focusing our portfolio, strengthening our fundamentals, and becoming much more efficient.

We are in the early days of implementing this base plan, and it involves bold actions on costs, talent, and individual businesses. This is our primary focus right now. So it shouldn't surprise you when we share news about the bold actions we are taking in this regard. These actions are part of our commitment to running the Company well. And represent a pragmatic and responsible approach, given the current industry environment and our desire to realize the full potential of our business. I mention this to be declarative that our focus on stronger operations, which are required no matter what the future holds, does not conflict with the mentality of being open to other ways to create value. It's as straightforward as that.

Now recall, our base plan has four pillars. One, divesting private label, two, expanding margins, three, improving our consumer branded business and Lamb Weston, and four, maintaining our commitment to a balanced approach to capital allocation. This morning, I will offer a few words on each of these pillars.

First, we are on track in terms of our divestiture of the private brands business. We've had a lot of interest, and expect to have more to share on this front later in the fall. Given the planned divestiture, we will not be providing detailed results for this segment, which has been reclassified as discontinued operations.

Second, we're making good progress around our margin improvement efforts through a more aggressive approach to SG&A, and improved supply chain and trade productivity. On SG&A, we're well into mobilizing an intensive SG&A reduction effort that is aimed not only at offsetting stranded costs associated with the private brands divestiture but moving ConAgra into the top quartile of SG&A efficiency in our space over time.

As we discussed last quarter, absolutely everything is on the table here. This will take time, as some of this work will require system and capability improvements that are not turnkey. Nevertheless, if we find inefficiency, we will get it out as fast as possible. We will have more specifics to share on this later in the fall as well.

Hand-in-hand, with our focus on efficiency, is an intense focus on driving profitable growth by capitalizing on the highest potential brands and categories in the Consumer Foods segment. And growing the Lamb Weston business in our Commercial Foods segment. Consistent with this effort, we are delighted that Darren Serrao has joined us as our Chief Growth Officer to guide our efforts in maximizing the value of our brands. Darren and his team are hard at work on improving connectivity and boosting speed to market, ensuring that strong insights lead to relevant and timely products with the right marketing support.

As we undertake all of these efforts, we remain committed to maintaining an investment-grade credit rating, and a balanced capital allocation strategy. Including investments in organic and inorganic growth, and returning capital to shareholders through our top-tier dividend and share repurchases, as well as continuing to pay down debt. John will discuss capital allocation for FY16 in more detail later on this call.

Now turning to the quarterly specifics. As you saw in our release, we're off to a strong start for FY16, reporting comparable EPS of $0.45, up from $0.39 in the prior year. We have a good foundation and positive momentum in both Consumer Foods and Commercial Foods. In Consumer Foods, we reported net sales of approximately $1.7 billion, flat compared to the prior year, reflecting flat volume, a 2% improvement in price mix, and 2% negative impact from foreign exchange. Operating profit was $248 million, up 22% on a comparable basis, with margins up more than 250 basis points.

Throughout FY16, we are focused on building on the foundation established during FY15. Our plan is concentrated on strengthening our brands and providing resources behind the brands and channels that generate the best return. By focusing on the strongest brands and channels, we're getting better price realization and trade efficiencies. The outcome is a better price mix, and margin improvement. The strong operating profit we delivered in the first quarter is direct evidence of our progress and reflects the improved price mix, and benefit of the more targeted approach to advertising and promotion investment.

I want to highlight a few brands that also demonstrate the progress we are already seeing in this segment. We continue to invest and achieve strong operating results on Marie Callender's, Hunt's, ROTEL, Reddi-wip, Slim Jim, and PAM. All are category-leading brands that are well-positioned with consumers and deliver strong margins. We will continue to invest in brand building, A&P, renovation and innovation, and expand into growing customer channels.

As discussed in the past, there has been an intense focus and having the four P's right. Or as we call it, being perfect at retail. Executing well on product, packaging, pricing, and promotions. Along these lines, Chef Boyardee and Orville Redenbacher grew sales in the quarter. In addition, PF Chang's was re-staged with improved packaging graphics, and a stronger product range last year and since the re-stage, the brand has posted strong double-digit growth.

We continue to make progress in transforming the Healthy Choice franchise as well. Healthy Choice Cafe Steamers continues to perform well in a challenging segment. And Simply Steamers, our newest Cafe Steamers product, contain nothing artificial, while offering 100% natural protein. These new items are performing well, and importantly, they command a higher retail price. Looking ahead in Q2, Banquet will be re-staged with a complete product overhaul. That means increased food quantity and improved food quality, along with a much-needed modernization of packaging and higher retail pricing.

This focus on strengthening brand equities and expanding margins is providing the fuel to invest in those brands that have the fundamentals right, are consumer relevant, and have accretive margins, what we call being A&P ready. As a result, marketing investments will increase for the balance of the year, again, in a highly disciplined way. This is a virtuous cycle. Over time, stronger brands lead to better pricing power and higher margins. We have a lot more to do, but the results over the last six months are a good indication of the opportunity going forward. We anticipate profit growth from the Consumer Foods segment for the full year as we continue to drive efficiencies, and prioritize the key brands and sales channels that have the best opportunity for success. I'm confident that this focus will be the key that unlocks our branded Consumer Foods segment's ability to further improve its margin profile over time.

Now I'm going to turn to Commercial Foods. Net sales were approximately $1.1 billion, up 3% compared to the prior-year quarter. The Commercial Foods segment's operating profit was $139 million, up 13% on a comparable basis. The segment's strong performance reflects higher volumes and net sales across all commercial foods businesses with profits benefiting primarily from Lamb Weston's sales growth, favorable mix, and operational efficiencies, helped by improved raw potato quality.

Lamb Weston delivered strong volume growth in North America, driven by organic growth with key customers across all channels. While domestic growth outpaced international growth in the quarter, we expect international sales to return to normal levels in the back half of the fiscal year as we continue to recover from the impact of last year's West Coast port labor dispute. We remain focused on accelerating the growth of Lamb Weston internationally. The global QSR industry is aggressively expanding in emerging markets, with potatoes remaining a critical part of the menu. At the same time, Lamb Weston's North America business is the market leader in North America with a strong foundation, and is positioned to continue to grow.

As I noted earlier, we will not be providing results for the Private Brand segment. Which has been reclassified as discontinued operations, and thus, not a segment anymore. At a high level, I will say that while we have taken the right steps to improve execution and begin restoring this business to better profits, Private Brands is still feeling the impact of category softness and higher input costs that we anticipated this quarter. The underlying comparable profit performance, while still lower year-over-year in Q1, should improve sequentially throughout FY16.

At this point, I'll turn it over to John. But before I do, I want to reiterate that we are still in the early days, but we are making excellent progress. There is a great deal of change underway at ConAgra Foods, and our team is excited and we are energized. We're operating with urgency, and we have embraced the mindset of taking whatever bold action is required to unlock shareholder value. While some of these initiatives we discussed will be completed in FY16, others will be a multi-year effort. And we look forward to keeping you up to date as we continue to deliver on our plans.

With that, John, over to you.

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John Gehring, ConAgra Foods, Inc. - CFO [4]

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Thank you, Sean, and good morning, everyone. In my comments this morning, I will recap our fiscal first-quarter performance, including comparability matters, and then address cash flow capital and balance sheet items. I will also provide some brief comments regarding certain components of our FY16 outlook.

Before I comment on performance, I want to address a few key points related to the divestiture of our private label operations. First, during the quarter, we met the necessary accounting requirements to reclassify the operations we are divesting as assets held for sale. At the time we met these requirements, we were required to further assess the carrying value of the assets on a held for sale basis. As a result, we recorded an additional impairment of approximately $1.95 billion. The impairment does not reflect any offsetting benefit from the tax loss we expect to generate from the sale of our private label operations.

At this time, we have not met the necessary accounting requirements to recognize the tax benefit related to the capital loss. However, we remain confident that the Company will be able to realize significant tax benefits in the future from utilizing this capital loss carry forward. In addition, in accordance with GAAP, the Company is no longer recording depreciation or amortization expense on the assets held for sale. Discontinued operations for the fiscal first quarter reflect about $0.01 of EPS benefit from the absence of depreciation and amortization. The benefit in subsequent quarters will be more significant.

Next, while the businesses being divested are substantially the same as those previously reported in our Private Brand segment. There are businesses that were previously part of our Private Brand segment that will be retained as part of our Consumer Foods segment. The results of operations for these businesses, including any impairment charges in prior periods related to the associated assets, are reflected in the Consumer Foods segment for all periods presented. There are also businesses that were previously reported in our Consumer Foods and Commercial Foods segments which will be included in the divestiture and have therefore been classified as discontinued operations. As such, the results for these businesses are now reflected in discontinued operations for all periods presented, along with the other private label operations being divested. Overall, the net impact of these changes is fairly small relative to the size of our Consumer and Commercial Food segments.

Now, I'll recap our performance for our fiscal first quarter. Overall diluted EPS from continuing operations as reported was $0.38. After adjusting for items impacting comparability, diluted comparable EPS, including the contribution from discontinued operations of about $0.04, was $0.45 this quarter versus our prior-year quarter's comparable earnings base of $0.39.

As Sean noted, both our Consumer Foods and Commercial Foods segments performed very well. In our Consumer Foods segment, net sales were approximately $1.7 billion for the quarter, about flat with the year-ago period, reflecting flat volume, a 2% improvement in price mix, and a 2% negative impact from foreign exchange. Segment operating profit adjusted for items impacting comparability was $248 million, or up about 22% from the year-ago period. And operating margin on a comparable basis expanded over 250 basis points versus the year-ago quarter. Foreign exchange this quarter had a negative impact of $28 million on net sales, and about $11 million on operating profit for the segment.

Our Consumer Foods supply chain cost reduction programs continue to yield good results. This quarter, cost savings were approximately $40 million, and inflation had a negligible impact on results this quarter. On marketing, Consumer Foods' advertising and promotion expense for the quarter was $77 million, up about 7% from the prior-year quarter, reflecting our efforts to continue to strengthen and support our brands. In our Commercial Foods segment, net sales were approximately $1.1 billion or up about 4% from the year-ago quarter. Commercial Foods segment's operating profit was $139 million, or 13% above the year ago quarter's operating profit adjusted for items impacting comparability.

Discontinued operations posted a loss of $3.23 per diluted share this quarter, reflecting the impairment charge related to the pending divestiture. After adjusting for this charge and expenses related to restructuring, the private label operations earned $0.04 per diluted share this quarter. Expected earnings from the private label operations were included in our earlier guidance.

Moving on to corporate expenses. For the quarter, corporate expenses were approximately $85 million. Adjusting for items impacting comparability, corporate expenses were $72 million versus $58 million in the year-ago quarter. The increase versus last year's first quarter reflects higher incentives and office lease costs. Equity method investment earnings were $37 million for the quarter, and $26 million in the year-ago period. The year-over-year increase mostly reflects the inclusion of a full quarter's profits for the Ardent Mills joint venture. The prior-year quarter only included two months of earnings from this joint venture.

Our comparability items this quarter included two items. First, the expense related to the impairment of goodwill and other assets in the private label operations. This is included within the results of discontinued operations. And second, about $0.03 per diluted share of net expense from restructuring charges, $0.02 of which is in continuing operation and $0.01 of which is in discontinued operations.

On cash flow capital and balance sheet items, we ended the quarter with $114 million of cash on hand and $1 million of outstanding commercial paper borrowings. Total operating cash flows for the fiscal first quarter were approximately $67 million, versus $234 million in the year-ago quarter. The decrease is driven principally by timing matters related to payroll, incentives, and tax payments as well as higher working capital, driven in large part by higher receivables related to the increase in sales.

On capital expenditures, for the quarter we had capital expenditures of $108 million versus $90 million in the prior-year quarter. Net interest expense was $80 million in the fiscal first quarter, versus $83 million in the year-ago quarter. And dividends this fiscal quarter were $107 million, versus $105 million in the year-ago quarter.

On capital allocation, for FY16, we remain committed to an investment grade credit rating and a capital allocation strategy appropriately balanced between further debt reduction, a top-tier dividend, share repurchases, and additional growth investment. The Company will assess opportunities to increase the dividend after it is further along with the development of its strategic plan. We did not repay any long-term debt, or repurchase any shares this quarter. We have approximately $132 million remaining on our existing share repurchase authorization. And subsequent to year end, we did repay $250 million of long-term debt, principally through commercial paper borrowings.

Now I'd like to provide a few comments on the balance of FY16. As we noted in the release, we will offer more details on FY16 EPS expectations after we are further along with the process of divesting the private label operations and have finalized our SG&A reduction targets. We expect the Consumer Foods segment to post modest comparable operating profit growth for the full fiscal year despite higher marketing investment, one less week in the year, and headwinds from FX, higher incentives, and stranded costs. We also expect the Commercial Foods segment to post modest operating profit growth, despite having one last week in the year and higher incentive costs.

With regard to the second quarter of FY16, we expect EPS adjusted for items impacting comparability to be approximately in line with the year-ago quarter. Despite strong fundamentals and expectations for continued margin expansion, comparable operating profit for the Consumer Foods segment in the fiscal second quarter is expected to be negatively impacted by foreign exchange, higher incentives, and expected stranded costs related to the divestiture of the private label operations. Also, marketing costs are planned to be higher, as we continue to...


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