Conagra Brands, Inc. (CAG) Q4 2016 Earnings Report, Transcript and Summary

Welcome to today's ConAgra Foods Fourth 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 would like to introduce your hosts from ConAgra Foods for today's program, Sean Connolly, Chief Executive Officer; John Gehring, Chief Financial Officer; and Johan Nystedt, Vice President, Treasury and Investor Relations. Please go ahead.

Good morning. I'm Johan Nystedt, ConAgra's new VP, Treasury and IR. As Chris mentioned at the April earnings call, we're transitioning the IR function to my team here in Chicago. Chris is not able to join today's call due to a family matter. While he will be back next week, feel free to reach out to me directly on any follow-up questions you may have. My contact details is at the top of the earnings release. I realize that I have big shoes to fill and I'm looking forward to be working with you. That said, 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 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 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 and filings, then non-GAAP reconciliations. Now, I'll turn it over to Sean.

Thanks, Johan. Good morning, everyone and thanks for joining us to discuss our fourth quarter and full-year FY '16 earnings. I'm pleased with our results which reflect the progress we're making as we continue to execute our strategy to drive focus and discipline across the Company. Diluted comparable EPS for FY '16 was $2.08, compared with $1.93 in FY '15 which included an extra week. For the fourth quarter, we delivered comparable EPS of $0.52, slightly above our $0.50 guidance. Before John and I get into details of our full year and Q4 results, I want to provide you with a bit of context and perspective on where we're as we continue to build the foundation to support ConAgra Brands and Lamb Weston as separate, pure play businesses following the spin plan for later this year. It's been a very busy year and I'm pleased with the way the Organization has embraced the changes needed to drive value across ConAgra. We have not only implemented many of the structural changes necessary to create a more focused Company, but we have materially evolved our culture, adopting the discipline, focus and performance orientation we need to succeed going forward. We began the year with an aggressive agenda and accomplished a tremendous amount. You've heard me discuss many of our accomplishments throughout the year and we haven't let up. We have much more to do to fully optimize our business which will take time, but we're committed to the challenge. Consistent with our efforts to become a more focused Company, over the last several weeks we reached agreements to sell two terrific businesses that will be better served by more focused ownership, Spicetec Flavors & Seasonings and JM Swank. We will receive combined proceeds from these sales of approximately $480 million. These divestitures will sharpen our attention around our core product portfolio to drive sustainable growth and the sales of Spicetec and JM Swank further position us to execute a smooth separation into two pure play companies, ConAgra Brands and Lamb Weston, in the coming months. We expect to utilize the proceeds from the Spicetec and JM Swank divestitures as part of our broader balanced capital allocation plan which includes debt reduction, an attractive dividend, share repurchases and acquisitions. In addition to bringing more focused, the actions we took during the year enabled us to reduce our debt by approximately $2.5 billion and our balance sheet is much stronger than it was just 12 months ago. Since we last spoke in Q3, we've also continued to build momentum around our $300-million efficiency plan and our efforts to transform ConAgra into a lean, agile and more focused Company in order to improve profitability and unlock shareholder value. We recognize there's still more to do on this front and we continue to expect to realize the majority of our efficiency improvements in FY '17 and FY '18. As part of our transformation to a more leaner and nimble Company, we're settling into our corporate headquarters in downtown Chicago. In fact for, the first time, we're conducting this call from our new space. We moved in early this week and we're excited to have the Leadership Team and our consumer business under one roof. It's a great new space and our Team is energized and the more open floor plan will foster enhanced collaboration and accelerate our shift to a more innovative and tightly connected culture which will play a key role in driving performance and in creating value. Our Team also remains hard at work on the separation of ConAgra into two public pure play companies. We expect to file the initial Form 10 by the middle of July and will be hosting Investor Days for both companies in advance of the completion of the spin. We will be following up later this Summer with more specifics regarding the date, times and locations for those meetings. Our teams are working diligently to prepare ConAgra Brands and Lamb Weston for their lives as standalone public companies. We remain highly confident that this is the right path to maximize value for stakeholders, who will benefit from improved operating performance and consistency from both businesses. With FY '16 complete, the Team is proud of our accomplishments on behalf of shareholders and we now begin FY '17 ready to build on our momentum. It will take time to truly optimize ConAgra, but this Team has developed the refuse-to-lose attitude that I believe will enable our success. So on to our segment performance. As you know, our focus in Consumer Foods is on unlocking the significant latent potential of the business by expanding margins, improving brand health and delivering more consistent performance. We have aggressively executed against that strategy during FY '16 by allocating resources more efficiently through portfolio segmentation with a focus on building a higher-quality investment-grade volume base. At the same time, we're becoming more effective in pricing, mix management and trade promotion productivity and more efficient from a supply chain perspective. These advancements, coupled with favorable commodity input costs, provided us with fuel to grow profits, reinvest in the business and position our volume base for the long term. Clearly, we still is have more to do to realize our full potential as a branded food company. That said, we've made tremendous progress by re-igniting our operating performance this year. For the year, sales declined as we expected, consistent with our efforts to upgrade our volume base, take selective pricing actions were justified and improve our trade spend discipline. As we said early in the year, the payoff was going to be in margins, not sales and our results reflected our progress against that objective. Gross margins expanded, providing good fuel to reinvest in the business. For the full fiscal year, comparable operating margin grew to just under 17%, almost a 200-basis-point improvement over last year and comparable operating profit grew 7% to $1.2 billion, overall, a strong performance by the Team. In addition, we made progress throughout the year as we invested behind A&P Reddi brands, like Reddi-wip, Marie Callender's, PAM, Bertolli, Slim Jim and Hunt's. For the year, we increased A&P spending 12%, including 8% in Q4. Importantly, we have developed a much more rigorous and targeted approach to allocating these dollars against brands where we can drive the greatest margin impact. Our results for the quarter mirrored our results for the full year, as we experienced a 5% decline in net sales after adjusting for the benefit of the extra week last year, principally driven by volume declines related to the actions we're taking on pricing and trade spend. In fact, virtually all of the volume decline was a result of Banquet pricing associated with product upgrades and a broader portfolio decision to walk away from promoted volume that offered weak returns and conditioned the consumer to look for deep discounts. Once again, this was planned as we successfully expanded gross margins, allowing us to increase our brand investments and strengthen our non-promoted volume base. Operating margins also increased during quarter to slightly over 17%. Although comparable operating profit declined for the quarter to $290 million, this was a function of the extra week in the prior year, FX and the volume impact of pricing and trade actions, partially offset by lower SG&A. Expanding operating margin was our goal for the quarter and our focus on price mix and supply chain and SG&A productivity delivered results. Our FY '16 results are a testament to the fact that our strategy is working. Importantly, we're at the early stages of what we can achieve as a standalone business and I'm more encouraged than ever about the work happening in Consumer Foods and the significant opportunity ahead as we continue to accelerate our progress. As I've said before, discipline and investment create a virtuous cycle. Over time, stronger brands lead to better pricing power and higher margins and we're clearly on the right path to maximizing value here. We look forward to sharing much more with you on ConAgra Brands at the Investor Day this fall. Now, turning to Commercial Foods, for the year, net sales were approximately $4 billion, up slightly from the prior year. Operating profit was approximately $630 million, up nearly 12% from the prior year. Fourth quarter net sales were approximately $1 billion, down approximately 6% from the prior year, due principally to the 53rd week in the year-ago period. Operating profit was $156 million, in line with the year-ago results. We continue to see significant opportunities to drive growth across the Lamb Weston business, supported by food-away-from-home trends in the U.S. as well as growing demand in emerging markets. Consistent with our plans to capitalize on these trends, we recently announced an important investment in our Richland, Washington facility to expand our domestic production capacity which we also leverage for exports. We also announced an exciting investment in Russia by our Lamb Weston/Meijer joint venture. These investments will enhance our ability to support the increasing consumer demand for value-added potato products and the steady growth in key emerging markets like Russia. Ultimately, we expect these investments will contribute to our ability to continue to grow our share and deliver strong top- and bottom-line results for shareholders. More broadly, we continue to make good progress in preparing Lamb Weston to become a standalone business. We will be providing more details in the weeks to come. Before I turn it over to John, as always, I want to take a moment to acknowledge the resilience and dedication of our talented Team as we work to transform ConAgra into a stronger, more consistent Company with a more valuable future. While FY '16 was a year of significant change, we remain a work in progress. That said, I'm more confident than ever as we look ahead and I greatly appreciate the energy and focus on serving our customers that I see on display on a daily basis. Over to you, John.

Thank you, Sean and good morning, everyone. In my comments this morning, I will address several topics, including a recap of our 2016 fiscal fourth quarter performance; comparability matters; cash flow, capital and balance sheet items; and some brief comments on our outlook for FY '17. I'll start with some comments on our performance in our fiscal fourth quarter. Overall, we reported a loss of $0.07 per share from continuing operations, compared with $0.54 of diluted earnings per share from continuing operations in the prior-year quarter. The decrease from prior year is principally driven by a substantial noncash charge related to the year-end remeasurement of pension amounts. I'll provide some additional comments on this pension charge when I discuss comparability items. After adjusting for this charge and other items impacting comparability, diluted EPS from continuing operations for the fiscal fourth quarter was $0.52, slightly better than we had planned and modestly below the $0.55 in the year-ago period. As a reminder, the prior fiscal year and fourth quarter included an additional week which added roughly $0.04 per share to the EPS base. In our Consumer Foods segment, net sales were approximately $1.7 billion for the quarter, down about 12% from the year-ago period. We estimate that the extra week impacted Consumer Foods sales and volume by approximately 7%. After adjusting for the benefit of the extra week in the prior year, net sales declined 5%, reflecting a 4% decline in volume, flat price mix and a negative 1% impact from foreign exchange. Segment operating profit adjusted for items impacting comparability was $290 million in the fourth quarter, versus $324 million in the year-ago quarter. The decline in comparable earnings reflects lower volumes, including the impact of the extra week in the year-ago quarter and a negative FX impact of about 2%, partially offset by lower SG&A. For the fiscal fourth quarter, operating margin, adjusted for items impacting comparability, expanded modestly, driven by a slightly larger increase in gross margins. While the year-over-year comparable margin expansion slowed this quarter, we note that the FY '15 fourth quarter delivered very strong margin expansion and during that quarter, we began to see the impacts from our margin expansion efforts. For the full year, operating margins, adjusted for items impacting comparability, expanded over 180 basis points reflecting pricing discipline, mix management, supply chain efficiencies and favorable input costs, offset by higher marketing and incentive costs. On marketing, Consumer Foods advertising and promotion expense for the quarter was $64 million, up about 8% from the prior-year quarter, reflecting our efforts to continue to strengthen and support our brands. Foreign exchange this fiscal quarter had negative impacts of $15 million on net sales and about $7 million on operating profit. In our Commercial Foods segment, net sales were approximately $1.1 billion or about 6% below the prior-year quarter, principally reflecting the impact of the extra week in the year-ago period. The Commercial Foods segment's operating profit, adjusted for items impacting comparability, was $151 million, versus $154 million in the year-ago quarter. The decrease reflects the impact of the extra week in the prior year and higher incentives expense, partially offset by good sales and margin performance in our Lamb Weston business. Equity method investment earnings were $31 million for the current quarter and $30 million in the year-ago period. Moving on to corporate expenses, for the quarter, corporate expenses were approximately $414 million. Adjusting for items impacting comparability, corporate expenses were $62 million, in line with the year-ago quarter, reflecting benefits from our cost savings efforts, offset by higher incentives expense. On our SG&A cost savings initiatives, we're making good progress and we expect to realize the majority of our $200 million of SG&A cost savings over the next two years. Further, as I have previously noted, the benefit of our previously announced cost savings programs are concentrated in our Consumer business and we have developed aggressive targets and plans so that we can both offset modest stranded costs as they arise and selectively invest back into the business to build capabilities that will expand operating margins over time. Discontinued operations posted diluted EPS of $0.34 in the fourth quarter. Substantially all of the earnings relate to a $147-million tax benefit associated with the recognition of a portion of the capital loss carry forward asset resulting from the sale of the Private Label operations earlier this year. We expect to utilize the $147 million of capital loss asset to offset substantially all of the tax liabilities related to the recently announced divestitures of our Spicetec Flavors & Seasonings business and our JM Swank business which are expected to be completed during the first quarter of FY '17. On comparability items, this quarter included several items as follows. First, we had approximately $0.49 per diluted share of net expense related to the year-end remeasurement of pension amounts. This charge is related to the accounting change we made several years ago whereby we elected to immediately recognize significant actuarial gains and losses in our P&L rather than amortize them over time. The non-cash charge this year is driven by the drop in interest rates and therefore our discount rate and some lower returns on investments over the short term. Importantly, we remain comfortable with our current funding levels. In addition to this item, we also had approximately $0.07 per diluted share of net expense related to an impairment charge for our Chef Boyardee brand, driven by our plans to improve the quality of the volume base which we expect to result in lower net sales over the near term. Next, we had approximately $0.04 per diluted share of net expense related to restructuring costs and costs related to the previously announced planned spinoff of Lamb Weston. We also had approximately $0.03 per diluted share of net gain related to the mark-to-market impact of derivatives used to hedge input costs, temporarily classified in unallocated corporate expense. Finally, we had several smaller items, including approximately $0.01 per diluted share of expense for recent developments in a legacy legal matter, approximately $0.01 per diluted share of benefit from selling certain assets within the Commercial Foods segment, approximately $0.01 per diluted share expense for adjustments to prior-year tax credits and about $0.01 of rounding. On cash flow, capital and balance sheet items, we ended the quarter with $835 million of cash on hand and no outstanding commercial paper borrowings. Operating cash flows from continuing operations for FY '16 were approximately $1.05 billion, versus $1.22 billion in the year-ago quarter. The decrease is driven principally by higher tax payments in the current fiscal year. On capital expenditures, for the quarter, we had capital expenditures of $150 million, versus $103 million in the prior-year quarter. Net interest expense was $61 million in the fiscal fourth quarter, versus $88 million in the year-ago quarter and dividends for this fiscal quarter were $109 million, versus $107 million in the prior-year quarter. On capital allocation, 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 investments. For the year, we repaid approximately $2.5 billion of debt, mainly from the proceeds from the sale of the Private Label operations earlier this year. During the fiscal fourth quarter, we did not repurchase any shares and we have approximately $132 million remaining on our existing share repurchase authorization. Also, the Company recently announced agreements to sell its Spicetec Flavors & Seasonings business and the JM Swank business, each of which is part of the Commercial Foods segment. The transactions are expected to generate combined proceeds of approximately $480 million and both transactions are expected to close during the fiscal first quarter of 2017. As previously noted, we plan to utilize approximately $147 million of our capital loss carryforwards to substantially eliminate taxes that would otherwise be payable in connection with these sales. Also, the remaining capital loss of approximately $3.6 billion pretax or $1.4 billion after tax, is available to offset capital gains over the next five years. We remain confident that the Company will be able to realize significant tax benefits in the future as we work to reshape our portfolio in a disciplined manner. These proceeds are expected to be utilized as part of our broader balanced capital allocation plan. Now, I'd like to provide a few comments on our outlook for FY '17. First of all, given the pending Lamb Weston spinoff, we're not in position today to provide EPS guidance for the full fiscal year. As we have noted, we believe our Investor Days will be the proper form ever forum to provide both FY '17 and long term guidance for both companies. Further, on the timing of the spinoff, we're on schedule to complete the spin this fall. We expect to file a Form 10 over the next couple of weeks and once we get further into the Form 10 process later this summer, we expect to be in a position to provide dates for our Investor Days. For FY '17, while we're not in a position to provide full-year EPS guidance, I would note the following. For Q1 FY '17, we expect EPS growth to be in the mid to high teens from our earnings base of $0.41, driven by continued focus on margin management across both our Consumer Foods and Commercial Foods segments, continued strong top-line performance in our Commercial Foods segment, increased benefits from our cost savings programs and lower interest costs. We will also continue to invest in capabilities to strengthen and position our brands for stronger growth over the long term. Overall we expect the positive trends from our FY '16 to continue into FY '17. We look forward to building out our long term expectations at our Investor Days, at which time, we can provide more details about portfolio segmentation and expectations for top-line growth, margin expansion, capital allocation of financial policies, phasing of our SG&A and trade efficiency benefits, brand investment targets, as well as the short term impacts of any stranded costs associated with the planned Lamb Weston spinoff. In closing, we're pleased with our FY '16 performance and the changes we were able to execute to improve the long term health of the Company. We still have a lot of work to do, but we're confident we're taking the right actions to drive attractive value creation over time. That concludes our formal remarks. Before I turn it back over to Sean, I just wanted to briefly address my pending retirement. I'm excited to begin the next phase of my life and am looking forward to the opportunity to allocate more time to my family and interests outside of business. I'm equally excited, though, about the future of this Company. I've enjoyed seeing new Team come together under Sean's leadership and I'm confident that the Company is on the right track. It's been a privilege to work at ConAgra Foods for the past 14-plus years and to have served as its CFO for the last 7.5. Lastly, I will miss the relationships I've developed with many of you in the analyst and investor community over the years and I appreciate your interest in the Company and the insights and questions you've shared over the years. Now, let me turn it back over to Sean.

Thanks, John. Before we turn things over to the Q&A section, I'd just like to say how grateful we're for John's many years of distinguished service to our Company. Johns has been an outstanding CFO, leader and friend and John, we wish you the very best of luck in your next chapter. With that, Operator, let's move to the Q&A please.

[Operator Instructions]. Our first question today will come from Andrew Lazar with Barclays Capital.

One of the key strategies you've embarked on is the Consumer segment de-emphasizing the non-investment grade volume in favor of margins and returns and we've seen that obviously manifest itself on the top line with lower volumes but higher price mix. So I was a little surprised to see that price mix in the quarter was flat despite the more significant volume decline in the quarter, so was there any specific reason I guess discrete this quarter that we didn't see more of that come through and then in the forward-looking commentary for the first quarter, price mix was one of the things listed that was expected to be a positive contributor so maybe what's expected to drive that improvement sequentially versus what the pricing that did not come through in the fourth quarter?

Let me just kind of set the background on price mix. We think about pricing in terms of three components, the first is inflation justified, the second, proven by trade productivity and the third pricing in conjunction with brand and quality upgrades that we made. When you look at Q4 there are several things that are affecting price mix in the quarter. Our pricing activities are focused on how do we increase our overall margin which we did in the quarter. So in terms of inflation justified pricing we're being more disciplined and timely in pricing for commodity changes both up and down. As you know the vast majority of our brands are not in pass through categories but there are a categories that tend to be pass-through and one of those is fresh meat and in Q4 we saw protein deflation that we pass through on brands like Hebrew National and Odom's Tennessee Pride. So that was a deflationary, we built our overall margins. We continue to make progress on the second piece in terms of our trade productivity, we've committed to $100 million of productivity savings that's going to show itself up into additional gross margin which we saw in the quarter. You see it in the measured results we're making progress in lowering our percent on deal and you'll continue to see positive impact of that forward. And then finally when we restage a brand like Banquet which we’ve talked about we'll increase our price with those product upgrades. In this quarter we also launched a line of organic Healthy Choice steamers at premium pricing so that was a positive contributor. So what you see overall is the impact of this pricing end market, higher average price, lower promoted volumes and importantly a healthier more profitable non-promoted base. So overtime I think what you can expect is that our pricing margins will move up while there may be some quarter on quarter variations.

We'll move now to Ken Goldman with JPMorgan.

One quick one and then if I can sneak that one in then my more fundamental question. John, are you planning on sticking around until the next CFO has been identified? I was a bit confused because your comments today seem to suggest you may be departing a bit sooner than that? A – John Gehring: No, I will be here and I will work with the new CFO when he or she comes on Board and we will have a very full transition process so there will be plenty of overlap.

And then I guess my question is this in terms of the consumer segment margin -- I realize you were up -- you talked about some of this and I realized you were up against a tougher comparison in the fourth quarter but if we go back even if we look at a two year basis the pace of margin improvement did slow fairly meaningfully from Q3 and you talked about certain things like FX, but you also did just mention cheaper meat which usually is a tail-wind for margins. So I'm just curious if you could really help us sort of bucket some of those margin headwinds you faced in the quarter and which of these you think will stick around into 1Q perhaps?

So just for background, expanding margins is a foundation of building stronger brands and accelerating our growth in the future and that's an ongoing continuous process. As we talked about there's a lot of components in terms of margin, there's certainly the pricing components, there's the productivity component, there's improvement in mix and then margin growth through renovation and innovation. So only the first really inflation justified pricing is only one component of margin but we did see some deflation of protein. In light of that we did see overall gross margins expand from the other component of our plan, particularly productivity lower commodities. I think you see end market our average price per unit is increasing and our margins were up as a result of this holistic approach. Over time our margins are going to grow, there's going to be quarter on quarter variations but we're committed to continue to drive a holistic approach to the margin expansion. A – Sean Connolly: I think one of the keys is as we pursue margin expansion we pursue higher quality volume base. We're not going to get overly exercised about some variability from quarter to quarter because every quarter has got a bit of a different story to it whether it's wrap, whether it's seasonality, whether it's the mix of products that we've got moving through it. The fact of the matter is our absolute margins and consumer continue to be in a significantly improved position versus where they've been historically and that's because of the discipline that we're driving and you know we're going to continue to drive that discipline here in the next couple of quarters because we've got a [indiscernible] out of our base some behaviors that we're not adding to value. So you're going to continue to see as we've talked before we want to see the center line of our profitability move north over time. There may be some variability around that quarter to quarter based on the dynamics of the quarter we're in but our goal is to drive the center line north over time and reduce the standard deviation around that center line and we continue to feel excellent about kind of the progress we're making in the path we're on.

Matthew Grainger with Morgan Stanley has our next question.

This is John calling in for Matt. There has been some recent speculation around the potential for Lamb Weston to potentially be sold rather than spun. Without commenting on any specific transactions can you just address whether you're still open to potential alternative transactions for that specific asset and is there anything that you would lead -- would there be anything that would rule out you leading – would there be anything that would rule out you divesting the business at this stage rather than spinning it off? A – Sean Connolly: Well I appreciate you not asking to comment on rumor or speculation because we wouldn't be able to do that but I will reiterate that we're and we have been focused squarely focused on value maximization. We remain highly confident that our planned spin does the best job of meeting that objective. I've also said that many times that if something real and clearly superior were to emerge we would be open minded but the fact is we feel great about the spin and have all of our energy focused on executing that with excellence.

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

Looking at the Commercial Foods segment, a little bit of a deceleration at the top line and just a couple of questions within that, first, you’re broadly kind of what's going on pricing versus volume in that and regionally if there's any other special details in there and secondly, it looks like you sold about 11% of the annual revenues of that business and these two transactions, was there anything outsized in those two businesses that presumably were part of that base and won't be going forward that may be affected that top line trend in commercial this quarter. Thanks very much and congratulations, John. A – Tom Werner: This is Tom Werner. Commercial Foods, the fundamentals of the business remain intact and I think your deceleration question is referring to Q3 to Q4 I'm assuming. If you remember in Q3, this year, we were lapping the port impact from prior year and that was significant volume and sales contributor to Q3 no question about it. On a comparable basis, in Q4 total commercial, we saw modest single digit low single digit growth volume and sales and the business fundamentally are in good shape going forward, feel really good about the growth prospects.

And anything specific about the businesses you sold trend wise versus the business you're keeping? A – Tom Werner: No, they performed really well in FY '16. You know and as Sean mentioned we feel excited about their path going forward with their new owners.

We'll move now to Bryan Spillane with Bank of America.

Two quick ones for me first, the Form 10 now going to be filed in Mid July, John can you just -- I think previously you were thinking about late Spring so can you just give us some color in terms of why it's taking a little longer to file it? A – John Gehring: I think that it's just the process of going through all of the carve out financial statements and as I'm sure you're familiar with 410s there's a lot of comprehensive information that has to be gathered at a much different level of detail that is just taking a little bit longer. So I don't think there's anything significant there. We feel good about the timetable. Obviously, there's a significant SEC review process that probably adds some variability to the time as we go forward but as I indicated, I think we're going to monitor that process closely and then like I said by the end of the Summer we should have a better opportunity to bracket precise timing on the close as well as the Investor Day, but nothing significant other than just the volume work required to get the document put together.

And then just the second one in terms of the $300 million of targeted savings, can you just give us a sense just how much you've already realized maybe what was in the quarter and how much you've realized so far to date? A – John Gehring: I'd say for the year for fiscal 16 I think we were something north of $50 million, might be a little bit more than that and then as obviously as we’ve said as we get into fiscal '17 and '18 we would expect to see and again I'm speaking right now the $200 million of SG&A. So we would expect to see the lion share of the SG&A in '17 and '18. I would tell you we would expect to see some ramp up in SG&A savings as we go through FY '17 because as we enter the year we still have some duplicate costs as people transition in new jobs and people transition out of the same jobs, for instance. So I think we feel good about the lion share of that going forward and then on the trade phasing I might ask Tom or Sean to comment briefly on any significant insights there. A – Sean Connolly: Sure, our process in terms of trade spending is going to be a perpetual process of using advanced analytics to measure, learn and improve our spending. Certainly over the course of this fiscal year we've made fairly significant improvement and you'll continue to see those in the upcoming periods.

We'll move now to Citigroup's David Driscoll.

Just a couple of details and then a question for you, Sean. Just wanted to know, could you quantify what the benefit from lower input cost was in the quarter? And then is there any concern just about comping that next year? And then in the guidance, the double-digit number -- apologies guys, maybe you don't want to answer this -- but is that like 10% to 12% or does that mean 10% to 15%? I just don't know what the double digit means or how to appropriately deal with that for the Q1 guidance. And then Sean, the big picture question for you is, clearly, your enthusiasm is loud and clear. The volume losses, though, from an outside perspective, they do sometimes worry us and I'm just concerned about shelf space losses and does it mean that you have to put in a sizeable marketing investment to start to moderate these things in FY '17 and FY '18. Thank you.

I was trying to write all that down, so I may miss something here. But let me start with the Q1 FY '17 double digits. As I clarified in my script, we're looking at that to be in the mid to upper teens. I recognize that double digits probably means anything from 10 to 99, so I think if you think in terms of mid to upper teens, that's probably the range that would help you tighten up that range. I think you asked a question about deflation in the quarter. I'd say it was fairly modest. I don't have the number off the top of my head, but commodities probably showed a little bit of favorability. Our conversion costs were probably up a little bit. As we look forward to FY '17, I would say we probably are looking at continued benign commodity markets as we sit here today, that probably means we may still have some modest inflation just because we're coming off such a low base of commodities, but overall, we feel pretty good about the commodity inputs for FY '17 as well as our -- we'll have some conversion cost inflation which is not the majority of our COGS. But the important thing is, to the extent we have inflation or commodity moves, I think as Tom has indicated and Sean has certainly indicated, our muscles and our capabilities around pricing and expanding margins in the face of either increasing or decreasing margins is much better than it was even a few years ago. So I think the whole margin management capability and the holistic capability for us to manage margins higher as commodities move around is much stronger.

David, let me address the point you're making out of volume because I think this is a critical point. First of all, if you look at our overall story in Consumer, as I've said many times, we've got to remember this is a transformation we're undergoing here, not a flip of the switch. And on volume in particular, the bottom line is this. It is an undeniable fact that our past promotional practices have embedded in our volume base a group of consumers who are not brand loyal, who only buy on hot deals and who contribute virtually nothing to our profitability. It's also true that by catering to them, we have underserved the bulk of our volume base and these are consumers who would be willing to pay more for more contemporary, higher-quality offerings. The good news here around this whole dynamic is that it's reversible if we're willing to stick to our principles around optimizing mix and also refreshing the targeted brands for a new day. No one said this was going to be easy, but it is absolutely the right way to manage a branded asset for value creation. We know from years of experience what the alternative gets us and that's precisely why we do not get spooked when we see volumes pull back and margins expand. It's exactly what we expect [indiscernible]. In fact, I think in Q4, the volume backoff in Consumer was in the ballpark of 3.7% which frankly, in the scheme of what we're trying to do of purging some of these really bad deep-discount promotional behaviors, is frankly small in my mind. So that is a key point. The end game here is obviously what we're all about which is stronger brands, better innovation, better margins and ultimately, stronger growth and shareholder returns. And recall in the last year, we recruited a new Chief Growth Officer to run our Growth Center of Excellence and he is quite busy installing new work processes and raising our overall capability in this area. I'm looking forward to sharing some of these updates with you guys at Investor Day, but overall, I am quite optimistic around what the Growth Center of Excellence in partnership with our brands will be able to accomplish in this portfolio. In the meantime, we will absolutely let some of this non-investment-grade volume go and we will happily take the associated margin expansion.

We'll move next to David Palmer with RBC Capital Markets.

Really following up on that, you mentioned the $100 million opportunity in promotion and spending and efficiency. How much did ConAgra decrease in its promotion spending in FY '16 and how, specifically, did the Company achieve this? Was this predominantly in frozen entrees and done in conjunction with SKU rationalization? And I have a follow-up.

Let me make one general comment and I'll turn it over to Tom to give you some specific comments. ConAgra historically has probably been the least disciplined Company in our space with respect to taking pricing when it's justified, but also we've probably been the most over reliant in terms of deep discount trade and we clearly need to undo that. But what I find interesting is you really see that in the scanner data right now. If you look at the percent of our total volume base sold on deal past 52 weeks, past 26, past 12 and past four, you see sequential reductions in percent of our volumes sold on deal, to the point where we've gone from being one of the most over promoted companies in our is space to one of the leaders and obviously, as we do that we're going to see volume impact, we're going to see efficiency, but we're also going to have to reinvest behind the brands in other ways which is what we've done this year as you look at our A&P spend and increase year on year, but with respect to the $100-million program that you're talking about, like the SG&A program, it will build sequentially across 2016, 2017 and 2018 and a big part of that is because we're getting our sea legs. We're going from being fairly rough around the edges so to speak in terms of our capabilities here to much more system-based, much more analytical and once you develop the database on what's working, what's not, it's that virtuous cycle you improve on it. So small amount of improvement in this past year, ramping up this year and continuing to ramp up through 2018. I miss anything there Tom?

I think what I would add is we talk about $100 million of productivity improvement. That's likely going to come through margin expansion and not necessarily lower spending. This is not simply about cutting trade spending. It's about using advanced analytics to develop programs that have higher impact and better returns for both ourselves and our customers. So we measure our progress in terms of margin expansion and not so much in terms of the absolute amount of money we spend on trade.

And my follow-up on that is it strikes me this reminds me a little of Kraft Heinz where it looked like you are building capabilities at the same time you're ripping off band-aids that are more obvious opportunities but perhaps have volume consequences. So in other words, perhaps going forward, you think you might be smarter at shifting trade promotions into the better ones, whereas earlier on, this had to do a little bit with just cutting unprofitable volume and taking that hit. Is that a fair characterization of what's going on?

There should be a mix shift over time, certainly, but let me just address something that somebody may have mentioned before and perhaps we didn't hit it, but it comes up on every call and I just want to address it head on which is should you guys expect a rebase from us in terms of A&P spend as we back off trade and things like that and I just don't see a rebase in front of us. We're a year into our game plan. We're making progress. We're going to keep working at the fundamentals here because we feel really good about what we're seeing. We certainly have more to do, but it's not like we're in inning one and we need to double down and wildly ratchet up our A&P in a sudden way. I just don't see that for us. We're going to do this in a thoughtful, analytical, disciplined way and if there's a migration, it will be an orderly migration.

Our next question comes from Akshay Jagdale with Jefferies.

Just two questions, first one is for Sean and the other is for John. But this first question is bigger picture in terms of your portfolio segmentation process, Sean. I know you are not ready to give us all of the details of what's going to happen, but can you just give us some insights on where you are timing-wise in that process and the only evidence we have seen as a function of that process is you decided to fix Banquet. You're selling some ancillary brands or businesses that you have. So those are the biggest things we see so far. Is that a fair assessment? And so just can you give us some insights into timing and where you are really in the process and maybe big buckets in which we should think about your portfolio, like fix, sell, ready for A&P and so on and so forth, anything that would be helpful and then for John, just on the business that you just sold, the Spicetec business, I believe you said it was $470 million in sales. There was some pretty vague commentary on profitability. If you could give us some insights into how much the EBIT was that you're losing from that, that would be very helpful. Thanks.

Let me touch on portfolio segmentation. First of all, we will go deep on that with our investors at Investor Day and we'll have Darren Serrao literally walk through how we went about the process, because if you look at our branded portfolio, we have roughly 50 brands and unlike the old days, we're not going to take a first-horse-to-the-trough approach to resources around here on those 50 brands. We will be very disciplined around the roles each of those brands play in creating value. The simplest way to think about it is, first, we look at where do we compete in categories that are fundamentally healthy and growing and within those categories, do we have brands that are proven and strong competitors? If you'll see those markers, those are obviously places, especially assuming if you've got a good margin structure, where you're going to get a good return on A&P investment, so those become priorities in terms of renovating the brand, innovating the brand and supporting the brand. In other cases, we find we've got categories where perhaps the format has changed and it has shifted, but we still have perhaps the leading trademark with respect to the product, but we haven't moved into adjacencies or updated formats with the category. That's a simple innovation opportunity that is existing because, frankly, we're just not minding the shop. There are other businesses where we have historically invested in innovation and growth, but that shouldn't be the role of those businesses. Those businesses are major cash contributors. They are in mature categories. They have excellent margin and cash flow and we need to manage them for that because if we do that, that will provide fuel to really unlock all of the potential in the higher-growth categories. And then as we'll look at the portfolio, there may be one or two things we say, gee, we don't necessarily love the category. We don't necessarily have the answer in terms of what to do with these businesses. Maybe it's more valuable to somebody else than it is to us and if we find those, we've got this capital loss carryforward that's an asset that we've got here for roughly the next five years. So it will be a holistic approach to improving the businesses we have, optimizing the mix within our portfolio and also, if we see something on the outside that would be complementary to our portfolio, enable us to refresh our portfolio, especially in the areas of premium, gourmet organic, natural, that could be a good enhancement and addition to our portfolio. We did Blake's last year. That was a small one, but it's the right kind of stuff to really round out our portfolio and capitalize on our manufacturing assets and capabilities.

And on the businesses we sold, we're not in position today to disclose the EBIT on those businesses. What I would say is your sales are right. $470 million will come out on an annualized basis roughly. The proceeds were $480 million and I would tell you that the divestitures will be very modestly dilutive.

Deutsche Bank's Mario Contreras has our next question.

I just wanted to focus in on the Banquet brand. So for the last couple of quarters, that's obviously been a volume headwind, although it sounds like it's been relatively in line with your expectations. Has there been any sequential improvement this quarter versus what you saw last quarter? Are consumers getting any more used to the change in the promoted price point strategy? And then on top of that, I think in conjunction with this activity, there's been some price increases related to quality changes, so is there any way to parse out what the response has been to those actions in particular? And then just building on top of that, if there's any learnings you can take from that and apply to other brands that may be undergoing this type of strategy going forward?

This is Tom McGough. In terms of Banquet, it's been a very consistent and reliable contributor to profits over time and what we've done is we've looked at ways to invest to sustain that. And there are two things going on. As you mentioned, we took an everyday price increase getting off a decades-long price point of $1 and at the same time, we've eliminated discounts that took that price well below $1 at times. We're essentially just a couple quarters into the migration. I think it's important to highlight is that we made product quality improvements in conjunction with the pricing. What we're seeing from a consumer standpoint is that there are certainly households that bought Banquet because of the tremendous price value. We anticipated that we would lose some of those households. What we're beginning to see in the data is that the product quality upgrades are beginning to improve our repeat. So over time, we're going to see a business that our repeat purchase rate, our purchase frequency builds. But we're starting from a base of decades of $1 pricing and it is going to take several -- it will take time for us to rebuild business. What we do know is that we've significantly improved the margins of the business that have allowed us to invest.

We'll move now to Alexia Howard with Bernstein.

Can I ask about the innovation priorities? You've talked about increasing advertising spending and I'd love to hear maybe a little bit more about the advertising outlook, but in order to effectively advertise, obviously, innovation is the set of product messages you need to put out there. You mentioned product upgrades just now. Are there any specific additional factors or priorities within the innovation pipeline that you're focused on at the moment? Thank you and I'll pass it on.

Yes, innovation, obviously, is going to be a centerpiece of what our new Growth Center of Excellence is focused on and partnering with Tom's Team on and as you think about ConAgra with respect to innovation, I think you should anticipate that we will run the gamut from necessary renovation and even some of the stuff we've done this past year where we've updated the package designs for the first time literally since the 80s. That's basic renovation stuff. It's not going to set the world on fire, but it is critically important to present our brands in a way that they look like they're from the modern era, but then we're also working on bolder innovations. As an example, last year we conducted a test market of a new product called Wicked Kitchen in the Southeast and we learned a tremendous amount and there were some really exciting things there. So the Innovation Team is working on refreshing Wicked Kitchen and we'll show the market what that's going to look like when we do our Investor Day along with some other things. In terms of the kinds of benefits that you should anticipate we'll bring, well, it will be across the board and it will be in line with consumer trends, whether it's global flavor adventure, convenience, things like that. But in general, where we under index in our portfolio the most is really in, as I've talked about, the premium gourmet and then the natural organic and by not really tapping into those consumers, we're missing incremental sales and profit opportunities. Number one, they tend to be higher dollar range. Number two, they are totally incremental to a lot of the businesses we already have in terms of benefit. And number three, in most cases, we use our existing asset base, so it's very economically efficient. So we've got a full suite of things and we'll share a lot of this with you in the months and quarters ahead. One of the reasons we've been incredibly focused and aggressive on cost is because, frankly, it takes longer to rebuild your insight pipeline and rebuild your innovation pipeline. So we've jumped all over cost. We moved aggressively knowing that it takes some time to get the branded side of the innovation pipeline rebuilt. But that work has been behind the scenes, aggressively under way and we've got some really exciting stuff coming. You saw some of it, early stuff, this past year with things like Healthy Choice Simply which is a clean label line there that's done really well for us and some other things, but that's just the beginning; there's plenty more to come.

We'll move to Robert Moskow with Credit Suisse.

A question for Tom and Sean on the $100-million savings for trade promotion, I've talked to a lot of companies that are focusing on the same kind of effort and a lot of them have been a little bit concerned about making that dollar value target so public as you have. And Sean, I remember you did that with Hillshire as well. And I was wondering, in your relationships with retailers, has there been any negative pushback on the $100 million just in terms of people getting the wrong idea, feeling like the money is coming out of their pocket or have they at all said what's our cut of savings that you're going to be generating? How do we benefit from it? Wondering what you thought.

Rob, that's an excellent question and it's a very important question. I think I may have talked about this at CAGNY. When you talk about trade efficiency with customers -- I may have mentioned this on the last call and I think I used the phrase you have to have a good bedside manner because you have to be very explicit around what we're talking about and what we're not talking about. When you walk into a buyer's desk and you say, I'm ripping out trade and taking it to my bottom line, as you might imagine, that is not the most desirable bedside manner and it doesn't go really well and that is not the conversation we're having. It is we can think of it in terms of $100 million in EBIT improvement and certainly, there may be some trade deals that are just so stupid and in efficient, we just eliminate them lock, stock and barrel. However, in other cases, because of the advanced analytics we're investing in, what we're doing with most of our customers is saying look, here are some case studies of where we spend chunks of money with you. Let's look at the empirical evidence together. It's clearly generating a nonexistent or anemic return. Alternatively, here is some things we can do that can generate a positive return and drive your top line and drive your bottom line. And when we're database and can bring in the evidence around the deals that aren't working and also the evidence of the deals that are working and say we're doing less of the former and more of the latter, we find we have a very engaged customer, because at the end of the day, as tough as growth has been in this industry for manufacturers, it's been the same way for retailers. Everybody is looking for profitable growth. And if we can bring intellectual capital to the table that can help not only our situation but our customers' P&L, that's a conversation that's well received.

We have time for one more question.

Thank you. And our final question today will come from Chris Growe with Stifel.

I just have two quick ones for you. The first one will just be -- and I know there's been a general discussion about the gross margin, but it was weaker than I expected in the quarter. And as I think about supply chain savings and favorable input costs, I was surprised by the softer performance. And what I'm getting, at as I look ahead, there's a couple million dollars of cost savings coming through, but they're mostly SG&A focused. So I wanted to get a sense of the gross margin improvement, say, from like the average level over the past few quarters. Should we expect that to improve in FY '17? And then to the degree that's a fuel for reinvestment, I know you don't want to get into phasing of savings here, but just the degree to which -- like marketing should start accelerating early in FY '17 or is that likely to happen later in the year? Just trying to get a sense of when and where you'll invest.

Chris, in terms of margins, as I highlighted a little bit earlier, it's a multi-dimensional approach, revenue, gross management that we talked extensively about today, the mix management, also supply chain productivity network optimization. What you're going to see over time is a gradual and consistent increase of our margin that will allow us to continue to invest in our brands. That's our overall approach. I think there's a long runway of opportunity. We certainly talked about the $100 million in terms of the revenue growth piece in terms of trade. We have a very consistent history of supply chain productivity and we're adding additional programs and initiatives to bolster our capabilities. In terms of A&P, as Sean said, we take a very disciplined and strategic approach with an ROI to investment. I don't think we have a targeted level of A&P in general for the portfolio. It's brand by brand and you can see where we've made those investments and the market impact that's having. That's what I think you can expect going forward is a zero-based approach where A&P is not an entitlement; it's earned. And we're strengthening our portfolio in a way that allows us to invest in more brands.

All right, operator. I think that will do it.

Thank you. 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 available and archived on the web as detailed in our news release. We're available for discussions. Thank you for your interest in ConAgra.

This concludes today's ConAgra Foods fourth quarter earnings conference call. Thank you again for attending and have a good day.