Good morning, and welcome to the ConAgra Brands Third Quarter Fiscal Year 2018 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 this event is being recorded. At this time, I would like to turn the conference over to Brian Kearney, Senior Director of Investor Relations. Please go ahead sir.

Good morning, everyone. During today's remarks, we will make some forward-looking statements. While we are making those statements in good faith and we are confident about the Company's direction, we do not have any guarantee about the results that we will achieve. So, if you would like to learn more about the risks and factors that could influence and impact our expected results, perhaps materially, we 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. References to adjusted items including organic net sales refer to measures that exclude items impacting comparability. Please see the press release for additional information on our comparability items. The reconciliations of those adjusted measures to the most directly comparable GAAP measures for Regulation G compliance can be found in either of the earnings press release or in the earnings slides, both of which can be found on our website at ConAgrabrands.com/investor-relations. Now, I'll turn it over to Sean.

Thanks, Brian. Good morning everyone, and thank you for joining our third quarter fiscal 2018 earnings conference call. We continued to make solid progress on our transformation plan during the quarter. Our primary focus this fiscal year has been on the top-line and we are particularly pleased with our momentum on this front as underlying sales trends, notably consumption continue to strengthen across our domestic retail segments. The investments we are making behind our brands to drive enhanced saliency, distribution and consumer trial are having the intended impact. These investments were largely above the line this quarter and consistent with our strategy to partner with retailers to acquaint our consumer base with our modernized brands and new innovation. The timing of these increased investments converged with greater than expected inflation in the quarter including higher transportation costs, as well as higher than expected reductions in retail customer inventories. Combined, these factors created near-term pressure on our gross margin despite the fact that we continue to price ahead of our categories. Our M&A activity continued this quarter. We were very disappointed in the Federal Trade Commission’s decision on the proposed Wesson sale and we are continuing to review Wesson’s role in the portfolio. But, we kept our M&A momentum nonetheless. Our solid performance has enabled us to raise our full year adjusted EPS guidance range. As a reminder, the guidance we most recently provided at CAGNY already accounted for the impact of the tax law changes. Today’s incremental increase is based on our underlying performance. Even without the aid of Tax Reform, we would still exceed the high-end of our original guidance range driven by a strong top-line. As you can imagine, this is very satisfying, particularly in a far more onerous inflationary environment than we planned for. At our inaugural…

Thank you, Sean. Good morning everyone. Slide 34, outlines our financial performance for the third quarter versus the prior year. I’ll walk through our results at the total company and segment levels and you are going to hear some themes. First, our investments to drive the top-line are working. While the third quarter organic net sales were negatively impacted by hurricane-related timing shifts between the second and third quarters, as well as some unexpected customer inventory contractions in the third quarter, we see continued net sales progress. Our value over volume strategy and product innovation are working. Second, gross profit was impacted by several factors this quarter including our intentional choices on how to invest in the top-line. We continued to focus our brand building activity on above the line marketing investments with retailers and we reduced A&P investments. This impacted gross margin. We also saw challenges on the cost side. Our core productivity programs continue to deliver. But their benefits were more than offset by significant input cost inflation in the quarter including transportation. Since we don’t provide gross margin results at the segment level, you’ll see this flow through to operating margin in the segment performance. Also, the Grocery and Snacks segment experienced some transitory operating costs that impacted operating profit and margin. While the quarter presented a variety of dynamics to work through the teams stayed focused on fundamentals and as you can see, we’ve reconfirmed our net sales guidance and increased our EPS outlook for the year. So let’s dig into the details. Reported net sales for the third quarter were up 0.7% while organic net sales were down 2.2% reflecting timing shifts in sales between the second and third quarters and overall customer inventories contracting more than anticipated around calendar year end. As Sean mentioned,…

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

Good morning everybody.

Good morning, Andrew.

Good morning.

I guess my question is, given the broader industry trends we’ve seen on things like inventory destocking and the shift of dollars from SG&A to above the line as you’ve talked about, how confident are you that the expected retail consumption is acceleration in fiscal 4Q, I guess, can fully materialize into your reported sales, right, because you are looking for a pretty big step-up or for, I guess, for consumption to better match your reported sales in the fourth quarter.

Yes, Andrew, Sean here. I am very confident in that. The inventory destocking piece, there are two aspects to that. First of all, that we got to kind of separate. One is the hurricane which caused us to ship ahead of consumption in Q2 and reverse in Q3. The second was more of the unexpected decline in a handful of customer inventories near the end of the calendar year. I have seen that pattern before in my career numerous times. It tends to happen near the end of major customers’ fiscal years. In previous experience, it tends to almost always be transitory. So, I have no reason to believe that we are not going to see shipments and consumption converge. And then when you couple that with the fact that we’ve got very strong innovations in the marketplace today, our baseline velocities continue to improve and our total points of distribution continue to improve and the fact that we don’t have that much left to go in the balance of the fiscal year, we are very confident and really encouraged by the top-line expectations we have for the fourth quarter.

The next question will come from Bryan Spillane of Bank of America. Please go ahead.

Hey, good morning everyone.

Hi, Bryan, good morning.

I guess, I had a – just maybe a more philosophical question. As you are kind of looking out beyond 2018, this year you’ve had good success investing to drive the top-line and you’ve been able to sort of protect your margins. I guess, if you look at next year with tax reform maybe share repurchases, would you sort of look to continue to drive that spend to drive that top-line growth even if it might moderate operating profit growth given all the inflation and given that you’ve got some tailwinds below the line or would you think differently about that going into next year?

Okay, let me try to tackle that. I’m not going to get into any guidance-related stuff for next year at this point. But I think where you are getting at is, do I anticipate some kind of a material step-up in absolute total marketing spend going forward. Look, here is how I think about that. When it comes to total marketing spend at our company, we have – and we’ve talked about this repeatedly, a very strong ROI mindset, in fact, over the last few years, our marketing analytics around trade and A&P have improved dramatically. And that has enabled us on average to cut non-working dollars in both trade and A&P and redeploy them to better programs, be they above the line or below the line. It’s also enabled us on average to avoid the dreaded A&P rebase while we execute our transformation plan. So going forward, I think we are going to continue to find pockets of inefficiency in existing spend. And therefore, when the time comes to support incremental innovation in Snacks as an example, it won’t necessarily require incremental spend. Obviously, that may not be true in every single quarter, because we may have more spend in periods where we are in launch mode as I describe it. But I’d like to think that overall, our spend is in the ballpark, I think in general, we’ve done a pretty good job of that if you look at a significant body of time there may be variance in the quarter, but I think our overall spend is in the ballpark over a sustained period of time.

The next question will be from David Driscoll of Citi. Please go ahead.

Great, thank you and good morning.

Good morning.

My question is on the gross margins and retail pressures, so Sean, gross margins were down meaningfully in the quarter. There are certainly some management actions that are deliberate, but most of the pressure appears to be inflation-related. So, just two points here. First, how do you see gross margins going forward? Are you satisfied with this performance given the environment you are in? And then, separately, I would really appreciate it if you could give us some of your color to describe the retail environment and the ability of the ConAgra portfolio to achieve price realization in an inflationary environment?

Sure. Real quick upfront, David. As I mentioned in my prepared remarks, some of these transitory factors we are dealing with right now, we don’t expect them to have an impact on our longer-term margin outlook. But obviously, kind of the topic of the moment right now in our industry is inflation, productivity, pricing. So, let me tell you how I think about those things, big picture. I’ll start with inflation. Obviously, inflation happens, it is a fact of life and we view it as our job to navigate it as effectively as we possibly can to protect our margins. Productivity and pricing are two critical levers and we’ve got strong capabilities around each of those levers. That doesn’t mean that there won’t be short-term volatility, particularly when you are in a window where commodity inflation pivots from being benign to being acute as well as being in a window where you’re simultaneously investing to drive consumer trial of a very strong innovation slate. On productivity, the way I think about it is our team continues to do an excellent job executing on their projects in delivering strong gross productivity. As Dave pointed out though, there were some transitory offsets that suppressed what we call realized productivity in this quarter, but those won’t be reoccurring. Then when it comes to pricing, as you’ve seen over the past few years, we’ve been quite focused on liberating our brands from ultralow, legacy price points where our brands were stuck for decades. But principally, we think about pricing three ways. First, inflation-justified pricing, second, trade efficiency, and third, premium priced innovation which has been significant for our company as you saw in the CAGNY presentation. All three of these pricing tools have and all three will continue to play a role. And pricing isn’t easy. Frankly it never has been. I wouldn’t have all these white hairs if it was, but, it’s tough and it’s often complex. But as I think most of you know, we are partnering very, very closely with our customers these days and our customers are quite happy with the innovation programs that they are getting from ConAgra Brands and they understand that the fuel for those innovations comes from our margins. Now obviously, not every brand and every category is created equal, which is why we think about revenue management and integrated margin management broadly. But overall, I am confident that we will continue to move the centerline of our profitability north over time and then, simultaneously reduce the standard deviation around that centerline over time.

The next question will be from Akshay Jagdale of Jefferies. Please go ahead.

Good morning. Thanks for the question. Sean, I wanted to ask you about the sales growth acceleration. Isn’t that a leading indicator of the strength of your brand and the portfolio and longer-term, sort of the gross profit pool expansion, right. So, in other words, the sales growth acceleration that we are seeing from you and a lot of other peers in the industry shouldn’t that bode well for profit pool sort of growth over time and this cost increase is transitory. So, over time though, doesn’t the sales growth actually tell us that you should feel better about passing on these transitory costs? Thanks.

Well, obviously, Akshay, we believe in strong brands, because strong brands tend to equate with lower elasticities of demand, lower elasticities of demand tends to equate with greater ability to price for the desired impact. But I think it’s important to point out that brand strength is not a right, it has to be earned and there have been a lot of legacy brands in our industry that have weakened over time because they were neglected over time. We have worked incredibly hard to infuse modern attributes into our brands, so that we can reacquaint consumers with our brand and re-earn their respect and re-earn the credibility of those brands and we are doing it in a way that translating to higher price realization and over time will translate to higher margins. And it’s been our value over volume strategy where we pull the lot of the weak stuff out of the base. We’ve backed off on promotions and we’ve strengthened the fundamentals. So now, going forward, as we talked at CAGNY, when you think about the runway, we see in Frozen and then you think about at applying this playbook to other parts of the portfolio, yes, we believe it should translate to ongoing strength or long-term outlook calls for that. And that’s where we are going to stay focused on.

The next question will be from Chris Growe of Stifel. Please go ahead.

Hi, good morning.

Hi.

Just had – hi, just had a question around the cost inflation and productivity savings by division and not to get so exact, but if you think about what’s kind of your cost inflation versus productivity savings in Frozen versus Grocery and Snacks, are either one of those divisions better positioned around either one of those factors and maybe could require less pricing going forward, if you’ve got more offset – more kind of net productivity savings coming through? Thank you.

Yes, Chris, this is Dave. Let me – it’s a good question. There is a lot to this. So let me just start from the topic you look at gross margin, right, we are down 160 basis points, inflation was 250 basis points with a headwind and we also made the conscious decision to invest in above the line marketing with retailers which was 80 basis points. So, clearly, they were headwinds due to gross margin. From a productivity perspective, the gross productivity which in the first half was about 3.1% of cost of goods sold came in at that same level for the third quarter. So, when you convert that to a gross margin impact, that’s about 2% a little bit above. So, we are seeing that. The other thing that hit us were and I talked about some operational offset, some were transitory, some were not. I talked about ones that were transitory in terms of inventory write-offs and dynamics around that and in some plant maintenance and production dynamics. So, that was about 50 basis points in terms of what was transitory in the quarter for total company. When you kind of peel it out by segment, if you look at Frozen, the inflation for Refrigerated and Frozen and the inflation for Grocery and Snacks is about the same. It’s actually a little bit higher. Right now in Refrigerated and Frozen just because of the amount of proteins and the inflation that we’ve seen there. But we will start wrapping on that in the fourth quarter. So that won’t be as big of an impact. Transportation and freight, obviously affects us across our entire portfolio. And then from a productivity perspective, we are pretty balanced there. Maybe a little bit more in our Refrigerated and Frozen versus our Grocery and Snacks. So, our productivity is probably a little bit lower in Grocery and Snacks. That combined with the – these operational offsets that I talked about, that’s what had the bigger impact on operating profit in Grocery and Snacks for this particular quarter. So, that’s basically, in terms of inflation, we also have it in Foodservice, International as well. But there is the dynamic as you look at total and then you break it down by segment.

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

Thank you. So, in terms of this Grocery and Snacks division, on the price mix side, I know, obviously there – it seems like there, few more incremental investments that are now on marketing of other line, or within COGS relative to SG&A, but I am just trying to get a better sense of price mix in Q3 and what we saw, I know, I guess, you kind of point to this investments in brand saliency, et cetera. But, like, was there some additional promotional spend to push some of the innovation to get the distribution or I am just trying to get a sense as to why price mix would have decelerated sequentially, and then also why it should accelerate going forward? Thanks.

Let me take a shot at that, Rob. So, in terms of Grocery and Snacks, we talked about – we had a significant investment in above the line marketing with retailers. So I talked about 80 basis points for total company. More than half of that was in Grocery and Snacks. So, we are making those investments. There was some price mix benefit there, but that was more than offset by the additional investments we made with retailers. And these are – this is just not price discounting these investments that we are making. These are investments to improve merchandizing. Sean talked about it in his piece. So, we have significant investments in Grocery and Snacks. We also have the above the line marketing investments in Refrigerated and Frozen. But with our innovation now that that you’ve seen, we are starting to benefit from that component of pricing that Sean talked about which is based on innovation and margin-accretive innovation and the benefits that has on the price mix line. So, that’s why when you look at Refrigerated and Frozen, we are actually one percentage point favorable price mix because the benefits we are getting from the innovation are more than offsetting the investments we are making with retailers. So, making investments in both segments a little bit higher in Grocery and Snacks and we are not seeing as much of the innovation yet in Grocery and Snacks, but that will be more to come next year. Sean?

Rob, if I could just add one thing to that too. The other question is, what’s the impact to these investments above the line and as I mentioned in my prepared remarks, the impact has been very positive. Keep in mind, Grocery and Snacks is a space where we haven’t done a fraction of the material innovation yet that we’ve done in Frozen. So we’ve been making these investments to basically get a lot of our preexisting items back in front of consumers and get our consumers to retry them. And as you saw in the presentation today, our consumption has been quite strong and as importantly the non-promoted piece of that has actually been above what we expected. So, it’s working and I think that that suggests that we’ve got a solid foundation here to build off of as we move more of our innovation emphasis into this other reporting segment .

The next question will come from Matthew Grainger of Morgan Stanley. Please go ahead.

Good morning. Thanks for the question. I just wanted to get a better sense of how you are thinking about the freight cost outlook going forward and I guess, more specifically, does your inflation outlook take into account the potential for those costs to move higher again over the next quarter or two, which seems to be what we are hearing from some of the freight providers or do you see things as having reached more of a new normal? And then, follow-on, just proactively, what steps are you taking or can you take going forward in the supply chain to help mitigate that?

Matt, so, let me take a shot at that. So, yes, from the top, our inflation outlook of 3.7% for the year which hasn’t changed with this quarter incorporates our estimate of inflation for freight and transportation. So that’s in there. That’s in our fourth quarter estimate at this point in time. As you look at this more broadly, we have a really seasoned team here in our supply chain organization that manages transportation and freight and it’s an area that we look at every day. At the highest level, this comes down the basic supply and demand, right. If there is more demand to carry loads and there are drivers to carry that. So this creates a challenge. It really relies on our relationships with our carriers and our contracts that we have with them. So, when demand spike, we have to go into the spot market like other companies. And we are hiring spot markets than historical, but our overall spot market levels are lower than peers given our approach and the way that we manage this. When you look at our total freight and transportation and warehousing costs, they are roughly 10% of total cost of goods sold. But they are obviously increasing at a higher rate. So, as I mentioned in my remarks, 25% of our total inflation came from transportation and freight. So, we are proactively evaluating and adjusting our approach to minimize cost increases going forward and we view the cost increase just like all other input cost increases, when we look at overall inflation that we must try to offset with any pricing.

The next question will be from Ken Goldman of J.P. Morgan. Please go ahead.

Just to follow-up on that. Dave, I’d like to understand a little bit better how, in your opinion, you’ve been in the food group for a while now. How most agreements with trucking vendors work in this industry? Because, we’ve heard lately from a different, one of your peers that they were surprised by higher transportation costs and it sounds like part of the issue was that, maybe certain agreements with vendors were locked in for rates. But not miles, so that vendors were able to effectively opt that on these arrangements when rates rose. I guess, I am just trying to get your opinion on the group in general, is this a typical set up where vendors have this flexibility or is it somewhat unusual? Again, just trying to sort of better understand some of the risks for the group and I know you’ve seen a couple of different perspectives here.

Well, again, you’re right. I’ve been around a long time. But I am not a expert in freight transportation. But, I’ll kind of tell you what I see. The dynamics are interesting around the freight, because you can have different philosophies. You can have fewer carriers and try to leverage scale with those carriers or you can have more carriers and maybe that will – you won’t get the scale benefits, but then in situations like this, you have more flexibility, because you have more competition basically and more options, right. So, you have to look at that. We tend to have a lot of carriers. So, that’s kind of the way we manage it. We have a lot of strong relationships. So, there is a lot of dynamics like that that come into play, because supply and demand is challenged and when we need carriers can really vary, right, versus other companies. So, I can’t sit here and do it just this. I can tell you that this is obviously something that we’ve been focused on and we’ve been watching and we talk about all the time and Sean is involved with those conversations. So, we have a great group here. We do everything. We are looking at different options to try to manage it. But, there is a lot of dynamics in here. It’s not just one simple answer in it. You really have to kind of understand a little bit the philosophy that a company has around this area in managing the support for it.

The next question will come from Robert Moskow of Credit Suisse. Please go ahead.

Hi, thanks for the question. I am going to carry on with the theme, maybe a little differently on freight. Everybody sees it and your customer see it too and my understanding is that you are probably in a negotiating season with your freight providers. So, isn’t it logical to assume that if you and everyone else are going to experience higher freight costs through those negotiations and that maybe a 12 month timeframe. Couldn’t you go to your customers and say, hey, this is widespread, everyone has a time for the consumer to pay for some of it. It seems like a logical argument and yet, I think you and others have been a little cautious about what kind of promises could be made in that regard. Thanks.

Rob, it’s Sean. If freight were the only thing we were dealing with, I think it’s more logical that we would go have a direct conversation specifically about freight. But when you are dealing with inflation across a variety of different things, beyond freight, we’ve got protein inflation, we got other things that are experiencing inflation. It really pivot the discussion more to, how do you holistically find different ways to pursue pricing in order to try to protect margins and it – as I mentioned earlier, it varies by brand and by category, but really, we’ll try to bundle all of the things that are inflating in cost and let that total net delta inform the different strategies we might pursue to create offsets. So, that is that what you talked about which is a freight-specific conversation looking for offsets we’ve contemplated that. Who knows, it may evolve going forward, but we are really looking at all of the inflation and looking at the three pricing levers as well as productivity as I mentioned before.

The next question will be from Steven Strycula of UBS. Please go ahead.

Hi, and good morning. Sean, a quick question on the inventory destocking. What percentage of the portfolio would you say has already been touched by inventory destocking across major retailers? And are we running at what we would call minimum threshold of the inventory? Basically, can we see any more excess weeks of supply taking out or are we just really running on a just in time system? Thank you.

Yes, Steve, I think it’s closer to just in time. You’ve heard other companies in the last month or so referenced this kind of unexpected inventory destocking at certain customers near the end of the calendar year. And during that window, at least from what we could see, it got extremely low, unusually low versus typically what we see. And we don’t like to see that, because it typically means there is out of stocks on the shelf for consumers. So, I tend to think that doesn’t ultimately benefit anybody, but, we’ve seen that kind of move back to more normal levels. There aren’t absolute lean inventory levels in the industry right now and across categories. That’s been the case for a number of years, but it got really lean for a bit there, which is what we saw in Q3, but I think that’s largely behind us. Obviously, we are always trying to anticipate if that’s going to happen, but you never kind of know until you are in the thicker things. But I think we are tracking more just in time, more ship to consumption. At least, that’s the way we forecast it.

Thank you. And ladies and gentlemen, this will conclude our question and answer session. I would like to turn the conference over to Brian Kearney for his closing remarks.