Good day and welcome to the ConAgra Brands' First Quarter Fiscal Year 2019 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Brian Kearney, Senior Director of Investor Relations. Please go ahead.

Good morning, everyone. Thanks for joining us. I will remind you that we will be making some forward-looking statements. While we are making these statements in good faith, we do not have any guarantee about the results that we will achieve. Descriptions of risk factors are included in the documents we filed with the SEC. Also, we will be discussing some non-GAAP financial measures during the call today. References to adjusted items refer to measures that exclude items impacting comparability. Please see the earnings press release for additional information on our comparability items. The reconciliation of those adjusted measures to most directly comparable GAAP measures can be found in either the earnings press release or in the earnings slides, both of which can be found in the Investor Relations section of our website, conagrabrands.com. Now, I'll turn it over to Sean.

Thanks Brian. Good morning everyone and thank you for joining our first quarter fiscal 2019 earnings conference call. Fiscal 2019 is off to a good start with performance in the first quarter largely in line with our expectations. We sustained our solid topline performance delivering net sales growth in each of the four operating segments behind strong underlying fundamentals. And our operating margin came in slightly above our expectations, despite a continued challenging inflationary environment. We continued to optimize our marketing investments to deliver a stronger ROI. Once again, this included shifting some low ROI investments from A&P marketing to above the line retailer investments. This shift enabled us to drive brand saliency, enhance distribution, and consumer trial in store. Given our solid start to the year, we are reaffirming our fiscal 2019 guidance for the standalone ConAgra Brands business. And as we announced earlier this month, subject to the completion of all conditions, our acquisition of Pinnacle Foods is expected to close by the end of October, ahead of our original schedule. As you can see on slide five, our focus on brand building and innovation is paying off as we continue to bend the trend on the topline. Excluding sales from the Trenton, Missouri production facility, which we sold at the beginning of fiscal 2019, organic net sales increased 1.2% with all four operating segments delivering year-over-year growth in the quarter. Volume was essentially flat with growth in our Refrigerated & Frozen, Grocery & Snacks and International segments, offset by expected volume declines in our Foodservice segment as we continue to implement our value over volume actions. Overall, as demonstrated by our results, our deliberate actions to drive topline growth have delivered consistent steady improvement. And we're particularly pleased with our momentum, given our performance versus the competition.…

Thank you, Sean and good morning everyone. Slide 26 outlines our performance for the quarter. As Sean mentioned, the quarter came in largely in line with our expectations. Net sales for the first quarter were up 1.7% compared to a year ago and organic net sales excluding the impact of the sale of our Trenton, Missouri facility grew 1.2% as all reporting segments delivered growth. For the quarter, adjusted gross profit decreased 0.6% to $524 million, and adjusted gross margin declined 65 basis points to 28.6%. In the quarter, A&P expense decreased to $43 million or 2.3% of net sales. As we continued to shift low ROI A&P investments to higher ROI retailer investments that drive brand saliency, enhance distribution, and consumer trial in store. As planned, adjusted SG&A for the quarter was up 9.7% compared to the prior year and was 11.7% of net sales. The increase was primarily driven by higher stock-based compensation expense, due to a higher share price at the end of the first quarter versus the first quarter a year ago. Planned investments in IT projects and a reduction in income from providing transition services on divestitures. Adjusted operating profit declined 3.5% for the quarter and adjusted operating margin was 14.6%, which was slightly above our guidance range. Adjusted diluted EPS was $0.47 for the quarter, up 2.2% from the prior year quarter and in line with our guidance. Slide 27 outlines the drivers of our net sales change versus the same period a year ago. During the quarter, organic net sales growth ex-Trenton was 1.2%, driven by a 1.2% increase in price/mix. You will see on the page that the increase in price/mix was 2.1% before the increase in retailer investment, which reduced price/mix by approximately 90 basis points. Our total net sales were…

We will now begin the question-and-answer session. [Operator Instructions] Our first question today will come from Andrew Lazar of Barclays. Please go ahead.

Good morning everybody.

Hey Andrew. Good morning.

I think on the -- if I'm not mistaken on the fiscal 4Q call, I think you had said that fiscal 1Q organic topline growth should be roughly in line or with the level seen in 4Q, which was about 2%. And I know fiscal 1Q came in a bit below that. So, I was trying to get a sense of what you see has had changed maybe during the course of the quarter? Has it unfolded? And as part of that, volume specifically in the Grocery and Frozen segment was up a bit, despite some of the distribution gains that you've talked about in Frozen. So, again, I'm trying to get a sense of why that was perhaps not greater, especially, since the scanner and Frozen would have suggested it would be? Thank you.

All right, Andrew, it's Sean. Here's how I think about our sales in Q1. We guided to 2% to 2.5% growth and we delivered a 1.7% growth. The three tenths of a point missed versus the bottom end of our range equates to about $5 million, which can be fully accounted for by the higher than planned, above-the-line marketing spend. So, that puts us squarely at the bottom of the sales guidance range we gave for Q1. So, then the question becomes, why didn't we land the quarter higher in the range? And the simple answer to that, it's shipment timing, which is one of the reasons why we don't typically like to provide sales guidance quarterly. A good example in Q1 was on our largest brand, Marie Callender's, where we experienced a shipment slowdown near the quarter end as customers - retailers were resetting the shelf in advance of the new Marie innovation slate. Remember, Marie Callender is getting a full makeover this year. It was not the recipient of that last year. Last year, our focus was on Banquet and on Healthy Choice. So, when you [couther][ph] up and you look at the big picture, we reaffirmed full year guidance, we delivered excellent consumption trends, we gained market share and we are performing organically at the level of our 2020 growth targets in 2018. So, altogether, I'd describe it as we are performing largely in line with our expectations and very strong versus our peer set.

Thank you.

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

Hey good morning everyone.

Hey Bryan.

I guess the question is, we kind of think about the full year and the implied sort of improvement in margins that we'd expect in the back half of the year. I guess, Dave, could you just walk us through how much of that becomes the inflation as maybe more skewed to the first half or more savings coming through? Just trying to get an understanding of how we bridge just sort of margin improvement sequentially in the back half of the year given sort of what we've seen -- the dynamics we've seen in the first half?

Yes, Bryan, I'll take that. Our first quarter operating margins came in at 14.6%, driven by higher SG&A and the continued shift in the retailer investment. So, we've laid that out. Q1 just for -- is our lowest net sales dollar quarter, so margins are a bit lower than the other quarters. For Q2, we guided to operating margins that are similar to Q1, 14.4% to 14.7%. There will be higher net sales dollars in Q2. But we'll have a higher level of marketing investment in the second quarter on the A&P line relative to the first quarter, but SG&A will be lower in the second quarter as well. So, that's a really big investment quarter, which really sets up the innovation that's going to come through in the second half and the marketing investment to support that. So, in the second half, we'll benefit from that sales growth. And the margin accretive nature of those sales, plus it's just higher sales dollars, we'll get a little bit leverage on the gross margin line. And then SG&A as a percentage of sales will be lower as well. We'll get leverage on SG&A as well. So, that's kind of gets you to the low to mid 15% operating margin second half to get to our full year guidance of 15% to 15.3%. That's roughly how it plays out sort of second quarter and then second half.

Okay. Thank you.

Our next question will come from Rob Dickerson of Deutsche Bank. Please go ahead.

Great. Thank you very much. Just a question on Pinnacle. It's great that hopefully that will close by the end of October. I'm just curious, Sean, you've done a lot of work on Pinnacle so far. As you think you know forward once that deal closes, can you just give some color as kind of how you potentially plan to attack it come October 24, right? Is there may be a need to shift a bit more into trade relative to A&P at Pinnacle. Are there brands you may already have your eyes on, I'd assume where there could be upfront push like you did at ConAgra relative to other brands? Any -- just kind of opportunity kind of take -- layout upfront thought process as to how you will attack it from day one? Thanks.

Yes, sure, couple of points on Pinnacle. First of all, we are incredibly excited about the ConAgra-Pinnacle combination. Not only are there meaningful cost synergies but we are energized about what we believe we can do with the brands, particularly, in Frozen. That said, I do want investors to keep in mind that we are still operating at this point as separate public companies, and to some degree, competitors. That means we operate at arm's length, even though we are in intensive integration planning mode. Now, the fact that we will be closing by the end of October is a real positive. And to your point, Rob, what we will do is go deep on each and every brand and begin applying our ConAgra playbook as appropriate. But you know again, we're not in there yet. As soon as we get this thing closed, you can imagine there will be a groundswell of activity, and we will -- we would be wrapping our minds around exactly what the action plan is. Additionally, we'll begin the important prep work that is required for us to do a quality job at an Investor Day next calendar year.

Okay. And then just quickly on Wesson. I know that you put in the release; I don't believe you put it in previously, kind of post the prior potential transaction. Can you just give a couple of comments as to why you felt the need to highlight it again? Thanks.

Yes, Rob, we're continuing to set the alternatives for the business. In our -- on our balance sheet, we have Wesson as an asset held for sale, which we did when we put it up for sale originally, we've continued to do that. Once we're continuing to look for alternatives there and we're going through that process. Just one clarification because this did come up as a question as it relates to -- we disclosed that our $575 million acquisition proceed rate, either from equity offering or divestitures, and there was some question is, if we would not divest Wesson, would those -- would that have to be a higher equity rates or divestiture proceed need? And the answer is no. So, if we sell Wesson in the future, those proceeds will be used to pay down debt. It doesn't affect what we put out there for the equity raise or the divestiture proceeds.

Our next question will come from David Palmer of RBC. Please go ahead.

Thanks and good morning [technical difficulty]

Pardon me ladies and gentlemen, I'll move on to the next question and we'll ask Mr. Palmer to reenter the queue. Our next question will come from Steve Strycula of UBS. Please go ahead.

Hi good morning. Sean, quick question for you on the retailer investments. I realized there's been a little bit of an evolution here in terms of the A&P and above the trade line consideration. But can you walk us through what is kind of evolved in your partnership with the retailers since you held your Analyst Day back at -- I think it was two Octobers ago now? And what strategically kind of fed the narrative that you put up a few helpful slides today about just kind of walk us through the timeline? I think that'd be helpful.

Yes, I think strategically, the objective has never changed, which is if we spend $1 in marketing, we want it to work hard for us. And what has changed is the efficacy of different marketing tools over the years. So, not surprisingly with the advent of Netflix and DVRs and things like that, things are traditional TV advertising and print ads have diminished materially in terms of their effectiveness. And that means that if you're going to spend on A&P, you're going to spend A&P very differently. And my comments today point it to that in terms of our significant shift toward the world of digital, which is how you really build brand affinity today below the line. The other thing that has shifted fairly materially over the last five years is the progressiveness of marketing and partnership with customers. As I've mentioned many times before, in the old days, above-the-line marketing spend was really one of two things. It was investment in couponing, which was a price discount or it was investment in trade discounting, which is the classic example of ConAgra, of course, was 10 units for $10. Customers are much more sophisticated today. They saw, you know to four, five years ago as you all saw, diminished lifts with younger consumers in those kind of deep discount merchandising events. And at the same time, they also recognize that they're sitting on a gold mine of data. Data around how consumers purchase, which consumer purchase which things, and we they began to partner much more progressively with manufacturers to unlock the power of that data and target consumers with relevant content at the point of purchase. So, there's been an ongoing -- two years ago when we did Investor Day and even beyond that, there's has been a compounding curve in terms of a progressiveness of retailer marketing and the desire they have to really leverage the database they have and partner with manufacturers to do a better job manufacturing. So, it really becomes a very simple calculus. Identifying those spends below the line that are no longer working as effectively as they did historically and then recognizing that there is real progressiveness happening in terms of retailer partnering above the line. The end of the day, retailers like manufacturers are hungry to grow and if they believe they can partner with us to drive that growth, both in-store and just in general supporting the innovation agenda we're driving, that's a win for them. And it's clearly working for them and for us, and we're going to continue to stay nimble in making these kinds of investments as we move through the balance of this year and then beyond.

Our next question will come from Alexia Howard of Bernstein. Please go ahead.

Good morning everyone.

Hi Alexia. Good morning.

Hi. So, I just wanted to ask about the closure of the Trenton plant and why that's being excluded from organic sales growth guidance or the sales growth results? Is that because you weren't able to migrate sales from that plant elsewhere? Is there something -- I mean, you've closed plant lines before, other companies have closed lines and not called that out. I'm just curious about what's unique about that situation? Thank you.

Alexia, yes, that's -- the plant we sold, there's sales that we're selling with that, right? So, it's just -- it's like a divestiture. So, the sales are no longer in our base. So, we just treated it. We're excluding it when we look at organic.

Our next question will come from David Driscoll of Citi.

Great. Thank you and good morning everyone. I just wanted to follow up on this trade move and spending. So, gross and operating margins are down, Sean. The trade spend does reduce net price realization as you showed on slide 27. So, I just wonder if you could just provide some thoughts, is this a case of a win and a loss? You get the distribution on the new products, it's very additive to those brands, but not enough pricing is being realized to hold your margins. How do you think about that?

Well, we've been getting pricing into the marketplace, David, ahead of our categories pretty consistently over the last several years and will continue to do it. We do it in a multitude of ways, differently than yesteryear, when it would strictly be a list price increase and now there a lot of ways we get pricing in from innovation to downsizing, many different ways. So, that's going to continue to be part of our playbook. We will push on all of our margin levers. We'll get pricing in, in a multitude of different ways and it'll play out over time. There'll be some volatility quarter-to-quarter, but margin expansion and pricing remains core to what we do, which is just going to vary depending on what we've got going on in the marketplace.

Yes, just to add to that. So, part of that too if you look on our bridge, we have the productivity but then we have operational offset. So, in the quarter, there were investments we made, business investments we made in improving customer service that hit cost of goods sold for the quarter. So, investments, you know to ensure that we're meeting on-time delivery requirements and transportation, package design, those terms of investments are in cost of goods sold and they hit against how we classify it on the bridge with price/mix. So, the benefits are in there, but there's also investments that net against that. So, it's a combination of a few different things that hit that part of the bridge.

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

Yes, hi good morning guys. This is Jake [Indiscernible] on for Rob. Just a quick question regarding inventory. Given all the new product launches and the new points of distribution, should we expect retailers to increase inventory of your products in fiscal 2019 following of fiscal 2018, where they reduced inventory? Thank you.

I don't think so, Jake. I mean, we, in general, expect to ship to consumption. There will be some volatility quarter-to-quarter depending upon when new item innovation will shift, depending upon how holidays shape up, but in general, they're not a lot of inventory out there right now. The days on hand that retailers keep these days versus 10, 20 years ago is significantly smaller. But I wouldn't expect any kind of meaningful change this year versus what we -- versus in terms of bouncing back from last year.

Our next question will come from Ken Goldman of JPMorgan. Please go ahead.

Hey, it's Tom Palmer on for Ken. Thanks for the question.

Hey Tom.

I wanted to ask about the second quarter guidance. First off, does guidance include any benefit from this year's hurricanes? And secondarily, is the second quarter guidance consistent with the cadence you contemplated at the start of the year when you issued full year guidance?

Yes, so let me take that. So, as of now, we're seeing no sales impact in the second quarter related to Hurricane Florence. We laid out the impact in the prior year of $45 million in net sales benefit in the prior year from Irma and Harvey, but seeing no benefit so far related to Hurricane Florence there. Yes, the cadence in terms of the Q2 guidance is -- and I mentioned in my comments, it's planned. So, this is how we had planned the year. We knew the benefit we had from the hurricanes in the prior years. So, when we planned it, we knew that from a sales perspective, we'd be ramping on that and that's non-recurring. So, our guidance is consistent with our plans and our guidance also reflects, as I said earlier, our increase in A&P investment in the second quarter with a reduction is the SG&A percentage in the second quarter.

Our next question will come from Akshay Jagdale of Jefferies. Please go ahead.

Thanks. Thanks for taking the question. I just wanted to get your perspective, so the market is looking at some of these results, including yours where we're seeing a slowdown in sales growth, even implied for the next quarter while margins are compressing, right? And it seems like they're projecting for that to continue. And I'm not obviously of that view and obviously your guidance is pointing to those trends changing. But can you just give us some examples of -- the measured channel data, I guess, is the best thing to look at in terms of the optimism you have for the turnaround in the back half, but is there anything else that you can point to that gives you confidence that what's happening this quarter and next quarter in terms of a deceleration is just temporary? Thanks.

Yes, Akshay, this is where I think we really got to put this sales bit in perspective. As Dave just said, Q2 -- our Q2 outlook is really no different from what we expected all along. We obviously have full visibility to the impact of the hurricane last year. And that's what you're seeing. So, you're not seeing a fundamental deceleration of performance whatsoever, you're seeing a reversal of a major hurricane benefit in the year ago. And Q1, as I just pointed out with Andrew's question at the beginning, we landed at 1.7%, which was modestly below the low end of our range, and I provide some color why. But as you could see the fundamental strength of our takeaway and our market shares are strong. Then when you take into account that we are debuting things like our new Snack business in October at NACS and that's forthcoming as well as the other innovation that's continuing to flow into the marketplace as we speak, Marie Callender, for example, our biggest brand, which is really seeing the full makeover this year. We have a very robust innovation slate continuing to flow into the marketplace now and as we go into Q2 and we already have momentum. We're not starting in a trough. We're not declining today. We grew in all four operating segments. So, you really need to look no further than that and recognize that what we're dealing with in Q2 is a lot of noise. We -- last year, recall we looked at a combined Q2 and Q3 to try to eliminate some of that volatility and provide kind of better perspective on the underlying fundamentals. But the bottom-line here is our underlying fundamentals for ConAgra Brands on sales has been strong and remains strong.

Our next question will come from Farha Aslam of Stephens Inc. Please go ahead.

Hi good morning.

Good morning.

Question on a below-the-line item, your equity income in Ardent Mills was down year-over-year. Could you just provide us some color on the quarter? And then what we should look for, for the year from that business?

Yes, so Ardent Mills is a growing milling company that continues to improve its operations and its efficiency. But given the nature of their business, volatility in the markets can create volatility in their quarter-to-quarter results. So, if you look at Q1 a year ago, they had significant profit growth due to favorable marketing conditions. And this quarter, they weren't the same marketing conditions. So, our profit for the quarter was down $14 million or about $0.03 per share. If you'd go and compare it to two years ago first quarter, you'd actually see our Ardent Mill's profit was up $3 million. So, that just demonstrates the volatility of a milling business quarter-to-quarter different than our core branded business. We don't give specific guidance for Ardent for the year. Right now our expectations are that Ardent for the year will be relatively flat. But given the volatility I just explained, you know that can jump around. So we don't give specific guidance on Ardent.

Yes, and just if I can build on that. I commented on the beginning of this Q&A session around some of the reasons why we didn't land Q1 higher in our guidance range on sales. Similarly, on EPS, really I would point to two things: Ardent Mills; and the tax rate, obviously that impacted EPS. But neither of these items are a commentary on the strength of our core business. And I think that's an important fact as investors think about ConAgra moving forward.

Our next question will come from David Palmer of RBC. Please go ahead.

Thanks. Good morning. Just to follow-up on David's question. I think you've heard the investor concerns lately that pricing power is not there the way it was and that sector margins are going to continue to go down out there, and I'm sure that some are going to see the ConAgra shift in your guidance or at least some of the extra detail on your guidance as the retailer-level spending is up, back-weighted guidance, this is circumstantial evidence that not just that ConAgra has its own timing of its programs and initiatives, but that this -- that the pricing power is not there the way it was and particularly with key retailers and it's going to be tighter for delivering the year. So, if -- any comments you can provide on the environment would be helpful and sort of untangling the read-through for the environment versus ConAgra-specific stuff? Thanks.

Sure, David. It does create a bit of messiness when we toggle below-the-line marketing to spend to above in terms of getting a read on gross margins. We are obviously aware of that, and we've had several analysts and several investors say to us, obviously, that puts more of a burden on the operating margin line relative to the gross margin line. Because at the end, as we pointed out, we are getting positive price/mix, but we are spending marketing dollars more effectively and it just happens to be above the line, which means that the gross margin has noise in it which directs more attention to the operating margin line, which I should point out did come in strongly versus our guidance in Q1. So, we're going to continue to retain the ability to toggle some of that A&P spend above the line because it's effective and its driving brand affinity and that's ultimately what's going to create value for shareholders over the long-term. But it does provide noise and it does act as a counter to other pricing that we are legitimately working hard to get into the marketplace. We're just -- we've got the burden of communication of making sure we're fully transparent on this and continuing to emphasize the importance of operating margin, given this below-the-line to above-the-line marketing dynamic.

Ladies and gentlemen, this will conclude our question-and-answer session. At this time, I would like to turn the conference back over to Brian Kearney for any closing remarks.

Thank you. As a reminder, this conference has been recorded and will be archived on the web as detailed in our press release. Investor Relations is available for any follow-up discussions. Thank you for your interest in ConAgra Brands.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.