ConAgra Brands, Inc.

Good morning, ladies and gentlemen, and welcome to the ConAgra Brands third quarter fiscal year 2019 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw from the question queue, you may press star, then two. We ask that you limit your questions to one and one follow-up. Please note that this event is being recorded. At this time, I would like to turn the conference over to Brian Carney, Director of Investor Relations. Please go ahead, sir.

Good morning, everyone. Thanks for joining us. I'll remind you that we will be making some forward-looking statements during today's call. While we are making those statements in good faith, we do not have any guarantee about the results that we will achieve. Descriptions of the risk factors are included in the documents we filed with the SEC. Also, we will be discussing some non-GAAP financial measures. References to adjusted items, including organic med sales growth, refer to measures that exclude items management believes impact the comparability for the period referenced. Please see the earnings press release for additional information on our comparability items. The reconciliations of those adjusted measures to the most directly comparable gap measures can be found in either the earnings press release or in the earnings slides, both of which can be found in the investor relations section of our website, ConAgraBrands.com. We will also be making references to total ConAgra brands as well as legacy ConAgra brands. References to legacy ConAgra brands refer to measures that exclude any income or expenses associated with a recently acquired pinnacle foods business. Finally, we will be making references to pro forma net sales for Pinnacle. Pro forma net sales refer to results for Pinnacle Foods prior to the acquisition that have been adjusted to align with ConAgra's fiscal calendar. With that, I'll turn it over to Sean.

Thanks, Brian. Good morning, everyone, and thank you for joining our third quarter fiscal 2019 earnings conference call. There's a lot to cover this morning. We have strong legacy ConAgra results to discuss, a positive pinnacle integration update to share, the leveraging to discuss, and a preview of our April 10th Investor Day. But the most important takeaway from everything Dave and I will discuss today is what these results mean. The ConAgra Way to Profitable Growth delivers. The impact of our unwavering commitment to the ConAgra Way over the past several years has been consistent progress. most recently resulting in the continued strong momentum in core legacy ConAgra brands during the third quarter, particularly in our leading frozen and snacks businesses. We are now aggressively applying this approach to Pinnacle, and it's working to keep the technical integration on track as well as driving a reinvigorated innovation lineup. As we said in Q2, we expect that innovation to lead to improved Pinnacle trends in the second half of fiscal 2020. It also enabled us to gain traction on de-levering. In the short five months since closing the pinnacle transaction, we've reduced debt by $685 million. Overall, we are confident we will deliver quality long-term growth at ConAgra and we'll share our robust innovation pipeline and new long-term financial algorithm on April 10th, along with details of the increased cost synergy opportunities that we see. Before I get into the quarter, let me talk a bit more about the ConAgra way. We'll unpack this even further at Investor Day, but this playbook is our bedrock and you've seen us execute it for several years now. The ConAgra way to profitable growth is relentlessly principle-based and firmly grounded in the consumer. It advocates that growth is essential and that we cannot and will not cut our way to prosperity. It acknowledges that our ability to build strong brands requires differentiated capabilities, particularly those that fuel innovation, areas like demand science, precision marketing, and omni-commerce. And the ConAgra Way recognizes that our success requires a highly disciplined approach to portfolio management, which you've seen us execute consistently for the past four years. Importantly, our disciplined approach is repeatable and scalable. It built our healthy and growing frozen and snacks businesses and serves as the basis for how we're approaching the rest of our portfolio, including Pinnacle. We're confident about how we do things around here because it works. We don't take shortcuts. We do things the right way, a way that best positions us for maximum value creation over the long haul. So let's talk more about the results the ConAgra way delivered in Q3. First up is the legacy ConAgra business. We continue to deliver good consumption growth in our legacy ConAgra segments in the quarter with strong trends on both a year-over-year and two-year basis. As you can see on slide eight, legacy ConAgra's domestic retail segments had another good quarter. Q3 growth in our legacy segments was once again based on solid fundamentals tied to the increasing strength of our brands. Our retail sales and base velocities remained in fertile territory and continue to gain momentum on a two-year basis. Turning to our segment results, Refrigerated and Frozen was up 240 basis points in the quarter, with Frozen again delivering terrific growth, 490 basis points. Refrigerated was down, but as I mentioned last quarter, apart from Ready Whip, we have yet to renovate these brands and bring new innovation to the marketplace. Refrigerated is one of the final pieces of the Legacy ConAgra portfolio to receive attention, But the work is well underway, and you'll see exciting new products on store shelves in 2019. But turning back to Frozen, we've talked a lot in prior quarters about the successful implementation of our playbook in Frozen. As you can see on slide 10, that success continued in Q3. We reinvigorated and continued to lead the Frozen category, and our fundamentals remain strong in the quarter with improvement in consumption trends, TPDs, and base sales velocities. Our approach is having a positive impact on our results, and importantly, it's also driving category growth in frozen single-serve meals. Our rigorous approach to modernizing and premiumizing our brands through renovation and innovation has delivered impact for ConAgra and for our customers. While we began our innovation journey in frozen more than a year ago and went broader and deeper in frozen in fiscal 2019, we have even more on the way. In fiscal 20, we expect to have our most robust and powerful slate of innovation in this segment yet. The team has done a lot of great work to develop a strong multi-year pipeline of innovation across our legacy ConAgra frozen brands and across refrigerated brands like Hebrew National, Eggbeaters, and Ready Whip. Turning to our legacy ConAgra grocery and snack segment, we have more positive news to report. The snacks business grew by 8.2% during the quarter, This tremendous growth validates our recent investment in the business. Looking at our snacks business in more detail on slide 14, the growth we delivered in Q3 came with contributions from every key snacking vertical, popcorn, meat snacks, sweet treats, and seeds. On a two-year basis, retail dollar sales for our legacy ConAgra snacking portfolio were up an impressive 14%. Dissecting the snacks growth, which we've done on slide 15, you'll see that while TPDs were down, base velocities increased significantly. In other words, our growth in snacks during the quarter was driven by bringing terrific products to market that consumers wanted. Those products were in high demand and moved off shelves very quickly. And growth through improved consumer pull is sustainable growth. Of course, TPDs have been an important metric in assessing brand health historically. But TPDs are not always a helpful barometer of brand vitality. As an example, look at these Slim Jim results. Slim Jim is one of our healthiest brands and is driving strong snacks growth. But Slim Jim's TPDs declined nearly 18% year over year as we optimized our assortment. With that data point alone, you'd think the brand was struggling, but it was not. Velocity was up more than 28% and the net results was a retail sales improvement of more than 7% in the quarter. Our Slim Jim business became stronger by increasing shelf inventory and facings on our best-selling, fastest-moving items, and by pruning low-velocity SKUs. These actions led to higher sales for both ConAgra and our customers, and TPDs did not tell this story. We saw the exact same dynamic on Swissmas in Q3, and I share this because it's a good reminder that TPD optimization does not always come through TPD growth. I'm very excited about the innovation that we've deployed across snacks in the last year, and even more excited about the impact of that innovation. But we're not even close to being done. To the point I highlighted earlier regarding refrigerated and frozen, our innovation and renovation machine is humming, and we have a terrific multi-year pipeline built out for the brands you see here. I won't go further into it now. You'll have to wait until investor day. So in summary on Legacy ConAgra, we feel very good about our momentum. We're pleased with the results we delivered in Q3 and are confident that with the ConAgra way, we'll continue to deliver. Turn to Pinnacle priorities on slide 18. It's been a short five months since we completed our acquisition of Pinnacle. We've accomplished a great deal in that time. with much more to come. I'll spend a few minutes covering each of our focus areas, integrating the business, reinvigorating Birdseye, Duncan Hines, and Wishbone via innovation, and deleveraging. First, let's talk about the integration. I couldn't be happier with our progress on this front so far. We've said all along that the similarities between Legacy ConAgra and Pinnacle made a combination of our two companies an obvious opportunity. And the fact that we've been able to quickly align our organizations and deliver our integration work plan to date is evidence of how well the two companies mesh. Put a finer point on it, work transitions are on track and processes are being aligned. Systems integrations are well on their way with key milestones being hit. And importantly, we captured approximately $12 million of cost synergy in Q3, which paces ahead of our expectations. We continue to expect to over-deliver the $215 million of cost synergies we previously announced, and we'll share more detail on refined cost synergy opportunities next month. Thank you to the entire ConAgra team across legacy ConAgra and Pinnacle for all their terrific work to date on the integration. We've also been spending time in Q3 undertaking a concentrated effort to begin deploying the ConAgra way to the Pinnacle portfolio. And first up is our proven value over volume philosophy. We are starting the process of cutting slower turning and lower margin SKUs while redesigning Pinnacle's customer investments for better ROI. Retail sales and TPDs continued their downward trends in Q3, but base velocities improved as shown in the chart on the right. Non-investment grade SKUs were the ones being pruned in the quarter, and that means that the Pinnacle products remaining on shelf are higher quality and generating consumer takeaway. As we did with our legacy ConAgra business several years ago, we are creating a stronger foundation on which to build. While we won't be happy until total retail sales begin to turn in the Pinnacle portfolio, we are confident that the value over volume process underway gives us that stronger foundation. As we introduce future innovation slates into the market, the net result will be more profitable, sustainable growth. And to be clear, our Pinnacle-related work is incredibly focused. Right now, it's all about strengthening Pinnacle's big three, Birdseye, Duncan Hines, and Wishbone. Pinnacle historically referred to these brands as leadership brands and with good reason. However, in the second half of last year, each of these businesses struggled with executional issues. These challenges hurt sales and profit, representing the vast majority of Pinnacle's drop-off on each. While recent performance in these great brands has been below historical norms, as we discussed last quarter, we're confident that we can reinvigorate them through great innovation. And Q3 brought the beginning of our implementation of focused action plans for each brand. First, let's talk about Birdseye. Birdseye is an iconic billion-dollar brand, previously the largest in the Pinnacle portfolio and now the largest in the ConAgra portfolio. Recently, however, the Birdseye brand was slow to respond to key consumer trends, opting out of innovating in important growth pockets. That is changing. The differentiating capabilities that come with the ConAgra way include a well-developed innovation muscle and the know-how to identify and capitalize on consumer trends, Applying these capabilities to Bird's Eye means that we're not only opting in to the innovation opportunities in this key category, but opting in in a big way. Here again, we've already built a multi-year pipeline of innovation and renovation that will deliver a sequenced deluge of new Bird's Eye products. We'll share a lot more in April. Now let's turn to Duncan Hines. While Duncan Hines' recent results have been disappointing, it faces a different situation than bird's eye. Recall, the Duncan Hines brand actually did a fair amount of innovation over the past two years. The brand moved into broader snacking with a very innovative idea for mug cakes. With this innovation, the Pinnacle team was clearly heading in the right direction. However, the execution of that innovation was not up to our standards. Inefficient SKUs proliferated, while competitors entered the space with a more provocative execution, generated better velocities, and gained share. And that new innovation from the competition caused Duncan Hines to suffer. The good news is that we see the solutions here as straightforward, even if they'll take a bit of time to cycle into the marketplace. Slide 23 shows how deploying the ConAgra way to Duncan Hines is leading to a restage of the product with simplified branding, a larger size impression, an optimized SKU range, and an upgraded product with a simple addition of the hero ingredient consumers want, frosting. And finally, let's talk about Wishbone, where the situation is again unique. In the summer of 2018, Wishbone labels were updated, but unfortunately, the execution came up short. Despite a more modern design, the labels did not effectively communicate the flavor variety, and Variety communication is absolutely essential in salad dressing. Take a look at the picture on the left. The modernized label communication was flawed and sales velocities declined quickly and considerably following the label change. Fortunately, this issue has an obvious fix. The right side of slide 24 shows our updated label. It prominently features the dressing variety. Again, a simple solution but one that will take a bit of time to cycle into the marketplace. After it does, we believe that consumer takeaway for this iconic brand will improve. Overall, the health of the Big Three pinnacle brands is critically important, and you can be assured that our teams have spent the last five months incredibly focused on each of them. There is definitely more work to do, and it will take some time for customers to add our new innovation into their shelf resets. Again, as we said in Q2, We expect innovation to lead to improved pinnacle trends in the second half of fiscal 2020. But the point I want you to take away today is that we have dug into what exactly ails each brand, and we are squarely on top of the solutions. But top-line growth isn't our only focus. We're also focused on improving margins across the pinnacle portfolio and generating more cash from each dollar sold. Over the last several years, we've built capabilities that address each of the margin levers noted on slide 25 and deployed them across the legacy Niagara portfolio. And now, we're focused on getting Pinnacle's gross margins back on track with solid realized productivity above our cost synergy initiatives, margin accretive innovation, improved pricing capabilities, a better brand mix, a better channel mix, and trade optimization. In other words, we're intensely focused on infusing the ConAgra way into Pinnacle. Part of this is simply ensuring that our newest team members, those from Pinnacle, understand the fundamentals of our approach. I've always said that the cultures at ConAgra and Pinnacle have many overlaps, particularly with respect to our common embrace of a lean and agile culture, and that's still my belief. But we also approach some things differently. and we're excited to share our ConAgra processes and tools, particularly those that drive innovation-based growth, such as demand science, precision marketing, and omnichannel selling. I'm proud of how our combined organization is working together in the short time since the completion of the deal. Shifting to our balance sheet, I'm very pleased with our disciplined focus on deleveraging in the last five months. We're committed to a solid investment-grade credit rating, And as I said earlier, in a little less than five months since closing the transaction, we've already reduced debt by $685 million. We expect leverage ratios to improve over time as we increase our EBITDA growth from both the realization of cost synergies and the application of the ConAgra way to the Pinnacle portfolio. We will also continue to prioritize debt reduction in our approach to capital allocation. I want to be clear. that while we always view our portfolio with a lens toward optimizing growth and returns, we do not expect to need to make any additional divestitures in order to hit our leveraged target. Looking ahead, you can be certain that we will not take our foot off the gas in the legacy ConAgra business. And we've already mobilized to aggressively apply our playbook to the pinnacle portfolio and will continue to work to return those brands to growth. Finally, we remain squarely focused on executing our margin-enhancing capabilities across the entire company. As you probably gleaned from my remarks so far, we've got a great investor day coming up in a few weeks. As I mentioned earlier, we will be going into depth on the ConAgra way, how it has benefited legacy ConAgra, and how it's being applied to Pinnacle to build long-term sustainable growth. And while we've previewed a couple of the innovations we've been working on, there's a full slate of new products on deck that we will show you. We'll also be sharing additional details on our pinnacle action plan now that we've identified and begun to address the issues at hand. This will include a sneak peek of some new pinnacle innovations that we'll be bringing to market. And finally, we will be providing updates to our financial algorithm, including new data on cost synergies. We hope that you will be able to join us in Chicago on April 10th. We're confident that the future here at ConAgra is one of long-term, profitable growth. Our Q3 progress contributes to that confidence, as does the long-term opportunity we'll share on April 10th. With that, I'll turn it over to Dave.