Conagra Brands, Inc.
Q4 2014 Earnings Call Transcript

Published: 30 Jun 2015

[Operator:]

Good morning. And 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. All audience lines are currently in a listen only mode, however our speakers will address your questions at the end of the presentation during the formal question and answer session. At this time, I’d like to introduce your host from ConAgra Foods for today’s program, Sean Connolly, Chief Executive Officer; John Gehring, Chief Financial Officer and Chris Klinefelter, Vice President of Investor Relations. Mr. Klinefelter, please go ahead.

[Chris Klinefelter:]

Good morning. And welcome to our fourth quarter call. During today’s remarks, we will make some forward-looking statements, and while we’re making those statements in good faith and are confident about our company's direction, we do not have any guarantee about the results that we will achieve. So if you'd like to learn more about the risks and factors that could influence and impact our expected results, perhaps materially, I'll refer you to the documents we filed with the SEC, which includes cautionary language. Also, we'll be discussing some non-GAAP financial measures during the call today, and the reconciliations of those measures to the most directly comparable measure for Regulation G compliance can be found in either the earnings press release, our Q&A or on our website. Now I'll turn it over to John.

[John Gehring:]

Thank you, Chris. And good morning, everyone. In my comments this morning, I'll recap our fiscal fourth quarter performance including comparability matters, and address cash flow, capital and balance sheet items. I'll also provide some brief comments regarding fiscal 2016. Let's start with our performance. Overall, the fiscal fourth quarter and full year results were in line with our revised expectation. For the full fiscal year we reported a fully diluted loss per share from continuing operations of a $1.46 versus earnings of $0.37 last year. Adjusting for items impacting comparability fully diluted earnings per share was $2.18 versus our prior year comparable earnings base of $2.17. Turning to our fourth quarter results. We reported net sales of $4.1 billion, about 4% above the year ago quarter, reflecting the benefit from the extra week. The extra week overall contributed approximately 7% to the fiscal fourth quarter net sales in volume for each operating segment. We reported diluted earnings per share from continuing operations, a $0.47 versus a loss of $0.95 in the year ago period. The sharp increase in reported EPS from the year ago period was driven by significant non-cash impairment charges recorded in the year ago quarter. Adjusting for items impacting comparability, fully diluted earnings per share were $0.59, about 7% above comparable year ago amounts. The EPS growth was largely driven by the approximate $0.04 per share contribution from the extra week which benefited each of the segments. Now I'll share a few comments on our segment performance. Starting with Consumer Foods segment where net sales were approximately $1.9 billion for the quarter, up about 4% from the year ago period, reflecting a 5% volume increase, a 1% improvement in price mix, a 1% negative impact from foreign exchange and some rounding. The extra week favorably impacted sales and volume by approximately 7% for the quarter. Our Consumer Foods segment operating profit adjusted for items impacting comparability was $319 million or up about 20% from the year ago period, reflecting overall good execution on key initiatives to strengthen the business and position it for fiscal 2016. The increase in operating profit reflects the higher sales and gross margin expansion partially offset by higher marketing and SG&A cost. Gross margin expanded over 200 basis points versus the year ago quarter and the increase was driven by pricing, mix improvement and cost savings. Foreign exchange had a negative impact of $24 million on net sales and about $14 million on operating profit for the segment this fiscal quarter. Our Consumer Foods supply chain cost reduction programs continue to yield good results. This quarter cost savings were approximately $75 million and largely offset inflation of about 3%. Inflation was driven by cost increases on certain inputs particularly proteins. On marketing, Consumer Foods advertising and promotion expense for the quarter was $59 million, up about 13% from the prior year quarter. In our Commercial Foods segment net sales were approximately $1.2 billion, or up about 7% from the prior year quarter. Results were driven by an 8% volume increase primarily reflecting the benefit of the 53rd week and good execution across all of the businesses in the segment. The Commercial Foods segment's operating profit was $154 million or 3% above the comparable operating profit in the year ago period. The operating profit increased principally reflects the benefits from higher net sales, partially offset by lower gross margin at Lamb Weston due to higher manufacturing and distribution costs related to the West Coast port issue. Our Private Brand segment delivered net sales for the quarter of $1 billion, down about 1% from the prior year quarter, reflecting a 4% volume decline and slightly favorable price mix. The extra week favorably impacted sales and volume by approximately 7% for the quarter. Operating profit excluding items impacting comparability was approximately $31 million, down 30% from the prior year quarter. This decline reflects the soft volume performance and margin compression driven by product mix, commodity inflation and lower overhead of source. Sean will have more to say about our plans to divest this business in his comments. Moving on to corporate expenses for the quarter, corporate expenses were approximately $62 million. Adjusting for items impacting comparability, corporate expenses were $65 million versus $59 million in the year ago quarter. The increased versus last year's fourth quarter reflects higher incentive costs and the impact of the extra week. Equity method investment earnings were higher this quarter due to the addition of earnings from the Ardent Mills joint venture. On comparability matters, this quarter's reported EPS include approximately $0.12 per diluted share of net expenses. As detailed in the release, these items include following approximate amount. $0.09 per diluted share of net expense related to the impairment of goodwill and other assets principally in the Private Brand segment. $0.05 per diluted share of net expense resulting from restructuring and integration costs. $0.03 per diluted share of net benefit related to the mark-to-market impact of derivatives used to hedge input costs temporarily classified and unallocated corporate expense. And $0.01 per diluted share of net expense related to mark-to-market adjustments of pension amounts. To be clear we do not treat the contribution from the 53rd week of approximately $0.04 per share as comparability item as it has been in our guidance all year. On cash flow, capital and balance sheet items. We ended the quarter with $183 million of cash on hand no outstanding commercial paper borrowings. Operating cash flows for fiscal 2015 were approximately $1.47 billion, down modestly from our previous estimate due primarily to higher working capital balance. On capital expenditures for the quarter, we had capital expenditures of $154 million versus $117 in the prior year quarter. And for the full fiscal year of CapEx was approximately $472 million, somewhat lower than our previous estimate. Net interest expense was $89 million in the fiscal fourth quarter versus $93 million in the year ago quarter. And dividends for this fiscal quarter were $107 million versus $105 million in the year ago quarter. On capital allocation, we are pleased that we are able to repay approximately $1.1 billion of debt this fiscal year and $2.1 billion since the Ralcorp acquisition, modestly exceeding our $2 billion goal. This quarter we repurchased about $12 million of shares and as we enter fiscal 2016, we remain committed to an investment grade credit rating and a capital allocation strategy approximately balanced between a top tier dividend, share repurchases and additional growth investments. Now I'd like to provide a few comments on fiscal 2016. Given the uncertainty around the planned divesture of the Private Brands business particularly related to timing, structure, price, use of proceeds and stranded cost impacts, as well as the need to finalize our investment plans for the rest of the business and evaluate the impact of our SG&A and other cost savings initiatives, we are not in a position today to provide comparable EPS guidance for fiscal 2016. At such time as we have more details regarding the plan divesture, investment plans and cost savings program, we will provide more details on our outlook. We currently expect that fiscal 2016 fiscal first quarter will not be significantly impacted by the aforementioned factors. And the company expects EPS adjusted for items impacting comparability for the fiscal first quarter of 2016 to be roughly in line with comparable year ago amounts. That concludes my remarks. I'll now turn it over to Sean for an update on his analysis of the company, the work he has been leading and the exciting path forward for ConAgra Foods. Sean?

[Sean Connolly:]

Thanks, John. Good morning, everybody. I am delighted to be here with you on my first call since joining ConAgra Foods. As you know, I've been in deep study on our business, our capabilities and our culture since I walked in the door on March 3rd. My detailed review of the company has largely confirmed the perspective that I had coming in. The crux of which was if the company is prepared to move quickly and to take bold actions on a number of fronts, there is meaningful value to be created. Importantly, before I started the Board made it clear to me they fully understood the misstep that had occurred at ConAgra and assured me that I would have the latitude to make the moves that I felt were necessary to best drive value creation. They made it clear that they wanted me to bring change. They have given me their full support to pursue any path following appropriate due diligence that will create long-term sustainable value for our shareholders. I have approached this process objectively and while the team and I have not completed our work, I am in a position today to share our overarching philosophy about value creation and some very substantive elements of our emerging base plan. I think you will see we are quite clear eyed about the need for change. It all starts with our strongly held and overarching philosophy about value creation. That philosophy is simple but it is also unwavering. We will always remain open to any actionable pathway that maximizes value for our shareholders. At the same time, we also know that improving the fundamentals of a business is management's job. So we must be aggressively mobilized against a base plan we have full confidence in. These notions are not at odds with one another but rather they reflect a pragmatic and flexible dedication to value creation. So you should expect us to continuously explore and evaluate alternative pathways thoroughly, analyzing how much value can they really create, how certain is the execution and how long will they take to come to fruition. Yes, an alterative path emerges that is clearly superior to our base plan, we will alter course. Certainly, we acknowledge there is healthy debate in the market around the question of whether an alternative path should be pursued sooner or later or ever. The answer to that question obviously depends on how actionable and how valuable that alternative path turns out to be. That is precisely why this work needs to be ongoing and why it always requires careful analysis to ensure our shareholders get the best possible return on their investment. At the same time, as stewards of the business, our threshold point is a base plan that can materially improve our performance. This base plan is what we are sharing with you today. Change is needed and we have a responsibility to perform better in the market place. We know that the inconsistency of our past performance is totally unacceptable. And we need to raise our game such that when we make a long-term commitment, we deliver it. We are highly confident that we can implement the changes operationally and culturally that will enable just that. It will of course take time. It will also require a different approach, but that approach has delivered before. So with that as a foundational backdrop let's move on to my observations on the business and the highlights of what our plan entails. While we've seen some bright spots over the past year like the strong profit and margin improvement within Consumer Brands and the continued strong performance of Lamb Weston, those bright spots have been overshadowed by inconsistency, volatility and disappointments in our operating performance particularly from Private Brands. The management team knows where we have been. It is time to act to create a different future. Frankly, aspects of the situation are not all that different from when I joined Sara Lee and led the transformation into Hillshire brands. There we turned in aging and underperforming food company into a more energized, agile performer capable of creating significant value as a standalone company. Many of you know the story. At Hillshire, we reinvigorated iconic brand that had become stale and return them to growth. We redefined what lean looks like, took out a lot of inefficiency and cost and instilled a culture of ownership behavior. We created flexibility by taking steps to ensure we had a strong balance sheet. Then we modernize the portfolio through innovation and M&A. We acquired on trend brands, they complicated our capabilities and we divested non strategic assets. And while we drove a double digit EPS CAGR through our daily focus on improving the fundamentals, we never lost our openness to alternative pathways to maximizing value. A remind of the story because here at ConAgra Foods we have a similar philosophy and an equally clear vision of what our base plan looks like. In short, that plan has four pillars. One; divest our Private Brands business for greater focus. Two; aggressively pursue SG&A reductions and productivity improvements to drive margin expansion. Three; grow our Consumer Foods and Lamb Weston businesses through portfolio and capability improvements. And four; maintain a balanced capital allocation philosophy. The substance of our plan comes not only from the thorough analysis we've done and the feedback we solicited from investors, but importantly from the hands on experience of having done it before. As you can imagine, I've been eager to discuss the details of the decisive action plans we are on the path to implementing, and I'll touch on each of these base plan imperatives during my remarks today. As John pointed our we are not yet in a position to provide forward looking guidance on the financial outcomes of this plans, we will share that detail with your at an Investor Day later this year after we've completed our work. Most important aspect of that we will be having a more concrete view of the economics of a Private Brands divesture. Before I jump into specifics of our action plans for reinvigorating ConAgra Foods, I want to share a few thoughts on my assessment of the situation. I'll start by saying that I have been pleasantly surprised by the organic prospects of ConAgra Foods and believe we have reasons to be optimistic. In fact, some good works were already underway when I arrived. For example, we begun the SG&A reduction process and we started on portfolio segmentation in the branded consumer business. In addition, we had terrific things going on in Lamb Weston. But overall the status quo is simply not acceptable and I am resolute in my belief that unlocking our potential requires major change. Change will encompass everything from portfolio mix and segmentation to more aggressive SG&A reduction, to acquiring new talent and capabilities to compensation metrics and culture. And I am confident it can be done. This view comes after objectively evaluating our current portfolio to determine where we are best position to win going forward and where we are not. It reflects a careful assessment of our organization and systems and feedback from customers and investors. You can accurately conclude that the plans we will begin to share today have been arrived at after months of careful study and deliberation. Before I go in further, let me assure you I am clear -eyed around the challenges in our industry and within some of our categories. These are not new. But when I look at ConAgra Foods I do see opportunities. Getting at these opportunities requires a clear plan and aligned team. The Board and management team are 100% aligned to drive this change agenda. I want to be very clear that the base plan is not an overnight fix. There are some things we will fully complete in fiscal 2016, but others will be a multiyear effort. And we'll say more about that in due time. That said let me preview some of the most critical elements of our plan for remaking ConAgra Foods into a focused, higher margin, more contemporary and higher performing company. As I mentioned earlier, the first step in our plan we will be the divesture of our Private Brands business. While we are taking the right steps to improve our execution and began restoring this business to previous levels, we believe the better investment of our resources is on other priorities where our capabilities are more mature. This business has real potential and the Private Brands segment of the retail class of trade continuous to grow. But we have to come to conclusion that this asset will be more valuable outside of ConAgra Foods. We did not come to this conclusion lightly. We've carefully evaluated our options for this business. This work culminated in a meeting on June 10th at which the Board authorized us to develop and pursue a plan to divest this business. We believe there will be significant interest from potential buyers to support a transaction that is acceptable in terms of value and structure. We will continue our work to improve execution but believe the best outcome for value creation will be successful divesture. Our goal here is straightforward. We are driving toward a more focused corporate strategy; the realization of proceeds associated with a fair value sale for the benefit of shareholders and potentially tax assets. The likes of which could enable additional tax efficient portfolio shaping down the road. We believe that a divesture of Private Brands will meaningfully accelerate our progress against our pursuit of change and value creation. While we won't be giving regular updates on the divesture process, we will report out when we have something material to say. The second step in our plan is a margin expansion commitment stemming from a more aggressive approach to SG&A and continued progress in supply chain and trade productivity. On SG&A, we are well into mobilizing an intensive SG&A reduction effort that is aimed not only at offsetting stranded cost associated with a Private Brands divesture, but moving ConAgra into the top quartile of SG&A efficiency in our space over time. In fact, shortly after I arrived at the company, I enlisted some outstanding, outside help to contribute to our aggressive push on SG&A. That push will be on four key levers across all our SG&A function. Those four levers are

[Operator:]

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

[Andrew Lazar:]

Good morning, everybody. And so two questions from me. First just one on Private Brands. I guess up until may be a quarter or two ago, the Board and it seemed pretty resolute that the issues in Private Brands really were not structural meaning not an issue of putting Private Brands and branded together and much more just executional in nature. So I am trying to get a sense of with you coming in with a fresh perspective on it, what led you to determine that, that's no longer the case and that it really is something more structural with respect to this business. And then I got a follow up.

[Sean Connolly:]

Yes. I don't know that I said I believe structural at all, Andrew. I think there is certainly upside from recent levels. And this business can be much stronger over time. The issue we faced is a different one. We think it will take a lot more time and effort to get this business where it needs to be. And our view is that it should be done by somebody else instead of us so that we can focus on opportunities that pay off earlier by comparison.

[Andrew Lazar:]

Okay. Thank you for that. And then when you think about some of the work that you are going to want to do and undertake and the core sort of Consumer Foods business going forward. And the type of investments that you may want sort of putting to that. Is it fair to say that -- obviously you will be more aggressive on cost to try and cover some of these but that you will probably need more whether it's on the marketing front, on the high quality marketing side and just as we think even broadly forward we should think about additional investment maybe first off to kind of see what you want to do. And I am talking more like the typical sort of rebase that comes with a new CEO with a new plan. Just trying to get a sense of how you feel about that.

[Sean Connolly:]

Well, we are not going to provide guidance today in terms of what the full year looks like. But I don't think it's going to be new news to anybody that the company has historically under invested in the brand side of the -- branded side of the portfolio. So we plan and investment more in marketing as the brands can handle it. And I think that's the key phrase is they can handle it as they are as we call it AMP ready and as the margins allow but the key is and I think you know this from my previous philosophy on marketing spend. You have to bring in an incredibly strong discipline here. You just don't go start spending money because you think it is going to work. You can only invest where you have full confidence that you can drive margin expansion and you can drive a good return on that investment. So when I think about increasing marketing spend, I think of it in terms of words like being surgical and extremely disciplined about where you can get a return. So the notion of dramatically jacking up spending levels for the sake of getting back on the horse does not make sense, and that's not the kind of play you will see us run. You'll see us being more surgical and be more disciplined as we move forward just try to strengthen our branded portfolio.

[Operator:]

And we move now to David Driscoll with Citi Research.

[David Driscoll:]

Great, thank you and good morning. I wanted to ask when the Ralcorp business was purchased; there was an expectation of something like $300 million in synergies. And when you contemplate the divesture of this, the synergy is not actually been realized at this point and so they kind of would be out there in the consensus forecast of ConAgra's earnings. So how do you guys think about this when Private Brands is sold, what happens to that $300 million of expected savings? Let me just stop right there and may be ask a follow up after you respond.

[John Gehring:]

Yes, David, this is John. Let me take a shot at that. First I would say is we have in fact been able to drive a lot of cost out, the problem is the other issues in the business and particularly some of the pricing and margin, other margin pressures have created situations where we clearly have not seen that come through. There have been some synergies that have actually manifest themselves in other parts of business in terms of some of the leverage we got from some of the buys, so there is a little bit of that shows up in consumer but I think as we look forward this is a matter of whatever we were expecting or anybody else is expecting out of Private Brands, I think become somewhat irrelevant as we focus back on the consumer and commercial businesses. It is really about continuing to drive cost savings and margin expansion that we've seen particular in the consumer business over last quarter to continue that trend. So in terms of a total company model I am not sure the synergy number from several years ago really lives on going forward.

[David Driscoll:]

Yes. I am always worried that the synergies filter into different lines not just the private label line hence the importance of the question. Two quick follow ups. What was Private Brands' EBITDA in 2015? And is it fair to say that your target leverage going forward post anything would be something like around 2x, would that satisfy your statement of wanting to be solidly investment grade if I were just to try put flag in the sand for a ballpark figure.

[John Gehring:]

Well, first of all on the EBITDA for Private Brands, I'd say on a normalized basis it is probably in the mid [300], I don't want get to a point estimate in terms of debt to EBITDA, the broad range I used right now as we seek to be priced somewhere 2x and 3x. Obviously, if were three our capital allocation priorities probably a little bit shifted and if we got to two probably say we have plenty of fire power to do more investments. So it is all going to be I think depended upon where we are at point and time and what opportunities in front of us.

[Operator:]

And Jonathan Feeney with Athlos Research has our next question.

[Jonathan Feeney:]

Good morning. Thanks very much. Sean, you mentioned you did some intense study. I mean could you give us a couple of example of what you think -- what convinces you to take such long time to fix the Private Brands business and a couple of examples of why you think that maybe someone externally might be able to do that little bit more quickly.

[Sean Connolly:]

Well, Jonathan, it is fair question but I don't think my contemplation and my analysis was really just about Private Brands. I have been under hood on every single piece of this company to try understand where the opportunity is and how resource intensive the work would be in order to accomplish what we see as the opportunity in those different parts. And our conclusion is that there is significant opportunity with this company to create value but we need to be focused and we need to have our resources squarely lined up against areas where our capabilities are more matured, where we can get the most impact on the fastest possible timetable, and ultimately that led me and the Board to make a decision that we need to focus. We need to prioritize and we need to get squarely focused on driving the kind of aggressive change agenda that I just laid out for you in my comments a few minutes ago. So this is about making the tough call and prioritizing around those actions that we believe can drive maximum return for our shareholders and that includes an immediate divesture of our Private Brands business and that's why we are working that process.

[Jonathan Feeney:]

Okay. May be I can ask little different way. I guess why-- certainly different philosophies on this but one might think that maybe a tactically better approach might have been to execute some sort of sale divesture before deciding on this plan. Could you maybe tell us a little bit about why the decision to sort of go public with this, change in direction without having anything necessarily lined up at the moment?

[Sean Connolly:]

Well, we haven't gone public with it; you probably would have found out about it anyway one way or another. So we thought it would just be best part our shareholders to understand the big picture of our plan. I mean what we are laying out for you today is clearly different direction. I don't think there is any need to keep that a secret while we are working at behind the scenes. We've got a base plan, we have tremendous confidence in, and we have an overarching philosophy around how to create value for our shareholders that we always keep running side by side our base plan. And we have full confidence there is upside in this Private Brands business but we also believe that should be done by somebody else instead of us so that we can focus on these other opportunities that we need to get after with some urgency.

[Operator:]

And we will hear question now from Ken Goldman from JPMorgan.

[Ken Goldman:]

Hi, good morning, everybody. Sean, thank you for the color this morning, it is appreciated. One question I wanted to follow up on, you were pretty open about saying look this is the plan. But if a better plan comes up that is more accretive to shareholder value that you will certainly consider it. What one of those possibilities be to investing Consumer Foods. And the reason I am asking that specifically is if you divest the Private Brands and then you divest Consumer Foods there is not much left in Omaha. And there are political issues probably with the Board and with a lot of other stakeholders and effectively leaving Omaha. So is it I guess my question is it on the table that Consumer Foods could be divested as well?

[Sean Connolly:]

Ken there was lots of assumptions there in your question. I think I have been pretty clear and consistent in my comments today that our Board of Directors and our management team fully understand the importance of creating shareholder value. And I am sure you understand from my remarks earlier that our philosophy is to always be proactive and open minded in evaluating the different paths to creating value. But we put forth the beginnings of a plan that we are convinced can drive a lot of value on its own. However, it becomes obvious if some other tangible and actionable path is a better way to create value, our Board and our management will adapt accordingly.

[Ken Goldman:]

Okay. No, I appreciate that and always making many assumptions, but that's what they do on the sale side. question two is you have meeting or set of meetings set up this week I believe with JANA. Can you talk a little bit about in a relationship you have within so far, your expectation going in, just any forward looking thoughts as to what you are anticipating from those meetings?

[Sean Connolly:]

Sure, no problem. We have not yet spoken with the folks at JANA. But clearly we welcome their feedback as we would with any of our shareholders who are focused on long-term value creation. I think that is common ground that we have with JANA with other investors. I can't offer anything specifically related to JANA other than to say we want a constructive engagement and we will listen to their point of view. They are big shareholders but we've not yet met with them so we don't really have a whole lot more to share or disclose at this point.

[Operator:]

And we will move now to Jason English with Goldman Sachs.

[Jason English:]

Hey, good morning, folks. I want to come back to Mr. Feeney's question on big studies that you have undertaken but attack it more from the cost side. Sean, as you point out, you looks at your SG&A, you benchmark its peer, and it's already relatively low. The rhetoric on getting lean, getting mean, isn't that far off from sort of the message that Gary had over the years that John you've also carried forward, so my question is really where the opportunity is is? As you shake out the study, I heard some of the big buckets you laid out but I was hoping you get a little bit more specific on where you really see opportunity get leaner and meaner here at the SG&A line?

[Sean Connolly:]

Well, the details of kind of what it look, well, first of all I would frame it in terms of margin expansion, Jason, not just SG&A because I do think there is a significant opportunity improve the margin in this company across the board as we get after this things. Certainly SG&A is a big bucket for us; clearly the company has made progress and felt good about kind of that progress when I got here. But my message the day I got in is it doesn't matter how much progress we've made. It is not good enough. We've got more to do. Part of that is exploring the four levers and pushing hard on them that I mentioned today. Part of it's cultural. It's just this getting everybody who is part of our team to understand that any inefficiency and waste is just a tax on our brand and tax on the profits that we return to shareholders. That is a mindset that we will drive. I've already been socializing that idea for months now and people are getting it. They understand how critical it is to get this out. They want to attack all of their orthodoxies that have been held previously. And really get after margin expansion. So SG&A will be a big part of it, with things that I talked about spans and layers all the things you can imagine. Productivity should not be dismissed as well nor trade efficiency. These are all things that over time as we execute them will contribute to what I think could be meaningful improvement in our margin structure.

[Operator:]

And we will take a question now from RBC, David Palmer.

[David Palmer:]

Good morning. Sean, you mentioned that portfolio mix and segmentation is needed and this seems to mean that trade promotion rationalization, but also perhaps higher spending on certain brands and categories. In the past, it's felt like ConAgra's brands have suffered when the Company planned for a promotion rationalization, the big setbacks often were highlighted as a key competitor punished the -- by grabbing its activity for themselves. And then on the spending side, it's been equally frustrating at times where ConAgra to find good ROI spending. So as we think about this in the segmentation, are there examples or reasons that can help us get our head around why even a more positive approach can work for ConAgra?

[Sean Connolly:]

Well, there is a lot to work with here, David. With the right portfolio refinement and the right investment, this is a good portfolio to post some modest growth and expand margins and redeploy capital. And we are going to be realistic around our industry and our categories. The key is portfolio segmentation and having the right expectations by brand and by categories so that we are matching investment with potential establishing the right goals and delivering results. I mean that is really the key. But I think the phrase that I used in my prepared remarks earlier was a different approach. Every company goes after brand building. Every company goes after innovation and every company goes after trade efficiency with mixed results I might point out. I fully expect we have better results and that's going to come from a number of different areas which is includes a different approaches, it is going to be potentially some new talent that we bring on to the team. This is a piece I understand very well and our effectiveness has to improve meaningfully on the back of better work processes and much more rigorous analytics. But overall anything to drive the branded portfolio is got to be done on a surgical basis with clear eyes. It is not going to be blanket for Andrew's question earlier. That is just not going to happen. And on trade efficiency, I have been doing trade efficiency for a long time, we've got a team of people that are working it with kind of professional over site and we know exactly what we got to do there. The key is you got to have a strong set of brands. If all you have to fall back on is price, it is hard to get more efficient on trade. So you got to have stronger brand. So you got more thought to bring to the table for our customers as we change some things.

[Operator:]

And we will take a question now from Matt Grainger with Morgan Stanley.

[Matt Grainger:]

Hi, good morning, everyone. So just first on Private Brands. I was hoping to get a sense of how you plan to manage the business from a sales capabilities standpoint while the strategic reviews underway. You've been focused for a while on trying to improve execution and also win back business you may have lost. Are those both still going to be near-term priorities? And do you think the profitability margins can improve sequentially during this strategic review process?

[Sean Connolly:]

Well, these are definitely separate stream. The work we've done and the organization changes we've put in place to run this business better to execute more effectively, nothing is going to change there. We've got the right structure now calling on it, we've a clear understanding of how you run this business and what it takes, and we are rebuilding our relationships we've got with customers. So all of that is going to be intact as we run the sale process. However, the pace of path recovery is clearly further out and longer than we expected last year. So that is -- I would not expect any kind of rapid recovery from where we've been. We do expect the segment to be better in 2016 versus 2015 but that progress will happen sequentially as we move through the year given the changes we put in place.

[Operator:]

Our next question will come from Eric Katzman with Deutsche Bank.

[Eric Katzman:]

Hi, good morning, everybody. So I have two questions. One on private label and the next on frozen. I guess is there -- with regards to the private label sale, is there a kind of minimum amount that the Board is willing to accept? Because obviously the business is impaired and it's struggled but it does have kind of $4 billion roughly of sales, so I guess is there a limit as to how much of a loss the company is willing to take. And then second -- I think Sean I am trying to think through your career and I don't recall if it ever involved like frozen food or specifically frozen entrees because it seems like that's been the one category since the great recession that has been in serious decline and that's a very big part of the consumer portfolio. And is there something that you see within those brands and within frozen entrees that where maybe the category has bottomed or there something technology that you see within the business today that makes you more comfortable that there can be turn in what's a very important part of the consumer segment. Thank you.

[Sean Connolly:]

Yes. Let me take those in order, Eric. On the first part of it on Private Brands, as I mentioned earlier we think there is going to be significant interest in these assets and we think we will be able to divest these assets at a fair value that will be acceptable to shareholders and with appropriate structure. And we also believe that we do need to get this behind us so that we can strengthen our focus on our base plan that you heard me layout. So when you do a comparison to make this move now or to make this move later, we are absolutely convinced that from a value creation standpoint it is better to make this move now. With respect to the frozen question. Yes, I have extensive experience in frozen. You may recall at Hillshire brands we had great frozen business anchored by the great Jimmy Dean brand and what I told my investors then is I reject the notion that frozen is a place where you can grow and grow profitably. It is just not grounded in fact. When you look at consumer need state absolutely there are consumer need state, where consumers want fresh and perishable items that they can enjoy with a whole family. But you probably know from your own lives that there are lots of consumer need states where you are eating alone, you don't have a lot of time and it's in those consumer need states where frozen is the absolute perfect solution. The key is the foods got to be good. You got to have good quality food. You got to have a proposition that consumers value and I always use the Jimmy Dean example in my previous live is just when you got great food, the consumer has the need state already there, you are going to be successful. So that's why we have taken the actions we've taken on our business like on Healthy Choice with Café Steamers which is a clearly superior product than what we sold under the Healthy Choice named previously. And it is working. And now we are taking it to the next step with the clean label 100% natural line. Similarly in Banquet, that is a value tier brand where we recognized when you just look at through in the plain light a day we needed to do better job on food quality. And that's what we've done. We've improved that. And these are the kind of fundamental actions that you need to take to improve performance. So it is not a question of is it the world going to frozen or is the world going to fresh. There are clearly is room for both. Our idea is that we need to make frozen fresh and we need to bring fresh perspective in frozen and that's how you drive profitable growth.

[Operator:]

And we will move now to Robert Dickerson with Consumer and Research.

[Robert Dickerson:]

Thank you. So, Sean, I guess the first question I have maybe sounds a bit simplified but I'd like to hear your take from on the set, I know you are talking about reaching kind of that top tier SG&A level being very aggressive with cost cutting efficiency et cetera but what's your take just by being there for few months as you do your studies just kind of why ConAgra kind of basically just has lower gross margin profile relative to the industry. I just asked because I mean quite frankly as you even point out SG&A as a percent of sales really isn't that bad as we benchmark. But it is really -- is could there be a much larger gross margin opportunity at ConAgra and if so is that something you would be willing to invest behind? Thank you.

[Sean Connolly:]

Well, Robert, first of all, I think I've said a couple of times there is absolutely a gross margin opportunity at this company. One there is couple of reasons why our gross margin is where it is today. Some of it is we had segment that are clearly at much lower gross margin that drag down a whole private brand obviously is a different gross margin than consumer. But if your comments are largely focused on consumer, there is absolutely an opportunity get gross margin going there but what's interesting about your question is in my experience the way you build strong brands with strong gross margins is you have to invest in them. You got to keep them fresh. You got to keep them relevant. You got to keep them contemporary. And that's exactly why when investors see a company like ours that's committed to margin expansion, part of that recipe I need them to understand is making sure that we have strong and relevant brands because then we got the ability to take price when we see inflation then we got the ability to invest in margin, accretive innovation. This is all part of a flywheel here that moves things in the right direction from a value creation standpoint. So and part of it is capability. So when I think about the over reliance on trade and under reliance on advertising and consumer, that tends to manifest itself in branded portfolios and lower gross margin. That is stuff that we can progress on and we will do just that.

[Operator:]

We will take a question now from Akshay Jagdale with KeyBanc.

[Akshay Jagdale:]

Good morning. And thanks for the color. My question John is about you mentioned the portfolio being an advantage for Consumer Foods, why -- the conclusion that I reaches somewhat the opposite because the playbook that you put forth today is -- it is not similar to what Gary had put together in 2007 being more efficient with trade price, spending more and brand et cetera but quite frankly 60% to 70% of your sales in consumer are in grocery and frozen which has had major challenges from overall category perspective. So can you just talk about why you think grocery incentive store perhaps is not structurally defining category longer term? And then maybe talk about the tax implications because you did mention the sale of this Private Brands asset creating tax shelter that you can use down the road. I mean is the reason why you don't take a more aggressive stands on portfolio pruning maybe consumer that -- is the reason for that being the tax issues or tax implications or just help me understand the portfolio strategy on Consumer Foods. Thanks.

[Sean Connolly:]

All right. Akshay, let me just correct the couple of things that you said there. Because I don't think they are consistent with what I said before. First of all, we are going to be absolutely realistic about our industry and our categories. So there is no dilution in terms of where different parts of the store can go. Secondly, we are absolutely open to divesting elements of our portfolio down the road and that's part of rigorous portfolio segmentation analysis. I don't have any color, additional colors to add on that right now. But those are key points. With respect to the branded portfolio and the way I see it, while we are very realistic about what these categories are doing, we also see pockets of real interesting growth within many of these categories. So I will pick a category that I didn't talk about today. Not butters, we have Peter Pan peanut butter business but there is very interesting and new start that is happening in a category like nut butters right now. I find that to be interesting because it tends to be margin accretive stuff and it tends to be very high growth. Even if you pick a category where we are the market leader like pot pies where you outside is the pot pie category. I'd argue, it's very exciting category, we've got the market leading brand with Marie Callender's, it is posting robust growth and it is got good margin. However, we also recognize we were not reaching all the consumers who are participating in that category because some had kind of what I'll describe is a different value system around what kind of brands they appreciate. So we went out and we made the acquisition of Blake's All Natural which is also a pot pie where we got tremendous leverage in terms of our ability to manufacture, but it appeals to a different kind of consumer with a natural and organic kind of mindset and that is incremental to the business we already on today. So what's different around the way we will approach these growth opportunities is effectively everything. We are going to pursue different work processes, we are going to have new capabilities and we got completely different approach to getting after these all grounded in a clear eyed realism around what's possible and strong analytics around kind of what we go after very surgically and where we invest.

[Operator:]

We will move now to Chris Growe with Stifel.

[Chris Growe:]

Hi, good morning. Can you hear me okay? Okay, just two questions if I could quickly. I guess little bit follow- on to Akshay's questions and your response, Sean, would just be -- what are -- what's the basis for divestures going forward? There is a place in a portfolio for growth businesses as well as cash flow brand, I am just curious if there is something you are targeting? Is it sort of category that's off trend or that kind of thing. And then secondarily if I could ask what Lamb Weston would -- your expected growth profile for that brand going -- for that business going forward particularly with its international focus?

[Sean Connolly:]

In reverse order Chris, I will hold on the Lamb Weston question because we will give more perspective on and much more detail on that business and the growth prospects when we do our Investor Day. On the question regarding potential divesture candidates, I really think it is just come down to basic principle. We don't have anything to announce, we don't have anything imminent. I think you were asking within the branded portfolio but ultimately you ask yourself things like, is it a strategic fit? Is it running on -- is it on auto pilot business that is doing no harm but contributing cash flow or is it a chronically key bucket and one that you just can't adjust by putting resources on. If we have those kinds of businesses clearly it makes more sense to put them under somebody else's ownership because they value it more than we will. Our whole theme today and what you heard around this new direction is focus and discipline segmentation. And that means saying yes to some things and saying no to other things as opposed to try to make everything happen across the entire portfolio. So it will be very logical and common sense should we pursue a divesture down the road that will also be very principle based in why we are doing it.

[Operator:]

And we will go again to Robert Moskow with Credit Suisse.

[Robert Moskow:]

Hi. Sean, you had spoken very positively about frozen and I guess the scale and the opportunities for innovation. Can I conclude that this is an area where in portfolio segmentation you will want to invest and also I guess I'd like to ask there are bidders out there who will pay high multiples for those frozen assets? I mean is it -- would it have to be some kind of really high crazy amount to persuade ConAgra to part with it. Thanks.

[Sean Connolly:]

Well, with respect to the first part of your question, Rob, it was breaking up a little bit but I think you were asking around -- is that an area we would be interested in investing in and I think the principle of disciplined segmentation applies within our frozen portfolio. There are clearly businesses that we will get behind and support and there are other businesses that we will manage for cash. And stable contribute-- we call them reliable contributors. So it depends. I think we will be very disciplined and very focused and judicious in terms of what we get behind there. With respect to your second -- the second part of your question, that's purely speculation. So I am not going to comment on it or fuel speculation other than to say I think you heard me say multiple times today, I am very open, my Board is very open to alternative ways of creating value should one come along that is clearly superior to our base plan and actionable and all of that. So there is nothing specific I can offer beyond that other than, that is overarching philosophy and yes it is simple but it is on wavering and we believe in it.

[Operator:]

And we will take a question now from Evan Morris from Bank of America/Merrill Lynch.

[Evan Morris:]

Good morning, everyone. Yes, just Sean if you can remind just with regard to some of the cost savings and some of the levers that you talked about pulling on the SG&A side, the supply chain side. Can you just remind us how many these initiatives are similar initiatives? Did you employ at Hillshire, how much margin improvement did it derive and do you see sort of I guess in a relative sense more opportunity or less opportunity as you are assessing ConAgra and then I just have a follow up.

[Sean Connolly:]

I think Hillshire came from Sara Lee and I am not going to get into great details there other than to say big legacy food companies have SG&A opportunities. It's undeniable. And we got after at Hillshire, we are getting after it here, some of that work has happened as somebody pointed out few minutes ago in the past, but by no means does that mean our work is done. SG&A reduction is a never ending quest at ConAgra Foods. It will be cultural. It will be something that we have disdain for inefficiency because those are resources that could otherwise go into brand building, go into innovation or go to back to shareholders. And that is what we are going to drive against and there is additional opportunity beyond what we've already captured.

[Evan Morris:]

Okay. And then just two quick follow ups. The book value of the Private Brands business right now, what is it?

[John Gehring:]

I don't have that handy, off hand given the various pieces to it. Chris maybe follow up maybe but --

[Evan Morris:]

Okay. All right, we can follow up off line. And then just regard to the guidance for the first quarter being flat with last year, clearly below where street expectation were, is this just sort of the need for higher marketing, is it result of lower than expected sales, what's driving sort of the flat year-over-year guidance in the first quarter?

[Sean Connolly:]

Well, I think I'll answer that by just taking us back to the big picture which is we've announced we are divesting Private Brands. We shared that the recovery on that business has been slower than we previously thought. We also shared that while we do expect that business to improve as we go through the course of the year. It will improve sequentially. So I think that kind of shapes really the answer your question.

[Chris Klinefelter:]

Operator, this is Chris. Given where we are in terms of time, we have room for one more question.

[Operator:]

Thank you. Our final question will come from Todd Duvak with Wells Fargo.

[Todd Duvak:]

Yes, good morning. Thanks for the question. I guess the question I have is regarding your financial policy. ConAgra's financial policy has been consistent for many years and targeting in investment grade credit rating and you have definitely reiterated that this morning which we appreciate. I guess one question Sean on Hillshire you had an agreement to acquire a peer company that was heavily debt financed and would have resulted in Hillshire's credit rating being downgraded to below investment grade. So my question is really twofold

[Sean Connolly:]

Well, let me take the second part first. The base plan we laid out today we have full conviction and its ability to make ConAgra a far better company into the future than in the past. So we believe in that base plan. We have conviction and of course we'll always remain open minded but that's our position on that. On investment grade, management and the Board of Directors are aligned, there is really nothing more to talk about on that, we are aligned and we are committed to it.

[Operator:]

And that's concludes our question-and-answer session. Mr. Klinefelter, I'll hand the conference back to you for closing comments.

[Chris Klinefelter:]

Thank you. Just as a reminder this conference is being recorded and will be archived on the web as detailed in our news release. And as always we are available for discussions. Thank you very much for your interest in ConAgra Foods.

[Operator:]

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