Brian Kearney - Director of IR Sean Connolly - President & CEO Dave Marberger - CFO

Andrew Lazar - Barclays Capital Ken Goldman - JPMorgan Alexia Howard - Bernstein Matthew Grainger - Morgan Stanley Jason English - Goldman Sachs David Driscoll - Citi Research Bryan Spillane - Bank of America/Merrill Lynch Akshay Jagdale - Jefferies Robert Moskow - Credit Suisse

Good morning and welcome to the ConAgra Brands First Quarter of Fiscal Year 2018 Earnings Conference Call. All participants will be in listen-only mode. [Operator instructions]. After today's presentation, there will be an opportunity to ask questions. [Operator instructions]. Please note this event is being recorded. I would now like to turn the conference over to Brian Kearney, Director of Investor Relations. Please go ahead, Sir.

Good morning, everyone. During today's remarks, we will make some forward-looking statements. While we are making those statements in good faith and are confident about our company's direction, we do not have any guarantee about the results that we will achieve. So, if you would like to learn more about the risks and factors that could influence and impact our expected results, perhaps materially, we refer you to the documents we filed with the SEC, which include cautionary language. Also, we will be discussing some non-GAAP financial measures during the call today. The reconciliations of those measures to the most directly comparable GAAP measures for regulation G compliance can be found in either of the earnings press release or in the earnings slides, both of which can be found on our website at ConAgrabrands.com/investor-relations. Now, I’ll turn it over to Sean.

Thanks, Brian. Good morning, everyone, and thank you for joining our first quarter fiscal 2018 earnings conference call. We delivered strong results in Q1 and are pleased with our start to the year. Before I get into the details of the quarter, let me take a step back and provide our perspective on the overall environment and how we are approaching the opportunities that lie ahead. Roughly 2.5 years ago, we saw the need to take bold actions to address internal challenges that we faced as a company, as well as the rapidly changing dynamics in the market. We set out an aggressive plan to strengthen our foundation and build the necessary capabilities to enable us to drive growth into the future. As we’ve discussed, we took a number of actions on this front, including reenergizing our culture and organization, reducing our cost base, and rebuilding our growth capabilities to reshape ConAgra Brands into a focused, higher margin, more contemporary and ultimately higher performing company. Our goal was not only to maximize shareholder value, but also to do a better job for our consumers and our customers by way of stronger brands. It's unmistakable that today, ConAgra is better positioned to drive value creation. Becoming a pure play branded CPG company has enabled us to zero in on the critical elements necessary to improve performance. We've shifted our focus to value and a strategy based on renewed brand relevancy. We've been aggressive around SKU optimization, we’ve become more disciplined around our A&P support and we continue to strengthen our innovation capabilities, as reflected by the new products that we are currently bringing to market. We have a deep commitment to operating with a leaner approach, and as you have seen, our margins are far stronger. By relentlessly following the portfolio management principles we shared at our Investor Day, we've positioned the company for long-term value creation. Now, that said, it is not lost on us that the sentiment surrounding our industry is laced with a high level of pessimism, but I can tell you that at ConAgra, we remain optimistic. As we were 2.5 years ago, we are clear eyed about the changes and challenges we see in the marketplace, but we also see this dynamic as offering opportunity. Our optimism is grounded in our analysis of consumer behavior, which we believe provides a roadmap for what we need to do to drive growth. In fact, much of our plan is built around our view that if we study the growth pockets in our industry and then adapt our iconic brands so that they incorporate modern food benefits and attributes, we will deliver value to our consumers, our customers, and to our shareholders. It's hard work; but the endgame is clear. In order to grow, we have to modernize, innovate, and renovate our portfolio, and that is exactly what we are doing. Turning now to Slide 7, you can see the cadence we laid out for how our transformation would unfold. We are now in the middle innings of our journey and remain squarely on track. The last couple of years were about resetting our topline as we upgraded the quality of our revenue base. Now in fiscal '18, our goal is to further improve our topline trends as our innovation pipeline and new marketing programs take hold in the marketplace. Meanwhile, margin expansion will continue to be a core pursuit at ConAgra. While we’ve made tremendous progress, our work is not done. We still have a lot of opportunity in front of us and we will continue to chip away at margin opportunities and strengthen our innovation programs in order to improve our growth prospects. We got off to a strong start in the first quarter of fiscal 2018. Our adjusted EPS for the quarter was up nearly 18% from the prior year and exceeded our expectations. We continued to make progress on our margin expansion agenda, despite the higher-than-expected inflation. I'll provide a bit more color in a moment about how we are bending the trend from a sales perspective, but we’re pleased with our progress. Our sales trends continue to improve, and that improvement is accelerating. We have continued to make progress in modernizing our portfolio through strong innovation, which is performing well and through recent acquisitions. As evidence of our conviction regarding our long-term plan and value-creation potential, we repurchased approximately nine million shares of common stock for $300 million during the first quarter. The bottom line is that we're encouraged about our first quarter performance, and we are reiterating our 2018 guidance. We remain unwavering in our focus on driving the centerline of our profitability up over time and we are committed to continue taking the right actions to position ourselves for the future. Turning to Slide 9; in the first quarter, we again delivered strong margin performance. In addition to the gross margin improvement I touched on a moment ago, you can see we also drove 110 basis points of adjusted operating margin improvement compared to Q1 of last year. It's important to keep in mind that because we had minimal new innovation a year ago, we had atypically low slotting investments in our base period. In first quarter of this year, we re-committed to innovation and the associated infusion of slotting back into the P&L served as a transitory headwind to our margin expansion. The way we think about it, our unaffected gross margin expansion this quarter is plus 61 basis points, which excludes incremental slotting related to new innovation. Going forward, the incremental slotting related to new innovation will become part of the base and not have the same magnitude of impact as we continue to roll out new products. Overall, our strong margin performance continues to be enabled by the success of our value over volume strategy and the supply chain productivity work. Turning to the top line and our progress and continuing to bend the trend in our sales performance. 2.5 years ago, we set out to improve the quality of our revenue base by cutting back on excessive promotion, rationalizing a long tail of low performing SKUs, and renovating our brands to include the attributes that today’s consumers demand. Our actions are reflected in the charts on slide 10. On the left-hand side of the slide, you can see our distribution performance, shown here as TPDs or total points of distribution, is beginning to improve. We expect these trends to shift to net gains in the back half of the year, as the pruning of low performance SKUs abates and new innovation continues to roll out. Importantly, we have continued to increase sales velocity, as we upgraded the quality of our TPDs. When we modernize our products and discontinue weak SKUs, you can see that we are reconditioning our shoppers to purchase updated products off the shelf at full margin, and the velocities are getting better every time we look at the data. As distribution increases throughout the year, this will drive continued improvement in base dollar sales. As you can see in the chart on the right, this improvement is already materializing. Looking now at organic net sales, our disciplined approach to resetting the top line continues to show progress, with Q1 delivering a 250-basis point increase versus fiscal 2017. Importantly, our branded domestic retail segments, where we are farthest along with our action, are performing even better. This improvement is coming off a healthier, less promotional base business, with a greater percentage of volume coming from loyal households at higher margins. What you can't see from this chart, is that as we moved through the quarter, trends accelerated. Our scanner data, however, does reveal this acceleration. Take a look at the last five weeks here on slide 12. On the left, you see total ConAgra domestic retail sales were down 1%, which reflects steady improvement as compared to the last 13 weeks, and the last 52 weeks. And keep in mind, this is a period where our new products are just shipping into the marketplace. Looking at the chart on the right, you see the top line improvement is particularly dramatic in our frozen single serve meal business, which we believe is the best proxy for the traction of our plan. As you know, our brand renovation work last year focused on frozen, given its scale and therefore represents the bulk of our new innovation this year. Early days but very promising. Overall, you can begin to get a sense for why we feel good about our growth algorithm, both this year and long term. One of the most compelling reasons for our optimism is the strong sell-in and early success of our new innovation slate. You see a sample of these exciting new innovations on this page, most of which are shipping in the first half of the year. The products are the result of our actions to refresh our iconic brands and are over-indexing to new, young, higher income consumers with bold, on-trend flavors. While we started rebuilding our innovation slate with our primary focus on our frozen business, you can expect to see us apply the same level of rigor and discipline across our portfolio as we go forward. In addition to modernizing our existing brands, we have added new on-trend brands to our portfolio. This includes Frontera, where we recently applied our expertise in frozen to extend the brand into single serve meals and Wicked Kitchen, which is a millennial focused brand we’ve built with wickedly bold flavors and highly innovative packaging. In our snacks business, the integration of tenacity foods is on track and Duke's and BIGS were strong contributors to the grocery and snack segment during the quarter. The encouraging performance of these brands illustrates the value of contemporizing our portfolio through both acquisitions and in-house development to extend into faster-growing, more premium segments. Now, I can imagine that with all of this new activity, some of you were probably thinking that was going to mean a significantly higher marketing expense in the quarter. Actually, that was not the case. As you can see from this chart, when you net slotting and A&P, our marketing spend in Q1 was roughly flat compared to year ago. Frankly, funding our new innovation slotting costs with reductions in A&P made sense. First, we have to build distribution and awareness, then we drive trial. Therefore, in Q1, we shifted our mix to more slotting, and we expect that mix to shift back to A&P and as our new products achieve full distribution, we expect total A&P spend to increase year over year. In the first quarter, this mix shift towards slotting meant accepting a gross margin and net sales headwind, which, of course, was a non-issue for operating profit and margin. As you probably saw, just last week, we announced the agreement to acquire Angie's Boom Chicka Pop, a leader in the fast growing better for you snacking segment, which complements our existing snack business. The $250 million transaction builds on our efforts to refresh our portfolio and accelerate growth through modernizing acquisitions. It also provides an important beachhead in the growing ready to eat popcorn category. The Angie's team has built a tremendous business, which is on track to generate approximately $100 million in net sales by the end of calendar year 2017, which is when we expect to close the transaction. The positive energy that the brand conveys, along with the bold flavors and whole grain goodness of the product are squarely on-trend with today’s consumer tastes. Given these characteristics, we think the brand is highly extendible. As we look ahead, we will continue our two-pronged M&A strategy, focused on both smaller modernizing and larger synergistic transactions. As you have seen, we are committed to undertaking transactions that can be accretive to our margins, sales, and provide a good return. As we look at other M&A opportunities, including larger deals, that commitment won't change. Right now, we have the organizational interest, we have the capacity, and we have the balance sheet. We are always prospecting for something that fits, is actionable, and is reasonably valued. And as you know, we will also continue to look at opportunities to exit non-strategic brands in an efficient manner using our tax asset. I will wrap up with slide 18. In summary, we had a strong start to fiscal 2018, and are confident in our ability to build this momentum going forward. Looking ahead, executional excellence remains a key focus in everything that we do, as we are counting on our innovation to continue to perform as we move throughout the year. As we just discussed, we'll stay active in our pursuit of value enhancing M&A and we will be relentless about doing what is necessary to deliver our long-term algorithm. With that, I will hand it over to Dave.

Thank you, Sean, and good morning, everyone. Before I start, I want to review our basis of presentation. Lamb Weston and the related joint ventures were reclassified as discontinued operations in the second quarter of fiscal 2017. The commercial reporting segment only includes the historical results for the Spicetec and JM Swank businesses, which we divested in the first quarter of fiscal year 2017. References to adjusted items, including organic net sales, refer to measures that exclude items impacting comparability. These items are reconciled to the closest GAAP measures and tables included in the earnings release and presentation deck. Please see the press release for additional information on our comparability items. Moving on to our results, you can see on Slide 20, that we continue to make strong progress improving our financial profile as we reshape our portfolio. Reported net sales for the first quarter were down 4.8%, and organic net sales were down 3%, reflecting sequential improvement against our fiscal 2017 organic net sales growth rate of minus 5.5%. As a reminder, starting in fiscal 2018, organic net sales excludes the impact of FX, divestitures, and acquisitions until the anniversary date of the transaction. Adjusted gross profit dollars were down 4% for the quarter. The decline was driven by lower volume, higher than anticipated inflation, the Spicetec and Swank divestitures, and increased slotting investment to support Q1 innovation. These were partially offset by improvements in price mix and supply chain realized productivity. Adjusted gross margin was 29.2% in the quarter, an increase of 26 basis points year-over-year. Improvements in price mix, realized productivity, and margin accretion from the divestitures offset the impacts of slotting, inflation, and FX. Inflation came in at 4.4% of total cost of goods sold for the quarter, driven mostly by increases in proteins, peanuts, and packaging. As you saw in the fiscal 2018 full year outlook section of our earnings release, we have updated our inflation estimate to 3.3% from 2.7%. We expect second quarter inflation to be in line with the first quarter, before it moderates in the second half to get to 3.3% for the full year. Adjusted SG&A decreased 9.6% or $19 million in the first quarter versus a year ago, driven primarily by the timing of IT projects and lower incentive compensation expense. SG&A as a percentage of net sales was 9.7%, which remains top tier in the industry. A&P expense decreased 15.2% or $10 million in the first quarter as spending moved to later quarters to support the new product innovation after distribution. The first quarter 2018 had incremental slotting investment to support distribution. Total A&P and slotting investment taken together were approximately flat for the first quarter 2018 versus the prior year. Adjusted operating profit was up 2.2% for the quarter, fueled by the drivers I just referenced. Adjusted operating margin continued its strong improvement, expanding 110 basis points to 16.5%, compared to the prior year. The first quarter had a higher adjusted operating margin than our full year fiscal 2018 outlook due to the timing of adjusted SG&A and A&P. Adjusted diluted EPS was $0.46 for the quarter, which was up 18% and exceeded our expectations. I will discuss the drivers of this strong increase shortly. Slide 21 outlines the drivers of our first quarter net sales change versus a year ago. Organic net sales were down 3%, driven by volume declines in grocery and snacks, international, and food service. Partially offset by volume increases in refrigerated and frozen from new products. Price mix increased 2.3%, driven by trade efficiencies, pricing actions, and mixed benefits across all segments. As we mentioned in our fourth quarter fiscal 2017, we are implementing our value over volume strategy more aggressively in international and food service this year. The acquisition of the Frontera, Duke's, and BIGS brands in 2017 added about 170 basis points to the first quarter net sales growth rate, but notably the divestitures of Spicetec and Swank reduced growth approximately 370 basis points for quarter. As Sean just discussed, our planned strategic approach to bending the organic sales trend is on track. Slide 22 highlights our net sales and adjusted operating profit by reporting segment. Consistent with our value over volume strategy, every segment delivered adjusted operating margin improvement during the quarter. In our grocery and snacks segment, reported net sales were down 1.5%. The acquisitions of Frontera, Duke's, and BIGS added 3.6 percentage points to the reported net sales growth rate. Total organic net sales were down 5.1%, driven by a volume decline of 5.9%, partially offset by an 80-basis point increase in price mix. Grocery and snacks continued the planned actions to improve trade productivity and discontinue low performing SKUs. This was particularly evident in the first month of this quarter, where we opted not to repeat deep discount merchandising events on a handful of center store brands. Accordingly, the net sales decline in the segment abated materially as the quarter progressed, continuing into the second quarter. Adjusted operating profit was $183 million for the quarter, down 1.2%, but adjusted operating margins increased 7 basis points to 24.6%. In our refrigerated and frozen segment, reported net sales grew 1.8% and organic net sales grew 1.3% as the acquisition of Frontera added 50 basis points of growth in the quarter. Organic volume increased 1.4%, driven by new products with price mix flat as price and trade productivity increases were offset by 90 basis points of incremental slotting investment to support the new product launches. Brands that drove growth in the first quarter include iconic brands, Marie Calendar's and Healthy Choice and the new Frontera frozen business. Adjusted operating profit in refrigerated and frozen was $102 million for the quarter, up 4.9% due to increased sales, supply chain realized productivity gain, and A&P timing, partially offset by inflation and incremental slotting expense. Refrigerated and frozen adjusted operating margin was 16.6%, up 49 basis points versus Q1 a year ago. In our international segment, reported net sales were approximately $191 million for the quarter, down 2% versus the prior year. This reflects a 7.7% decline in volume, partially offset by a 4.1% improvement in price mix, as the international team continues to focus on value over volume. FX favorably impacted net sales in the first quarter by 1.6%. Adjusted operating profit was $19 million, up 29.1%, versus the prior year, and adjusted operating margin was 9.9%, up 238 basis points. The operating profit improvement was driven by favorable trade efficiency, pricing, and mix, partially offset by the negative impact of lower volume. In our food service segment, net sales were approximately $252 million for the quarter, down 6.1%. Volume was down 17.6%, but price mix was up 11.5%, as we applied our value over volume principles and exited the low performing and non-core businesses. Adjusted operating profit was $23 million, a decrease of 1.4% versus the prior year. Adjusted operating margin was 9.2% for the quarter, an increase of 44 basis points. Favorable price mix and SG&A savings partially offset the negative impacts of the volume declines. Adjusted corporate expenses were $29 million for the quarter, down 15%, reflecting the benefits of our SG&A reductions previously discussed. Moving to Slide 23, this chart outlines the drivers of the 18% adjusted diluted EPS improvement in the first quarter versus a year ago. As we expected, volume declines negatively impacted EPS as we continue our value over volume strategy. This was partially offset by the adjusted gross margin improvements. The tailwinds for gross margin in the quarter were trade efficiency, pricing and mix, and realized productivity. The headwinds for gross margin were inflation of 4.4%, slotting, and unfavorable FX. EPS also improved from lower SG&A and A&P expense, and increased equity earnings from our Ardent Mills joint venture due to favorable market conditions and continued improvements in operating efficiencies. For the remainder of fiscal 2017, we are not forecasting this level of year on year improvement for Ardent. Interest expense drove $0.03 of EPS improve due to our lower debt, and EPS improved $0.02 from our share repurchases. The adjusted effective tax rate for the first quarter was 33.9%, which reduced EPS $0.02 in the quarter, due to a lower tax rate in the prior year, driven by stock compensation deductions. The impact of acquisitions and divestitures reduced EPS $0.01 for the quarter. Slide 24 summarizes selected balance sheet and cash flow information for the quarter. Net cash flow from operating activities of continuing operations was $142 million for the quarter, down from 208 million for the same period a year ago, due mostly to an increase in inventory from our acquisitions and the launch of new products, along with the timing of tax payments. We repurchased approximately 9 million shares of stock, at a cost of approximately $300 million in the first quarter. We ended Q1 with net debt of $3 billion as planned, up from $2.7 billion as of the end of fiscal 2017. We remain committed to an investment grade credit rating for the business. In late May, we announced the sale of our Wesson Oil business. As disclosed in this morning's release, we received a second request from the FTC in connection with their review of the transaction. We intend to cooperate fully with the FTC as it conducts its review. Also disclosed in today's release, we have recently entered into an agreement to acquire Angie's Boom Chicka Pop for $250 million, net of cash acquired and a working capital adjustment. We expect to close the acquisition of this business, which is on track to generate about $100 million in annual sales, by the end of calendar year 2017. On slide 25, we reiterate our fiscal 2018 financial outlook. We expect reported and organic net sales growth to be down 2% to flat. As mentioned earlier, organic net sales excludes the impact of FX, divestitures and acquisitions until the anniversary date of the transaction. We expect adjusted operating margin in the range of 15.9% to 16.3%. On the Q4 fiscal 2017 earnings call, we communicated that we expected 2.7% inflation rate for fiscal 2018. We now expect the full year inflation rate to be 3.3%, and we expect the impact to be weighted towards first half of the fiscal year. Also, we continue to expect cost savings from realized productivity to be weighted towards the second half of fiscal 2018 due to the timing of projects. We expect the effective tax rate to be 32.5% to 33.5%, and expect adjusted diluted EPS from continuing operations of $1.84 to $1.89. We expect to repurchase approximately $1.1 billion of shares in fiscal 2018, subject to market and other conditions, including the absence of any synergistic acquisitions. Our fiscal 2018 outlook includes the full year estimated financial results of the Wesson business, since the sale was still pending, but does not include the P&L impact of the pending Boom Chicka Pop acquisition. In summary, ConAgra Brands continues to make excellent progress. We continue to bend the trend on organic sales. We have made great progress upgrading our volume base. Gross margins and operating margins continue to grow despite increased inflationary pressures. Our balance sheet is strong and gives us the flexibility to pursue acquisition opportunities to drive shareowner value. Overall, we are on track and confirm our full year fiscal 2018 guidance. Thank you. This concludes my formal remarks. Sean, Tom McGough, and I will be happy to take your questions. I will now pass it back to the operator to begin the Q&A portion of the session.

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. To provide equal opportunity to all parties, we ask that you limit your questions to one and a single follow-up. [Operator instructions] And our first question will come from Andrew Lazar of Barclays. Please go ahead.

Good morning, everybody.

Hey Andrew. Good morning.

Good morning. First question would be in the refrigerated frozen space, obviously you noted positive year-over-year volume. And I'm just trying to get a sense of how you feel -- what you are thinking about the sustainability of that? And I guess the question is, do we -- should we expect that we trade volume down a little bit and pricing up a bit as trade spend ramps down as we go forward? Or would you anticipate that sort of positive volume track to continue to go through the fiscal year?

Sure, Andrew. Let me start that and, Tom, if I miss anything, you can round it out here. I think we're just getting started on frozen. You're seeing positive results from us overall, but I think that one slide I put up was pretty important, which shows we moved into positive territory, really on the back of improved velocities. We still have not yet turned the corner into positive territory in terms of total points of distribution. So, as I look forward and I think about maintaining positive velocities, but also linking that up with a move out of declining total points of distribution into positive net gains of total points of distribution, our results should get stronger. So, we're off to a bit of a better start than we expected. Frankly, we are just getting warmed up. If you [indiscernible] out of the quarter and you think about the frozen section in general, as I've been saying for several years now, the entire space is ready for massive innovation and overhaul and so I think what you're seeing is the early days of the opportunity that I see in this frozen space and we feel like we're leading the way.

All right. Thanks for that. And then that kind of leads into the next question, which is the overall, I guess renaissance we're seeing in some of the growth that's being put up in the frozen space overall. It's true that you and the other players are obviously innovating in a bigger way. I'm trying to get a sense, do you think that’s -- I don't want to say that that was easy, but, was all it took was the major players to sort of get on board with improving the quality of the food and all of that? And it really ultimately never had anything to do with the frozen states or the temperature state, if you will, and it was just about giving, making this more relevant or is part of this -- what was recession-related for a period of time, where individual frozen meals were out of favor for families looking to -- on a budget? I'm trying to again a sense of what is leading to this renaissance a bit and again, with an eye towards the sustainability of it.

Andrew, let me -- I think this is a really important point, because our view here is that a lot of what you saw in frozen was self-inflicted. I can take that even to broader food and big food to be specific. There's been, as I mentioned in my prepared remarks, a lot of pessimism out there. And I think our attitude is, look, these are dynamic times, no doubt. But, it seems to me that the notion that the sky is falling is a bit too much, isn't it? I mean, we view it as our job to navigate change in a way that sustains our competitiveness, continues to mine new opportunities and create value and we feel like we are doing that. The good news is we are two and a half years into this. So, we’re not just getting started. And the place we are farthest along is frozen. Now we have got to turn our attention and do similar things in other areas where we see growth opportunities within our portfolio, as an example, snacking where you see we have been active, particularly in M&A in the last year.

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

Hi. Thanks very much. Two from me, if I can. And I apologize if I missed this first one, but there's a lot going on this morning. Is there anything unusual in terms of comparisons with last year, investments, et cetera, that we should be aware of in the second quarter in particular? I know you have given guidance on the first half and the timing and the cadence and all that. I just want to make sure we’re not missing anything as we model this out a little bit. Because I know that some people were maybe overlooking the last quarter of the slotting fees a little bit.

Yeah, Ken, let me take that first and then, Sean, you can build on it. If you look at this quarter, Ken, and you look at our gross margin, there were a lot of moving pieces to this, right? So, if you look at our overall gross margin improvement, about 30 basis points, you had slotting, which was negative impact of about 35 basis points. You had FX, which actually negatively impacted gross margin about 20 basis points and then you had the favorable impact of divesting Spicetec and Swank, which was about 50 basis points positive. So, if you look at those three things, they kind of net out, right? And we have now finally wrapped on the divestiture. So, to your question, Q2, that will no longer be there. So now you are just down to in Q1, the price mix benefit on gross margin was about 130 basis points positive, but the net inflation costs was about 110 basis points of a headwind getting to our 26-basis points improvement. So, I look at that has since our inflation, we expect to be similar in Q2, that sort of relationship should move to Q2. We still will have some incremental slotting in the second quarter, because some of our products are in Q2 as well, with our banquet products. So, there will be some incremental slotting in the second quarter as well. So, that's why we talked about the first half, there being most of the incremental slotting. So, hopefully that was able to paint a picture, but that's how I see the second quarter kind of flowing out.

That's very helpful. Thank you. And then, Sean, coming out of Andrew Lazar's recent conference, I still refuse to call it anything other than back to school, Andrew, but, some people came away from their conversations with you feeling like maybe you were signaling a little bit that you are willing to take on a deal that's not necessarily accretive year one, or maybe it'll take some time to build accretion. Maybe preparing people for a bigger deal that might cost a little more than what they thought. Is that a fair takeaway? Were people coming out of that with the right attitude? Or maybe I wasn't there, obviously. Were people misreading some of the signals you were sending?

Well, what I can tell you, Ken is I don't think I said those things but it's -- there are obviously always different interpretations of what I say. So, let me try to clarify how I think about larger M&A. We think about it, number one, in terms of does it fit strategically? Does it help us become a company that delivers stronger returns for the long haul? And, obviously, we have to really sharpen our pencils in terms of what kind of synergies we can get, so we can understand the cadence of the returns that we can get. And then, ultimately, once we’ve done those things, it comes down to is the deal reasonably valued? And is the deal actionable? And when those things fall into place, we are prepared to move. And as you can see from our balance sheet, we have got the fire power to do something of some scale. That doesn't foreshadow specific-- any specific actions because obviously we don't have anything to report. But, as I mentioned in my prepared remarks, we are always on the lookout for those key success criteria of ours aligning. And if we have something to report, you guys will be the first to find out.

And the next question will be from Alexia Howard of Bernstein. Please go ahead.

Good morning, everyone.

Hi Alexia. Good morning.

Hi. So, can I ask about the drivers of the margin expansion from here? It looks as though there was a bit of slowdown on the gross margin side, which I understand was largely to do with slotting, but it is a slowdown from what we saw in fiscal '17. Clearly the SG&A is still experiencing quite a bit of cost cutting in there as well. Can you just give us more of a qualitative description as things play out during fiscal 2018, how you expect the drivers of those margin trends to shape things? Thank you.

Sure. Let me talk about gross margins holistically for our company, because I think it's an important part of our story. We were very clear a couple of years ago that we lagged the industry materially in gross margin, where the industry was roughly at 36. We set a 2020 goal of getting our company to 32. We are squarely on track to achieve that goal. We reiterated that guidance today. We have made tremendous progress in the last few years, putting 500 basis points or so of gross margin on there. Back at our Investor Day, we articulated that the year-on-year progress would slow down, and for obvious reasons, but I think going forward, we have no doubt we can continue to chip away at our gross margin performance. And when you think about the drivers of gross margin, to your question, as I have outlined previously, we actually pursue quite an array of drivers, everything from pricing, improved pricing capabilities, trade efficiency, productivity in our supply chain, channel mix, brand mix, all of these things, margin accretive innovation, all of these things are central pieces of our gross margin expansion agenda. So, these are all things we are working. The only other thing I will make the point of, again, is that there will be some volatility in gross margin expansion quarter to quarter, based on any number of factors. It could be that we have got more slotting in a particular quarter and less slotting in another quarter. It could be that we are in the early days of a shift from a deflationary environment into an inflationary environment. So, we experience inflation in cogs and haven’t yet gotten pricing into the marketplace. These are transitory dynamics. I don't get too caught up in those and it's why I talk about us being focused on moving the center line of our profitability north over time and trying to reduce that standard deviation around the center line by each year as we get better in terms of operating the company.

Great. And on the grocery and snacks business, the volume declines seemed to pick up again this quarter. They were a little better last time. It looks as though you are pulling back on ineffective promotional activity, which makes sense, but how do you walk the tightrope between the volume declines, the promotional activity, and profitability? Are you going to just keep current course and speed for the time being?

Yeah, let me talk about that. Dave made some important color commentary remarks in his comments earlier about this, which is that a lot of what you saw leading to that total grocery and snacks decline in the first quarter was really isolated to the first period. And we did literally have a handful of brands in the first period where a year ago we had very aggressive deep discounting that had been long negotiated in advance with customers. So, you may recall last year I mentioned that with some of these customer deals, you lock in up to 18 months out. So we had some of those remnant deals in there, in particular in period one, on a number of our grocery businesses we had those. So, keep in mind, big picture, we are farther along in grocery and refrigerated. We are working aggressively now in other parts of the portfolio. Grocery is one of those. So, it makes sense for us to get these deep discount deals out of the -- out of the cadence of how we run the railroad here. It creates the wrong consumer impression about our brands. So, you can see, in frozen, as we’ve done that, we are starting to recondition the shopper to think about our brands fundamentally differently, enhanced by more modern, more premium innovation. You may not see the same level of intensity in our grocery and snack business overall. You will see us pick our spots. But you will see us back away from some of these legacy practices still. And we did that in period one and we saw material improvements in trends after we got through period one, moving into Q2.

And the next question will be from Matthew Grainger of Morgan Stanley. Please go ahead.

Hi, good morning. Thanks for the questions. I just wanted to come back to the uptick in inflation guidance. For the full year, it's still within the range that you can deal with using productivity, but on some of the selected commodities you mentioned. Can you talk about the balance between offsetting that inflation through selective price increases along with positive mix and restaging? And to the extent you are having conversations with retailers about pricing in the current environment, how those are going?

Sure, Matt. Let me take that and, Dave, if I miss anything, please chime in. We are taking pricing in the current environment. We are experiencing inflation and, as you might imagine with a portfolio as diverse as ours, it does not apply equally to each and every brand. So, if you consider peanut butter as an example, that's a product where it's obvious to everybody that the key commodity input was inflationary. We took price. Frankly, we have seen others in the category take price and the customer is aware of that as well. So, we have been taking price. But our overall efforts to manage margin, as I just mentioned to Alexia, is more than price. It's all of those levers I just talked about. But we are taking price. We are very clear eyed with our customers about our need to do that. And frankly, our relationship with our customers, in my judgment, since I have been here anyway, has never been better, because our customers are keenly aware that the ConAgra portfolio has a vast number of choices that offer exceedingly good value. What our customers really wanted from us is to see these iconic brands to get into the modern era, to see better food quality, to see modern food attributes, and in many cases to see their own customer margins begin to grow again, because they have been compressed for so long as the company had so many brands that were locked into these exceedingly low-price points. So, we have been highly aligned with our customers and, frankly, now the conversation with our customers is all about innovation. And the question we keep hearing is what's next?

Okay. Great. Thanks, Sean. And then just on a separate topic. I mean, none of us really know if or when or how tax reform is going to happen, but just from a -- I'm sure you are going through scenario planning related to outcomes that might occur over the next 12 to 18 months. And the big question is sort of if corporate tax rates do get lowered, how much of that do you consider taking through to the bottom line to free cash flow? How much of it gets reinvested in a more accelerated way in the P&L? I guess just any -- I know it's a bit speculative right now, but any thoughts you can share on that?

Yeah, Matt. So, obviously we have been looking at this. This week, the bipartisan proposal came out. But it's really important that we understand the details, right? More specifics around the corporate tax rate reduction, any limitations on certain deductions which would obviously impact us. But generally speaking, I think the legislation should benefit companies that have a higher percentage of their business in the U.S., which would be us. So, we're looking at it. In terms of if there is corporate tax reduction, and there's more cash, we bounce back to our capital allocation, right? In our balanced capital allocation, where -- what do we do with our money and we're looking at our debt. We are looking at share repurchase. We are looking at acquisitions and then investment in the organic business. So, that won't change. And we'll see how it all plays out.

Your next questions will come from Robert Moskow of Credit Suisse. Please go ahead. Mr. Moscow, your line is open. You may be muted on your side, sir. Hearing no response, we will move on to the next question from Jason English of Goldman Sachs. Please go ahead.

Hey, good morning, guys. Thank you very much for the questions. Like others, I’ve got two. First, coming back to the inflation backdrop, it's edged up higher on you and quick back of the envelope math suggests it’s, at these rates, it's about a 40-basis point headwind to full year operating margins. But you’re holding operating margins. So, quick question, what are the offsets? How are you successfully offsetting that more onerous inflation outlook?

Well, Jason, here again there's a lot of moving pieces here, right? So, obviously inflation ticked up. But, Sean talked about it. The one element is all the different aspects of price mix, right? So, list price increases, trade efficiency, mix, margin accretive innovation and just accelerating that and continuing to look at how that will flow out for the remainder of the year. We did not give a specific guidance on gross margin in the year, but we did for operating margin. So that obviously, A&P and SG&A impacts that. If you look at SG&A for the first quarter, we were down about $19 million. About half of that decrease was timing and half were real decreases based on costs we had in the prior quarter. So, we continue to look at SG&A and manage that and eliminate unnecessary costs. And we feel good about the progress there. So, when you take everything together with the pricing and how that flows out, the realized productivity that the supply chain is continuing to deliver, which is on track, and then our focus on SG&A. We still feel comfortable with the operating margin guidance.

That's helpful. Thank you. And then the second question comes back to the grocery and snacking business. First, congratulations on refrigerated and frozen and how you successfully bent the trend there. It's encouraging to see. Is it fair to draw some parallels between the initiatives that you have effectively deployed there and the initiatives that are coming on grocery and snacks? And if so, can you give us some color in terms of what any we may stand in, in grocery and stacks, relative to frozen. And really what I'm trying to get at is, A reason to believe you can do the same with groceries and snacks, and B; some sense of what a reasonable timing expectation to see that trend really bend on the forward.

Great question, Jason. Let me tackle that. I think the overarching thing is we don't have to do exactly the same thing in every segment that we have. We’re managing a total portfolio as a single cohort and really pushing growth where it makes sense to push growth. So, if you go back to our investor day and we talked about our portfolio segmentation model, we’ve got clear growers, we’ve got businesses that can move into adjacencies, we’ve got iconic brands that can be reinvigorated, and we have a lot of businesses that we call reliable contributors in the portfolio. Overall, big picture, we see lots more opportunity from here. We are innovating on our growth brands in growing categories. They skew disproportionately to frozen and refrigerated relative to, say, center store grocery. But we are also investing to bolster reliable contributors. Because reliable contributors contribute cash. Our growth brands which are in all parts of our portfolio use more of that cash and offer more top line. So, this is a fly wheel type operation that we have got moving in the right direction and we think we can accelerate it further from here. There are growth pockets, clearly, within grocery and snacks, some in grocery, some in, clearly, obviously in our snacks business. But there are also plenty of reliable contributors in that grocery business that are very high margin, high cash flow, and we just have not really renovated them yet and modernized them. So, that’s -- We will do that. Those businesses, some of them may not -- Chef Boyardee is an example -- we may not look at Chef as needing to become a growth engine, but it does need to reliably contribute because it's big. It's in tens of millions of households, it’s high margin-high cash flow, and it provides a lot of fuel for growth both in other parts of grocery and snacks and in frozen.

And your next questions will be from David Driscoll of Citi research. Please go ahead.

Great. Thank you and good morning.

Good morning.

I wanted to ask a little bit more about frozen. Sean, you called it out as the piece that you really think that people should be focusing on as kind of, maybe, the early proof, in terms of your tea leaf plans and evidence and proof that things are turning. Can you just talk a little bit more about what's going well with the innovation that's hit the market? And I say sometimes I think about it between core brands that are seeing innovation, and then flat out new brands that you are introducing to the market. And I think there's different risk profiles with these. And then just a second related point to this, you showed five-week data that was up 6.7%, and is this the type of growth that you have expected going forward or does it get even better as the advertising kicks in?

Yeah, sure, David. Let me try to tackle that. Frozen is -- we talked earlier-- it’s an opportunity and it's an opportunity and for all the reasons we discussed. And in the early success that we are seeing, I think it's a function of the fact that these products are really good. They are clean label. They are on trend. They taste fantastic. They are in unique packaging. So, many of you got the chance to see some of this stuff at Cagney and its very impressive innovation. But I think one of the things I'm most encouraged by in the very early data we see is the incrementality that we are seeing in some of our customers' data in terms of new purchases into the frozen section, new shoppers into the frozen section. To me, that's the big opportunity here because if you look at millennials as an example, who historically didn’t shop the frozen section. Well, think about it, millennials are living paycheck to paycheck. Perhaps one of the biggest single areas of waste in millennial budgets are the food that parishes in their refrigerator because they have been accustomed to buying refrigerated. We can deliver the equal quality product at better prices, but frozen so it’s not in a state where it’s going to perish and it won't lead to a wasted household balance sheet. So, that's a big opportunity and I think that's one of the key metrics that I want to see more of, along with the fact that we are taking legacy icon brands like Healthy Choice and we’re completely changing the way they show up, so that they suddenly have strong appeal, not to Boomers but to Millennials. So, that's part of keeping brands, legacy brands fresh for the long run. In terms of the balance between iconic legacy brand and start-up brands, as you can tell, by our portfolio, we have both and we think they both play a role. But in terms of what pays the bills, it's icon brands that have modern food attributes, that's where you drive velocity. And that frozen section in a customer’s operation is a true meritocracy business. And you have to ultimately drive velocity in order to perform and we’re seeing that with the icon brands that we’ve renovated. Going forward, yes, trends could strengthen from here. We’ve got -- obviously we are in the trial phase now. So as new products hit the marketplace, we will go from a trial phase to a repeat phase but we are also on a situation where we still are down in terms of net total points of distribution. So as that goes from negative territory to positive territory, that should only help. So, we are not guiding by segment or even by sub segment with frozen single serve meals, but obviously this is going in the right direction.

Thanks for the comments.

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

Hey, good morning, everyone.

Hi, Bryan.

So, I guess, my question is just around the sort of retailer appetite for promotional intensity and -- and even private label. We just hear that theme a lot from investors and, Sean, I guess my question is; as you have gone through the process of eliminating some of the really deep promotions and some of the highly promoted volume, have retailers reached out to try to just promote a different brand or, as you are pulling back on those promotions, are they also sort of looking to pull back on the promotional intensity in some of these categories?

Well, I -- we have received that question a number of times and I think overall, we have not been pressured to lower our prices or dial up the intensity of our promotion, and maybe that's in part because we already have so many brands that offer a tremendous value. I think your point is right, that retailers and manufacturers alike are hungry for improved growth, and the real question is; how do you get there? Now, the default position, and a lot of people I talked to, as well, it must be lower prices but when you actually look at the data, at least within the branded space, a lot of times -- most times, it is not the lowest priced stuff that is actually growing. It's the more premium, more innovative up to date stuff that's growing, and that's really what we are doing with our portfolio. But I think bigger overall point here is that the thing that is going to spur growth, in our mind, is innovation, which is consistent with our belief that the consumer's calculus on what drives value, and their value assessment is much more comprehensive than price alone. And the conversations we have with respect to our portfolio, with our retailers, really align with that.

All right, thank you. And if I could sneak one more in, just related to the inflation going up a little bit. Are we now -- how much of your commodity cost exposure is locked in for the year or is there potential that it could move one way or another some more as we move through the balance of the fiscal year? Thank you.

Yeah, we don’t -- that really varies by commodity. The area with the animal proteins where we have been impacted, that really doesn't lend itself to locking in as much. So, obviously, we buy forward, but -- so that's really where we were hit the most along with some of the packaging and Sean mentioned the peanuts. So, we feel we have the best estimate right now, based on all the information we have and we feel good with the estimate at this time. So, Sean, anything to add?

No. I think you got it.

The next question comes will come from Akshay Jagdale of Jeffries. Please go ahead.

Hi, good morning, this is actually [Luby] filling in for Akshay. I wanted to just clarify your comments on your sales growth expectations. I think you mentioned in your prepared remarks that you expect to see net gains in the back half of the year. Is that correct? I wasn't sure if you were referring to the overall portfolio. And will you have fully lapped all of the SKU reductions by the second half? That's my first question.

Yes, Luby, the net gain comment was with respect to total points of distribution. So, as you think about -- and when I think about the positive net gains versus negative net gains, it's just a net of the stuff we pulled out versus the stuff we have put in. Is it net it positive territory or negative territory. So, obviously last year, we did all takeaways out of the marketplace with SKU rationalization. In Q1, we’ve had more takeaways than we’ve had infusion in. And that’s going to shift as you see some of our SKU rationalization work abate and you see the new products hit the marketplace. So, you’ll see those total distribution points move more towards the positive territory as we move through the second quarter and the second half.

That's helpful, thanks. And then I just wanted to ask a question on the Angie's acquisition. So, I think you mentioned $100 million in annual net sales. On our math, we are getting to something in the region of $7 million in EBITDA, which seems pretty low. So, I guess, first question, is that sort of in the right ballpark? And if so, can you maybe talk about why the margins in that business might be as low as they are, and what, if anything, you guys can do to increase those? Thanks.

Well, we haven't given any profitability numbers on the business. So, I'm not sure where got. But what I can tell you is, this is an awesome brand. We can do a lot with it and we are highly confident that we will get a terrific return on our investment.

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

Hi. And thanks for getting me back in. Sorry for the technical problem before.

Hey, Rob.

Hi. When I look at your Nielsen data in the past four weeks, it's in positive territory, and it gets better and better. You have provided slides just on the base sales and obviously that looks better too. But can I look at this past four-week number and assume that this is the new normal, that from an overall perspective, that you can stay positive here? I think your multiple would benefit greatly if we got comfort that this is not just a one-month kind of trend, but kind of like where you are at.

Well, clearly, it's moving in the right direction and every month is going to be different. It depends upon -- we still do have a lot of trade spend. We still do have a lot of merchandising. So, it depends upon where our activities line up vis a vis our competitive activities. But, it's moving in the right direction. One thing that I probably should mention, as we are getting to the end of the call is some people may think that hurricanes played a big role in our P&L in the quarter. That's actually not the case. The hurricanes are really more of a Q2 concept but -- and it will impact certain brands in the week before a hurricane, and what we call the preparation stage. But net/net impact on our portfolio is not that significant because, if you think about it, you might build up in the preparation phase but then you've got -- you've got, perhaps pantry inventory that's got to burn down. Furthermore, to the degree you ever have extended power outages and things like that, as you might imagine, that's not exactly helpful to frozen and refrigerated businesses. So, you have these puts and takes, is, I think, my overall point. And there might be weekly volatility in there, but in our experience, it's not a significant net impact, really not an impact at all to speak of in Q1. And we'll see how Q2 plays out.

Just in general then, should we expect, because of that trade spend, that the reported retail sales trends are a little bit stronger than your -- than your internal kind of net sales reporting because of that slotting kind of difference?

Not really, Rob. We historically tracked -- We don't have a lot of seasonal businesses, we don’t have a lot of early shipments. Our consumption, on average, tracks pretty close to our shipments. So, there's a little bit of volatility in there. But, I think the big point you’re making which I would agree with is we are seeing our plan work. And it's not surprising to me that we had this same situation when I was at Sara Lee and Hillshire and saw similar types of traction. We are beginning to see it here. Obviously, we’ve got a larger portfolio here, so we’ve got more work to do in terms of touching different brands, and that takes time. This is not an overnight exercise, but there's just tremendous encouragement, I think, here on the team in terms of the traction that we're seeing.

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

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

Ladies and gentlemen, the conference has now concluded. Thank you for attending today’s presentation. At this time, you may disconnect your line.