Sean Connolly - Chief Executive Officer John Gehring - Chief Financial Officer Chris Klinefelter - Vice President, Investor Relations Tom McGough - President, Consumer Foods Tom Werner - President, Commercial Foods

Andrew Lazar - Barclays David Driscoll - Citi Ken Goldman - JPMorgan Matthew Grainger - Morgan Stanley David Palmer - RBC Capital Markets Jonathan Feeney - Athlos Research Bryan Spillane - Bank of America Eric Katzman - Deutsche Bank Alexia Howard - Bernstein Robert Moskow - Credit Suisse Chris Growe - Stifel Tim Ramey - Pivotal Research Group Todd Duvick - Wells Fargo Lubi Kutua - Jefferies

Good morning and welcome to today’s ConAgra Foods Second Quarter Earnings Conference Call. This program is being recorded. My name is Jessica Morgan and I will be your conference facilitator. [Operator Instructions] At this time, I would 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. Please go ahead, Mr. Klinefelter.

Good morning. During today’s remarks, we will make some forward-looking statements and 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 can influence and impact our expected results, perhaps materially, I will 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 and the reconciliations of those measures to the most directly comparable measures for Regulation G compliance can be found in either the earnings press release, our Q&A document or on our website. Now, I will turn it over to Sean.

Thanks, Chris. Happy holidays, everybody and thanks for joining us to discuss our second quarter fiscal 2016 earnings. As you saw in our release, our second quarter results reflect continued momentum following a strong first quarter with comparable EPS of $0.71, up from $0.61 in prior year. Before I get into details regarding our results, I want to take a step back and review the broader set of strategic initiatives we have undertaken to build a stronger, more consistent and more valuable future for ConAgra Foods. In the three short months since we met to speak about our first quarter fiscal 2016 results, we have undertaken bold actions that demonstrate our commitment to creating significant value for our shareholders. Specifically, we announced a $300 million efficiency plan with $200 million coming from SG&A reductions and $100 million from trade efficiencies. The decision to co-locate our entire Consumer Foods team under one roof in a new corporate headquarters in Chicago, the agreement to sell our private label operations to TreeHouse Foods and plans to separate into two independent pure-play public companies, ConAgra Brands and Lamb Weston. We are hard at work implementing each of these initiatives. We are on track to execute our $300 million efficiency plan, which will truly help us build ConAgra into a lean, more focused company and we are confident this effort will improve profitability, advance our growth agenda and unlock shareholder value. As we said previously, we expect to realize the majority of our efficiency improvements in fiscal 2017 and 2018. Work is also underway to bring our consumer team under one roof at our new headquarters in Chicago. We expect to move during the summer of 2016 and we are confident that bringing the consumer and corporate leadership teams together in a more open physical space will accelerate our shift to a leaner, more nimble, innovative and performance-oriented culture. Importantly, we also expect to improve our ability to attract and retain top talent. Ultimately, our goal is clear. We are building a ConAgra that is sharply focused on the consumer in a tireless pursuit of profitable growth. With respect to private brands, in early November following a robust process, we announced the sale to TreeHouse Foods for approximately $2.7 billion in cash. We remain on track to close the transaction in the first quarter of calendar year 2016. Finally, just last month, we announced our plans to pursue the separation of ConAgra Foods into two independent public companies, ConAgra Brands and Lamb Weston, through a tax-free spin-off, which we expect to complete by fall of calendar 2016. As we said when we announced the spin-off, our goal is to enable both ConAgra Brands and Lamb Weston to operate as vibrant pure-play companies with enhanced strategic focus and flexibility. We believe this is the best opportunity for these businesses to drive solid, long-term financial performance. Both companies will have strong market positions and will be poised to capitalize on their unique growth opportunities. As we get closer to the spin, we will share additional details regarding each business and our expectations for their respective performance at two separate Investor Days. So, we have accomplished a tremendous amount in a short period as we transformed ConAgra Foods to unlock long-term shareholder value. While a significant amount of work lies ahead on each of these initiatives, I can assure you that our management team is fully committed to executing with excellence. At the same time, we remain intensely focused on the operational plan that I laid out in June. Everyday, our business teams are and will remain focused on: one, driving margins through efficiencies; two, disciplined portfolio segmentation, brand building and innovation; and three, balanced capital allocation. Our solid Q2 results provide direct evidence of the progress we are making against these efforts. We have a good foundation in place and we are seeing positive trends in both Consumer Foods and Commercial Foods. In our Consumer Foods segment, we reported second quarter net sales of approximately $2 billion. This is down versus the prior year as a 2% improvement in price mix only partially offset a 3% decline in volume and a negative 2% impact from foreign exchange. In terms of profitability our commitment to improving our fundamentals led to a robust 10% increase and comparable operating profit and margin expansion of more than 200 basis points. This overall profile of margin expansion, alongside a disciplined pursuit of higher quality volume, will be a central part of our playbook in 2016 as we focus on maximizing our profitability over the long-term. Along these lines in Q2, we benefited from strategic pricing actions and reduced inefficient trade investments on key brands in order to begin establishing more of an investment grade volume base. Additionally, we made strategic investments in marketing to help drive long-term brand vitality. So again, our approach to the top line right now is one of increased discipline around portfolio segmentation, assortment, trade, pricing, innovation and A&P support aimed at driving higher margins and unlocking new channel opportunities. And as I have said before that means we are gradually eliminating volume that does not meet our profit standards. We will continue to follow this approach in coming quarters as we strengthen our foundation and create a platform, which we can grow in a quality way. One brand that demonstrates our intentions perfectly is Banquet, and I will say more about that brand in a minute. We also have a number of other brands that are performing well and delivering solid top and bottom line growth in response to investment. These are brands with clear differentiators and relevant consumer benefits like Marie Callender’s, Slim Jim and Reddi-wip. Our investments here are driving strong end market results as these brands grew significantly during the quarter. Looking ahead, we believe we have further opportunity to refresh our Consumer Foods portfolio in a number of ways, including further premiumization and an enhanced focus on wellness and authenticity. We expect to achieve this through a combination of organic innovation and marketing as well as smart acquisitions. You can see examples of this kind of work in our portfolio right now. We have launched Healthy Choice Simply Steamers, a clean label, lower carb version of our successful frozen Café Steamers line. We also launched Peter Pan Simply Ground, which is one heck of a product. And as you have heard us discuss before, within Hunt’s, we have leveraged our flash steamed peeling process that naturally peels tomatoes with steam. On Reddi-wip, with the emphasis on using real cream versus oil and on Hebrew National where our all-beef hot dogs are free of fillers, byproducts and artificial colors and flavors. And complementing our organic innovation recently was the acquisition of Blake’s All Natural Foods. While small, it’s a good example of how we also aim to refresh the portfolio through new additions. I mentioned earlier that Banquet demonstrated our margin over volume intentions perfectly and now I would like to offer more color. In fact, Banquet represented the vast majority of the second quarter volume decline as planned. Nevertheless, we believe our plan is the right one for long-term brand health and financial strength. In the second quarter, we launched a comprehensive program to restage the Banquet franchise and liberate it from the $1 price point. The higher price points enable us to invest in higher quality, including more protein as well as in surgical A&P that reeducates the consumer about the brand. As expected, we experienced an elasticity effect on consumer demand tied to the new pricing and reduced trade promotion frequency. But we also launched a new consumer marketing campaign late in the quarter to introduce consumers to Banquet’s new value proposition. Not every consumer will transition with the brand because a few are only about price, but given the higher quality we will attract new consumers to the franchise over time as well as improve the buying rate of brand loyalists. While it’s still early in the rollout, we like the margin expansion we are seeing and its highly disciplined approach to margin expansion is one we feel good about and we will methodically apply to other brands with similar opportunities. The final point I will make about our Consumer Foods segment is that we will remain relentlessly focused on improving operational efficiency and reducing costs to provide the necessary resources to invest behind organic and inorganic growth initiatives as well as the price mix benefits that come from our disciplined portfolio segmentation. Those initiatives should make for solid, consistent profit performance this fiscal year. Turning to Commercial Foods, net sales were approximately $1 billion, up 1% compared to the prior year. The Commercial Foods segment’s operating profit was $162 million, up 11% on a comparable basis. Lamb Weston delivered strong international volume growth. As you know, this is due in part to lapping the impact of last year’s West Coast port labor dispute as well as the impact of last year’s food safety issues in Asia. We are now seeing our international shipments normalized and growing in key markets. As we have indicated before, Lamb Weston remains well positioned to capitalize on the significant international growth opportunities created by the aggressive emerging market expansion of major quick service restaurant chains. We have and we will continue to invest in this business to support our customers’ growth internationally. In our Lamb Weston North America business we continue to see positive growth momentum across many of our key customers in the quick serve restaurant and operator distributor channels. We have industry-leading innovation and customer service and our breadth of diversified products continue to position this business as a clear market leader in North America. As we mentioned before, private brands has been reclassified as discontinued operations. At a high level, I will say that the team continues to make progress on stabilizing the business and making sequential improvement in profitability. We look forward to completing the transaction in the first quarter of calendar year 2016 and are working closely with TreeHouse Foods to ensure a smooth transition for all stakeholders. Before I turn it over to John, I want to take a moment to recognize the significant effort of our team across the company as we work to transform ConAgra into a stronger, more consistent company with a more valuable future as we unlock shareholder value. Yes, we have got a lot of work to do, but I am confident we are on the right path and couldn’t be more excited about what lies ahead. With that, John, over to you.

Thank you, Sean and good morning and happy holidays to everyone. In my comments this morning I will recap our fiscal second quarter performance including comparability matters and then address cash flow, capital and balance sheet items. I will also provide some brief comments on our fiscal 2016 outlook. Before I comment on performance, I want to briefly update you on the divestiture of our private label operations. As Sean noted, we continue to expect to close the sale in the first calendar quarter of 2016. At this time, we have only recognized a small portion of the tax benefit related to the capital loss we expect from the sale. However, we remain confident that the company will be able to realize significant tax benefits in the future. Specifically, we expect to utilize this loss carry-forward over the next few years as we work to reshape our portfolio in a disciplined manner. As a reminder, the results of operations for the businesses being divested are reflected in discontinued operations for all periods presented. In addition, in accordance with GAAP, the company is no longer recording depreciation and amortization expense on the assets held for sale. Consistent with our second quarter guidance, discontinued operations for the fiscal second quarter reflect about $0.07 of EPS benefit from the absence of depreciation and amortization. And as I noted last quarter, there are several smaller lines of businesses – business that have been reclassified between segments in connection with the private brands divestiture. The overall impact to our Consumer Foods and Commercial Foods segments is minor. However, we will provide reclassified historical segment financial information as part of our third quarter earnings release. Now I will recap our performance for our fiscal second quarter. Overall, diluted EPS from continuing operations as reported was $0.37. After adjusting for items impacting comparability, diluted comparable EPS for the fiscal second quarter, including discontinued operations, was $0.71 which is ahead of our expectations and compares favorably to our prior year quarter’s comparable earnings per share base of $0.61. As Sean noted, both our Consumer Foods and Commercial Foods segments performed well. In our Consumer Foods segment, net sales were approximately $2 billion for the quarter, down about 3% from the year ago period, reflecting a 3% decline in volume, a 2% improvement in price mix and a 2% negative impact from foreign exchange. Segment operating profit adjusted for items impacting comparability was $341 million or up about 10% from the year ago period. Operating margin on a comparable basis expanded about 200 basis points versus the year ago quarter. Margin expansion continues to be driven by pricing, mix management, supply chain efficiencies and favorable commodity trends. Foreign exchange this quarter had negative impacts of $32 million on net sales and about $12 million on operating profit for the segment. Our Consumer Foods supply chain cost reduction programs continue to yield good results. This quarter cost savings were approximately $40 million and inflation had a modest favorable impact on results this quarter. On marketing, Consumer Foods’ advertising and promotion expense for the quarter was $105 million, up about 18% from the prior year quarter reflecting our efforts to continue to strengthen and support our brands. In our Commercial Foods segment, net sales were approximately $1.1 billion or up about 2% from the prior year quarter. The Commercial Foods segment’s operating profit was $162 million or 11% above the year ago quarter’s operating profit adjusted for items impacting comparability. The strong operating performance was driven by margin expansion and strong volume performance in our Lamb Weston business. Discontinued operations posted a loss of $0.02 per diluted share this quarter, which includes an impairment charge of approximately $0.18 per share. This charge was required to adjust the carrying value of the private brand’s asset held for sale to $2.7 billion, which is our expected net proceeds from the pending transaction. After adjusting for this charge and other expenses, the private label discontinued operations earned $0.13 per diluted share this quarter, including about $0.07 per share of benefit related to the cessation of depreciation and amortization. Expected comparable earnings from private label operations were included in our earlier guidance for the quarter. Moving on to corporate expenses for the quarter, corporate expenses were approximately $190 million. Adjusting for items impacting comparability, corporate expenses were $65 million versus $57 million in the year ago quarter. The increase versus last year’s second quarter principally relates to higher incentives. Equity method investment earnings were $25 million for the quarter and $34 million in the year ago period. The year-over-year decrease reflects lower earnings from our Ardent Mills joint venture driven by unfavorable weak market conditions, which from time to time can result in short-term margin impacts. Our comparability items this quarter included three items. First, approximately $0.19 per share of net expense related to restructuring charges. Second, approximately $0.02 per diluted share of net expense related to the income tax matters from the planned sale of the private brands business. And third we had approximately $0.15 per share of expense related to items and discontinued operations for which we have provided additional details in the Regulation G disclosure included in the release. On cash flow, capital and balance sheet items, we ended the quarter with $96 million of cash on hand and $167 million of outstanding commercial paper borrowings. Total operating cash flows through the second quarter were approximately $318 million versus $418 million in the year ago quarter. The decrease is driven principally by timing matters related to incentives and tax payments. And as a reminder, due to the seasonality in our business and our normal inventory cycle, we typically generate a significant portion of our annual operating cash flow in the second half of the year. We remain confident in our ability to generate attractive operating cash flows over the balance of this fiscal year. On capital expenditures, for the quarter, we had capital expenditures of $69 million versus $67 million in the prior year quarter. Net interest expense was $80 million in the fiscal second quarter versus $79 million in the year ago quarter. And dividends for this fiscal quarter were $108 million versus $106 million in the year ago quarter. On capital allocation, we remain committed to an investment grade credit rating and a capital allocation strategy that appropriately balances between further debt reduction, the top-tier dividend, share repurchases and additional growth investments. During the second fiscal quarter, we repaid $250 million of long-term debt principally through commercial paper borrowings. We expect to refinance $750 million of debt, which matures on January 25, 2016 with short-term debt in commercial paper. As previously noted, we plan to use the proceeds from the sale of the private label operations primarily for debt repayment, including any debt issued to refinance the January debt maturity. During the fiscal second quarter, we did not repurchase any shares and we have approximately $132 million remaining on our existing share repurchase authorization. Now, I would like to provide a few comments on the balance of fiscal 2016. As we noted in the release, we are not offering fiscal 2016 EPS guidance at this point given the current status of the private brands divestiture. However, I would like to offer a few comments on our outlook. In our Consumer Foods segment, we expect to post modest comparable operating profit growth for the full fiscal year, even with our higher marketing investment, one less week in the year and headwinds from FX and higher incentives and stranded costs. The improved performance reflects margin expansion driven by pricing, mix management, supply chain efficiencies and a favorable commodity environment. We also expect the Commercial Foods segment to post solid operating profit growth despite having one less week in the year and higher incentive costs. The profit growth reflects volume growth in Lamb Weston and margin expansion across the segment. With regard to the third quarter of fiscal 2016, we expect comparable EPS, including discontinued operations to be modestly higher than the prior year quarter. Our guidance assumes expected headwinds from higher incentives, FX and increased marketing investments. This guidance also assumes a full quarter’s contribution from the private label business and reflects the benefit from the cessation of depreciation and amortization related to the private label divestiture. We expect continued strong fundamentals in both our Consumer Foods and Commercial Foods segment with margin expansion across those segments and continued strong volume performance in our Commercial Foods segment. We also expect modest initial benefits from our SG&A cost savings programs. In closing, while we are working through a great deal of change, we are pleased with our performance so far this fiscal year and strengthening margins across our businesses and in managing the significant changes in cost structure and portfolio that we believe will drive value creation over time. That concludes our formal remarks. I want to thank you for your interest in ConAgra Foods. Sean and I along with Tom McGough and Tom Werner will be happy to take your questions. I will now turn it back over to the operator to begin the Q&A portion of our session. Operator?

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

Good morning, everybody and happy holidays.

Good morning, Andrew.

Good morning.

Good morning, John. Just two questions from me if I could. First would be just around the efficiency projects and this maybe just splitting hairs, but I guess you talked about in the release this morning about getting the full $300 million in savings by the end of fiscal ‘19. And I think in the prior release when you had announced these projects, I think you said maybe roughly half in ‘17 with the balance in ‘18. So, I didn’t know if there was something that had changed that, that pushed it out by year or if it’s I am just making more of the wording than I should?

Yes. And probably, some imprecise wording on our part, but we would expect as I said in my comments we will have some modest benefits in fiscal ‘16. We will have a significant portion of the savings in ‘17. And by the time we get to the end of fiscal ‘18, we will be at our full run-rate of cost savings, so, really no difference – no change in our outlook from the previous call.

Great. Thanks for the clarity there. And then just want to make sure a little bit understanding of the guidance for fiscal 3Q. Given you are including private brands for the entire three months of the quarter, I guess given the D&A benefit to the private label results is likely to again be sizable in the 3Q. I guess it would sit I guess by back of the envelope would suggest it implies maybe the underlying operations maybe flat to down in 3Q. But given the strong performance this quarter, I am trying to understand what would really drive that or what’s different around the underlying business in the 3Q than what we saw in 2Q?

Yes. Andrew, I think your assessment of flat to down modestly, the way the math works is how we are looking at it right now. I would say we still expect to see good fundamentals across both of the operating segments. Commercial I think will continue to see good volume growth in margin expansion. In consumer, we expect to see continued strong gross margins. However, we also are reflected in that guidance. We also expect to continue to invest responsibly behind our brands and we will have some additional pressure from FX and higher incentives. So, I think the trends that we have seen in the strong segment performance will continue.

Yes, Andrew, it’s Sean here. If I can just build on that, clearly, the actions we are taking overall as a company right now are aimed at maximizing our value creation potential for the long-term. So, principally, the way I think about this is that the absence of D&A gives us some flexibility to make strategic investments for the long-term health of our portfolio. And importantly, that’s an approach that we will follow in the future fairly consistently where if things break our way, we will invest some of that favorability back in our business. And similarly, when things break against us, we won’t completely abandon brand building and innovation entirely. It’s all about maximizing long term profitability.

And we will move now to Citi’s David Driscoll.

Great. Thank you and good morning.

Good morning, David.

Good morning, David.

So, I just wanted to ask a couple of things about cost savings and inflation. I think you said that you generated about $40 million of cost savings in the quarter. How do we think about this figure going forward, John? Should it be is $40 million a quarter a good number? And then would this number be something on top of the $300 million that really starts, I guess, you said a little bit this year, but really big-time starting next year. This $40 million just kind of normal productivity and shouldn’t be repeatable on top of the $300 million going forward?

Yes, so really two separate line items there, David. The $300 million is our cost savings that we talked about a month or so ago. That is comprised of about $200 million of SG&A, about $100 million of trade efficiency. The $40 million I referenced was just the Consumer Foods supply chain, COGS efficiencies that we have achieved and I would say we certainly would look to perform at that level. I know we are going to challenge our business to make that even stronger over time, but that’s probably a decent model to work with.

And then just clearly on that – thank you, thank you for that. Just following on, on the inflation piece, you mentioned that inflation was a benefit in the quarter. Can you give us some kind of quantification on it? And then importantly, do you expect that level of inflation benefit to persist in the third and fourth quarters of the year?

It’s probably in the range in $0.01 or so, maybe $0.01 to $0.02 of benefit. I can’t get into the details in terms of looking forward. Clearly, the commodity markets have been favorable, I think almost across the board. However, as we look at there are some challenges from time to time in manufacturing and transportation particularly in terms of capacity and the transportation and warehousing area. But I think overall, we would expect inflation to be net-net a minor impact or benefit going forward for the balance of the year.

And we will take a question now from Ken Goldman with JPMorgan.

Hi. Thanks and happy holidays from me as well.

Good morning Ken.

In terms of the gross margins strength, I think you highlighted a couple of items and I think in there and correct me if I am wrong, reduction in trade spending in an effective way, some SKU rationalization. Two questions behind that, number one, if we were to bucket those two items in terms of sort of their importance in the gross margins strength, how would we think about that and also is there other writings that perhaps are beyond that – those two as well that helped the gross margin. And I know you talked about cost deflation, so I guess that’s the third. And then I guess the second question on that is are you getting any pushback from your customers as you spend a little bit less on trade, I mean I guess a lot of it has to do with Banquet. But just in general, some of the grocers that we cover talk about the balance they would like to have between promotion and non-promotion, but that they can’t – they don’t just want their vendors to cut it all off and leave it dry, so I am just curious how you think about that balance there and when there has been any push-backs from your top customers out there?

Yes. Ken, Sean here. When it comes to gross margin expansion, what we are really relying on our own actions and improvements in our own level of discipline, not windfall benefits from the market and from deflation, that’s not what this is all about. It is a multifaceted approach that we will continuously we take here in the quarters and years ahead to get our gross margins up. And a big piece of that is discipline around pricing trade efficiency, etcetera. But as we think about pricing, there are three pillars to our pricing actions. The first is what I will call inflation justified list price increases. The second is less deep discounting in terms of trade investments. And the third is brand quality upgrades like we did with Banquet this quarter. At any given time, we are pursuing some combination of these three and the goal is simple, which is to maximize brand strength and in doing so, maximize margins. Clearly, our efforts here are in early innings, but we feel very good about what we can do on the margin front and what we can do on the brand vitality front over time. With respect to your question on trade, we are a company that has historically, obviously lean too hard on trade and a lot of that was without a lot of discipline and we didn’t get a good return on that investment. That’s not in our customer’s best interest either to spend money with them that doesn’t generate top and bottom line sales. So when it comes to trade in $100 million we talk about, we talked about this before, but it’s not about cutting that $100 million, it’s about identifying where $100 million is not generating a return and then redeploying that. We might redeploy it in more efficient promotions. We might redeploy it in innovation, etcetera. At the end of the day, our customer wants to grow their top line and bottom line as much as we do. And if we cannot identify dollars that we are spending with them that are not working efficiently and make the more effective and more efficient, they are fully supportive.

Okay, thanks very much.

We will take a question now from Matthew Grainger with Morgan Stanley.

Hi. Good morning everyone and happy holidays as well.

Thank you.

So I guess first, just to follow-up on Ken’s question, I wanted to see if you could provide any more granularity on some of the promotional adjustments and SKU rationalization that’s going on in consumer and clearly a bulk of it right now is your focus on restaging Banquet, but I am just curious where you are in the process of assessing other brands acting on opportunities elsewhere in the portfolio. And in terms of the impact, any directional commentary you can give on how that might impact the top line in the second half or how much its benefiting margins at the moment?

Sure, Matthew. This is Tom McGough. Let me build off the comments that Sean highlighted. In terms of – I think we have talked about pretty consistently about making sure that each of our businesses is right on the four piece, improving the fundamental, being perfect at retail. If you look at a business like P.F. Chang’s this time last year when we reinstates that business in terms of product quality, product range and the business has grown very nicely. So our approach is one looking at our businesses and assessing the performance against those dimensions and Banquet is a move that we are making this year. We are combining our pricing increase with the significant increase in the product quality. This is a brand that has nearly 50% household penetration. It’s a relatively high purchase frequency business. We don’t expect all those customers or consumers to come with us with a higher price, but we are investing in the business to advertise the new benefits and features that we have added to the product. And over time, we believe that that’s the right long-term approach to strengthen the fundamentals on the business. In terms of trade productivity, as Sean said this is not a take away. This is about how are we more effective. And our experience has been that customers want to have higher impact, higher ROI and that’s our focus. So it’s part of our new discipline that we have across our company, getting the fundamentals right and looking at how we invest our resources for the highest impact of return both for ourselves and our customers.

Okay, that’s helpful. Thanks Tom. And then just one follow-up, I guess on the Consumer Foods top line growth profile, underlying sales growth in that segment has been a bit ahead of retail takeaway, I guess as implied by scanner [ph] data for the past two quarters and I know there is – some thing is going on with the adjustments in trade spending, but as we look ahead to Q3, can you just update us on where you stand on inventory levels at the moment, whether there has been any shipment timing dynamics around the Banquet restaging or anything that would have flatter results in the quarter?

So, our scanner performance is only a – it’s a significant portion, but only a portion of our overall results. There are non-measured channels, in particular club dollar that our portfolio is well positioned against. In terms of retailer inventories, we actually come in the industry see a trend among retailers to be more efficient. So, there is no real significant changes in any type of retail inventory. So as I look at the second half, we are going to continue to take a very strategic and disciplined approach to building a stronger and healthier volume base and our second half volumes likely to be down slightly as we continue to focus on eliminating that non-investment grade volume that John spoke about.

And David Palmer with RBC Capital Markets has our next question.

Thanks. Good morning, happy holidays. Just to follow-up on that trade promotion line of questioning, if you were to look at the volumes side, it looks like mid single-digit declines in Nielsen takeaway, how much do you think that decline is being caused by that purposeful reduction in promoted business or even SKU rationalization. And then perhaps separately, it looks like the cocoa business is coming off, I would imagine you are seeing weather noise there, any help on that would be great? Thanks.

Sure. Once again, this is Tom McGough. Let me just set the context of the overall sales performance. As both John and Sean talked about, our sales performance was largely defined by Banquet and FX. In terms of the balance of the portfolio, we feel really good that we have improved our overall competitive effectiveness. While there is puts and takes across the balance of the portfolio, in aggregate we grew sales and share across the rest of our business and that’s a multi-dimensional. It is increasing investments behind consistent high-performing brands like Marie Callender, Slim Jim and Reddi-wip. They also contribute to a significant mix improvement. We are taking inflation justified pricing. Most of that is rollover pricing from earlier in the year and we continue to work brand by brand to optimize the four piece. Part of that is looking at the trade promotion effectiveness. And another component is the SKU optimization where we have actually seen as we have eliminated SKUs, our velocities increase and the strength of our business is stronger. As you mentioned there are some near-term headwinds, particularly we see a slow start to the winter season. Our focus however, is really focused on what can we control and what we can control is our competitive effectiveness. And for the vast majority of our portfolio, we grew sales and share during the quarter.

We will move now to Jonathan Feeney with Athlos Research.

Good morning. Thanks for the question. Just a couple of questions. Follow-up on some of the earlier promo efficiency discussion, how much did your largest customers’ clean store initiative itself maybe drive some of this reduction in promo, but then I have one question after that?

This is Tom again. Across our customer base, our customers are each refining their strategies and tactics to improve their overall competitiveness. We are fully engaged with each of our customers to better align our initiatives, our strategies, our tactics with their go-to-market. I think that’s the new reality that we are going to face. And in that, what I feel good about is that we are increasing our overall share in the large portion of our portfolio. We seem to have a business that’s driven more by consumer poll than customer push. So, those are just the dynamics that are happening within our business. We are taking a very disciplined approach to our investments and always trying to figure out the best way that our program is aligned with our customer’s interest so that we mutually grow our businesses.

So from those comments, Tom, it sounds like a clean store initiative broadly speaking would align kind of things you want to do with your portfolio anyway?

I would make within our industry, it’s a relatively modest growth industry, and it is one about improving the operational efficiencies of the business. And those are the activities that we are focused on. We think they are the best interest of our brands, and ultimately, it’s where our customers are going as well.

And just Jonathan, it’s Sean here. One of the things – one of the places we are trying to get to is a place of more consistency for our shareholders so they can understand kind of the demand pull. And when historically we would drive these kind of artificial spikes of volume because of deep discount promotion, then you got to wrap it the following year, gets more costly every year, it’s just not a good way to run the business. It creates too much volatility. It eats away too much margin. That’s the opposite of what we are trying to get to, because obviously you take some time to kind of get off the drug so to speak and change your behavior, but I am really pleased with the progress Tom and his team are making here, because discipline goes a long way on this front.

We will hear a question now from Bryan Spillane with Bank of America.

Hey, good morning everyone. Just two quick ones. First, I guess in terms of the potential for some of the debt refinancing coming up and debt pay down. Is there – John, is there anything we should be thinking about in terms of whether there is going to be any sort of like cash costs or any other additional cost related to like prepayment, any kind of penalties or just cost associated with paying debt down early?

So, I am not going to go into details of our debt repayment plan, but certainly, depending on how we affect that debt repayment, there could be some premiums we pay to get – to repay some of the debt. We have not finalized all those plans. So, I can’t dimensionalize that for you. But what I can tell you is I am confident that whatever we do there, I think will be a pretty prudent use of the cash proceeds in a way that will benefit our balance sheet and then also balance that with reducing our interest cost over time.

And we have a question now from Eric Katzman with Deutsche Bank.

Hi, good morning. Happy holidays again. I have two questions. First, Sean, maybe can you talk a little bit about the kind of landscape for Lamb Weston and like sometimes in the past like the potato crop has kind of hurt results. And we don’t have a lot of visibility into that and just maybe kind of how some of the QSR trends are affecting the outlook? And then on the – maybe you could talk a little bit on the consumer side about just the frozen category as you know has been really challenged since the financial crisis? Are you seeing any kind of flat-lining or maybe even some growth in the mainstream parts of that category? And I will let go.

Let me come back and tell you how I am thinking about frozen, Eric. I am going to turning it over to Tom Werner, so we can give you a little bit of perspective on the crop and on Lamb.

Thanks. Hi, Eric. This is Tom Werner. First part of your question, we are at a point of the year where our crops in the storage so to speak and we feel really good about the crop and how it’s going to perform in our factories this year. So, we are not expecting any crop related financial issues for this fiscal year. The second part of your question, the QSRs, how are they doing? I would say when you look at North America and our international QSR customers we are seeing pretty solid year-over-year growth as we indicated. So, we feel really good about the trends that are happening particularly in North America, where we are seeing an uptick in traffic and that’s certainly being reflected in our results.

Yes. And just a few thoughts on frozen, Eric, because this comes up every quarter and I think what’s fascinating to me about frozen is you really need to peel back the onion and look very specifically category by category and then within category to see what’s going on, because you are going to see completely different trend lines in different parts of the business. I think the first big picture point on frozen is the consumer need state for frozen food is absolutely undeniable. If you look at income levels in this country, cash flows in this country and the perishability associated with fresh foods and the fact that people have need states most often during the week and frankly it’s the majority of occasions where they are eating by themselves off major kind of breakfast, lunch and dinner hours. The ability to have frozen food that stays ready when you are on hand is absolutely undeniable. What’s fascinating about when you peel back the onion and look at it is far and away the largest piece of the weakness within the frozen section is stuff that I will describe as diet foods. Brands that have historically had trademarks and positioning that were associated with weight loss. And they wore that weight loss diet positioning on their sleeve. Those are the products that disproportionately have struggled and have struggled for some time. I think companies are refocusing on quality and they are refocusing on what the definition of wellness means and for kind of a whole new generation, including us. So, if you look at our Healthy Choice franchise as an example, it’s kind of a mixed bag. We have got in the last few years a major thrust away from the old what I will call kind of ice cube tray type of frozen dinners that have been around forever and into a much more innovative product that we brand as Café Steamers. So, we have actually migrated away from the historic Healthy Choice positioning, focused more on Café Steamers, more on fresh. And then in this fiscal year so far, we built on that by launching the Café Steamers Simply line, which is all about clean label, low carb, much more contemporary. And these kinds of offerings are not only getting disproportionate customer support in terms of real state, because customers are dying for growth in frozen, but their velocities are significantly better and their margins are better. So, there is going to be a migration that takes place here and we want to participate in that and that’s why we think innovation is going to be central to getting the frozen section operating to its full potential.

We will move now to Alexia Howard with Bernstein.

Good morning, everyone and happy holidays.

Hi, Alexia.

Hi. You alluded to inorganic growth and maybe portfolio changes in the Consumer Foods segment, could you maybe talk about your aspirations for acquisitions in there? What kind of properties might you be thinking about, small, large, fast growth, focusing on cost savings? And would you anticipate any further divestments out of your Consumer Foods business? Thank you.

Sure. Let me tackle that, Alexia. What I have said in previous quarters I think remains absolutely true, which is this is in the macro we are reshaping this portfolio and it’s going to happen organically and it will happen inorganically. On the inorganic side, frankly, including the organic side, the places where we have got to bolster up our portfolio is more along the lines of clean label, natural, organic, more along the lines of premium gourmet. That will be both organic and inorganic. You already see stuff like that going on. Organically, you see things like Blake’s coming into the portfolio. So, we will be looking for those things. They tend to be faster growing. They tend to be margin accretive. The key is you got to be disciplined in your pursuit of that. So, we are very clear eyed on the strategy. We will be equally clear eyed on the economics of these deals. And with respect to small, medium or large, I won’t speculate on small, medium or large other than to say we got plenty on our plate right now organically. So, we are going to continue to look inorganically, but it’s not as if that’s a pressing need to do something of significant magnitude there. And as you think about divestitures, it takes me to this tax asset, these capital loss carry-forwards that we have gotten, just to give our investors a sense of how I think about that big picture because it really comes back to your question around how I think about divestitures. We – big picture, we are reshaping this portfolio, we are reshaping it to be more contemporary, higher margin, higher performing and more consistent. And that will happen over time through a series of organic and inorganic actions. And clearly the tax asset is one of those tools that we can leverage in this reshaping process, so there could be divestitures at some point. I won’t speculate on when that could happen, I will just say we will do what makes sense for the long-term value creation potential of the company. But the tax asset is not going to drive the company strategy, what maximizes value long-term will.

Our next question comes from Robert Moskow with Credit Suisse.

Hi. Thank you. Hey, Tom and Sean, from our modeling the Consumer Foods division is on track to deliver like one of the most profitable years in my recollection and the margins are going to be higher than we have seen ever, can you just give us a sense of like what is running ahead of schedule in terms of your timeframe, what’s surprising you on the upside. And then secondly, there is more savings coming, I am having a little trouble figuring out whether that’s offsetting like corporate expense dissynergies or whether we can take that to the bottom line on Consumer Foods, and if so if we can’t take it to consumer, Sean would you ever consider giving kind of a margin target for where Consumer Foods could go? Thanks.

Let me hit that margin piece real quick. Rob then we will come back to your other questions. But clearly when we get to our Investor Day for ConAgra Brands, we will give you the full algorithm for how we are thinking about this. We are hard at work at that right now, so we will give you a sense for what we think we can do on an ongoing basis with that company over time. Obviously though, margin expansion is our first priority and I want Tom to weigh in on this in a second, but let me just say having been in this industry a long time, any time I see an infusion of discipline in a portfolio like ours, I feel good about what lies ahead and then certainly the case here because short-term sacrifice for long-term gain is part of the equation. It’s part of the discipline. And that’s what drove the profitability this quarter. It’s kind of like avoiding the pecan pie after your big holiday dinner. It’s awfully hard in the moment, but you will respect yourself a lot more the next day and you will have less weight to lose before spring breaks. So this is making some of these disciplined choices are not easy because it’s tempting to go after the volume. But when you stick to your convictions, you see the kind of margin expansion that we are beginning to show. And frankly, we got more to go because we have got a diverse portfolio and we are going after the low-hanging fruit, but we are getting keep chipping away at this Tom. Tom, you want to elaborate?

Sure. Robert, this is Tom McGough. I think what’s materially different is that we have taken a more holistic approach to how we build margins. Certainly, we have had a strong track record of supply chain productivity. What we have added to that is a discipline and the capabilities that Sean have highlighted. It begins with portfolio segmentation where we invest is having a material impact not only on our sales performance, but also our margin performance. You see that on brands like Marie Callender, Reddi-wip, Slim Jim. The second piece is around what Sean highlighted earlier, around pricing, that’s multi-dimensional. It’s being able to be timely and disciplined and effective when there is commodity base inflation. We are a company that in the past had a very strong push mentality to our approach. Our approach on trade promotion is to deliver higher ROI, higher impact promotions. And in the near-term, this would trade-off between the efficiency and effectiveness of that. And then the third is taking a holistic look at a brand like we have – we have talked about many of those, P.F. Chang’s but Banquet. It’s about building margins through product quality upgrades, being able to command the price premium for that, so it’s a more holistic approach. There are new capabilities that we will be adding in terms of integrated margin management. Even more discipline in portfolio segmentation. I think what Sean highlighted is over time, we would expect our margins to grow and that I think is materially different than Consumer Foods over the last 5 years to 7 years.

Robert, this is John, if I can just clarify a piece of your question too. I think what Tom, and Sean are talking about are capabilities we have been working on and we are getting – we are seeing a really good traction. As I mentioned in my comments, as it relates to our cost savings initiatives both around SG&A and trade, we only expect to see a very modest impact from that this year, so certainly as we go forward we expect a much more significant contribution from that, which I think will enable us both to perhaps put some of that for the bottom line, but also make sure we are investing in the portfolio so that we have a sustainable model, so hopefully that clarifies that.

We have a question now from Chris Growe from Stifel.

Hi, good morning.

Hi Chris.

Hi Chris.

Hi. I just had two questions for you if I could, I want to be clear on is the portfolio segmentation that you intend for ConAgra Brands for the Consumer Foods portfolio, is that complete and therefore you are executing against the innovation, the promotional spending, against the categories that you are going to focus on going forward, is that of sort of complete already is really my question?

No, it is not complete Chris, with respect to segmentation or innovation. There is some good stuff underway, but frankly we still have a much larger opportunity in front of us. Darren Serrao, as you may know is only three months into his stint and as Chief Growth Officer. And he and Tom are working closely together to evolve our portfolio segmentation approach to the next level from what we have been using in the recent past. So this work will inform what areas we will prioritize going forward and also where we will scale back. And the point here is that we will be very deliberate in how we deploy our resources for maximum return. But on the whole top line side of our equation is earlier days than what we have been doing on costs as an example.

And perhaps that instructs my second question which is in terms of like incremental marketing spending and you are – where you are cutting back on promotional spending in areas of the business that you are going to change the kind of the marketing programs, that still is to be decided. So as we have seen increasing marketing this quarter of $80 million, it sounds like it’s going to accelerate in the third quarter, but we are not clear on what brand its going behind or how much that could accelerate at this point, if you given more color on that?

Sure. Overall – this is Tom McGough again. We believe in investing in brands, but we have to do it in a very effective – very disciplined way. It starts with the portfolio segmentation and that is the start in terms of where our best opportunities are. And to that, we hold a standard for each brand to be A&P ready. So what we look at is we have concentrated our spending on those brands that have the best category position, have the best fundamentals and strong margin profile. So our resources, what I am trying to communicate are very surgical, very focused and we are seeing very strong end market results. Earlier, there was a talk about the frozen category Marie Callender continues to grow in a challenged category, strong single-digits in growth. That’s indicative of the discipline and approach that we have in terms of A&P. Would you get more brands A&P ready, over time as we get those brands ready, we will increase our investments.

We will move now to Tim Ramey with Pivotal Research Group.

Thanks so much. Two questions, you called out some higher incentive expenses, should we assume that you are paying retention bonuses for key people in the move or how should we think about that?

Yes. Tim, this is John. On the maybe two things, first of all there are retention payments that we are paying to people as we transition the business. Those are typically captured in our restructuring costs, so that would not be captured in my comment on incentives. The incentives increase is really just simply a function of our pay for performance programs. And unfortunately last year, we did not perform particularly well, which was reflected in lower incentives, particularly in the back half of the year. And as we go forward this year, our expectation is that we are going to perform better, which will lead to higher incentives.

Okay. And then just on Banquet, you are reinvesting in the brand proving the product quality, if you could sort of implant the thought in the consumer mind, how would they think about Banquet on a go-forward basis versus kind of this historic, is it cleaner labels, is it fewer unidentifiable chunks, what’s the consumer going to take away if they fully get your marketing message?

Sure. We think it is incredibly strong brand. It’s in nearly one out of every two households. And the core of that brand is providing the family favored foods at a great value. So our fundamental positioning of the brand has not changed, but what’s improved is our overall execution and optimizing that. So what we are advertising is higher quality ingredients, more protein, higher quantity of food up to 25% more. And with that, we have combined that with the price increase to reflect the value and the benefits that we are delivering to the consumer, so same still great positioning a family favorite food at a great value. But we are investing in terms of the product quality and increasing the price commensurate with that.

We have a question now from Todd Duvick with Wells Fargo.

Yes. Thanks for the question. Quickly on the balance sheet, John you made some very helpful comments, specifically with respect to the January maturity, you mentioned that you are planning to refinance it with short-term debt and commercial paper, can you clarify whether that short-term debt, it sounds like it’s going to be bank debt as opposed to trimming out some debt in the debt capital markets, is that right?

More than likely, that will be the case because our – because of the timing of the close of the private brands we need to refinance that before we get the proceeds. So our objective is to be able to turn around and quickly repay that. So we are looking at short-term options there.

We will move now to Akshay Jagdale with Jefferies.

Good morning. This is actually Lubi filling in for Akshay. Happy holidays to everybody. Just had a quick question. Most of my questions have been answered already, but just regarding the sort of timing of the necessary filing that you have to do for the two standalone businesses, the Lamb Weston and ConAgra Brands. Could you give us any color into when we should expect to see, I think there is a Form 10 or something that needs to be filed? And just sort of the timing of that process if you could give us any color, that would be helpful? Thanks.

Yes, I can’t tell you with great precision, but I would say later in the spring is what we would be targeting. And again, we will be looking at a number of variables there on that timing, not the least of which is where we need to do to get, how much time do we need to get the work done, but also what’s the best timing there relative to when we think we will be going live, etcetera, but I would say late spring is probably a good place to take it.

Thank you. Our last question today will be a follow-up from Ken Goldman with JPMorgan.

Thanks for sneaking me in. On Banquet, it’s been sort of the de facto private label entry in the category mainly or in part, because its price was so low. As you raised the price, how do you prevent a private label competitor from coming in taking share, particularly those customers that aren’t traveling with the brand as you say? I guess, I am asking because prices are great when there is no major competitor underneath. Elasticity can be light, but isn’t there a risk that over time if the brand gets stuck in the middle if someone else does come in?

Ken I will attempt to answer that. Tom, if I miss something here, chime in, but you don’t tend to see a huge private label presence in categories where you have a large nearly $1 billion well-established kind of value player like a Banquet. So, Banquet has effectively played that role. And furthermore, frozen entrées in general, you don’t see a large private label presence. So, I am not overly concerned about that piece at all. It will still be a value, but the value proposition has changed. Frankly, when we talk to Banquet loyalists, some of them clearly say, hey, if you give me better quality, if you give me a little larger portion, if you give me more protein, I am happy to pay for it. That looks like value to me as opposed to just being caught on price. By the same token, there are other consumers in there who over time have been positioned and trained to just buy on deep discount, but we don’t value that consumer purchase the same way we value the other consumer purchase and we are getting more discerning around where we are going to – whose volume we are going to chase. That’s part of the concern. But I would say net-net I am not particularly worried about that scenario at all.

Thanks, Sean.

There are no further questions. Mr. Klinefelter, I will hand the conference back to you for final remarks or closing comments.

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. Happy holidays and thank you very much for your interest in ConAgra Foods.

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