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

Andrew Lazar - Barclays David Driscoll - Citi Ken Goldman - J.P. Morgan Matthew Grainger - Morgan Stanley Kevin Lehmann - RBC Capital Markets Jonathan Feeney - Athlos Research Bryan Spillane - Bank of America Lubi Kutua - Jefferies Jason English - Goldman Sachs Eric Katzman - Deutsche Bank Rob Dickerson - Consumer Edge Research Robert Moskow - Credit Suisse Chris Growe - Stifel Nicolaus Elyn Rodriguez - Bernstein Todd Duvick - Wells Fargo

Good morning. And welcome to today’s ConAgra Third Quarter Earnings Conference Call. This program is being recorded. My name is Candice Scriven, and I will be your conference facilitator. All audience lines are currently in a listen only mode. However, our speakers will address your questions at the end of the presentation, during the formal question-and-answer session. At this time, I’d like to introduce your host from ConAgra Foods for today’s program, Sean Connolly, Chief Executive Officer; John Gehring, Chief Financial Officer; and Chris Klinefelter, Vice President of Investor Relations. Please go ahead, Mr. Klinefelter.

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

Thanks, Chris. Good morning, everyone and thanks for joining us to discuss our third quarter fiscal 2016 earnings. As you saw in our earnings release, we delivered another positive quarter as results exceeded our expectations with comparable EPS of $0.68, up from $0.59 in the prior year. Yesterday was my one-year anniversary as Chief Executive Officer of ConAgra Foods. And I can tell you, I am pleased with what we are accomplishing. Clearly, it’s been an active year as we’ve methodically taken the necessary steps to help ConAgra start to unlock the value opportunity that I saw so clearly when I first started thinking about taking this job. Simply put, we are driving focus and discipline into the Company and the impact can be seen not only in our P&L, but also in our culture, where our team is energized, optimistic and determined about the path ahead. And while we’re pleased with our progress over the past year, we’re also clear-eyed that there is much more to do. Accordingly, our team remains hard at work on executing our plans to build a stronger, more consistent and more valuable ConAgra Foods. Before John and I get into the details of our Q3 results, I want to take a step back and provide you with my perspective on where we are relative to our strategic plans. In February, we completed the sale of our private label operations to TreeHouse Foods, marking the conclusion of a robust sale process. The sale enables us to sharpen our focus on our consumer and commercial businesses and it provides us with meaningful capital. We’ve already deployed $2.15 billion of the proceeds to reduce debt and going forward as part of a balanced capital allocation program, we plan to pursue further debt reduction. As we’ve discussed previously, the sale also provided a sizeable tax benefit, which can be used in the future. In addition to completing the sale of our private label operations, we have been hard at work at strengthening the foundation of our two businesses. We’re executing our $300 million efficiency plan, primarily within consumer to build ConAgra into a lean, more focused Company. We are confident this effort will improve profitability, advance our growth agenda, and unlock shareholder value. As we’ve said previously, we expect to realize the majority of our efficiency improvements in fiscal 2017 and 2018. We also remain on track to bring our consumer and corporate leadership teams together under one roof at our new headquarters in Chicago this summer. I’m excited about our plans to develop a more open physical space that will facilitate collaboration and accelerate our shift to a leaner, more nimble, innovative, and performance oriented culture. Finally, we remain on track to complete the separation of ConAgra into two public companies in the fall of calendar 2016. As we said when we announced the proposed 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. I’ll talk more in a moment about the progress we’re making in each of these businesses, but let me reiterate that when you take all factors into consideration, we believe the separation of ConAgra Brands and Lamb Weston is the right path to maximize value as we expect shareholders to benefit from better operating performance and more consistency from both businesses following the separation. As you know, there is a lot of work to complete between the announcement of a proposed spin and the separation itself. We’re hard at work on that front and we will have a lot of more information to share via SEC filings and investor days over time. Ultimately, our ability to drive value across these businesses is a function of how well we execute. To that end, our solid Q3 results exceeded our expectations and give me confidence that we’re identifying the right actions to drive improved profitability. So on to Q3 in detail. Our Q3 results for the Consumer Foods segment reflect continued progress and momentum around establishing a higher quality investment grade volume base. Even though we experienced the volume decline, we had strong price mix during the quarter. We’ve been implementing initiatives to improve pricing discipline and trade efficiencies while driving renovation and targeted brand investments. Importantly, as we undertake these actions, we remained relentlessly focused on execution. We’re making good progress on all these fronts. From a top line prospective, we saw volume declines where we expected them. The vast majority of the Q3 consumer volume decline was on Banquet, 90% to be exact. But more broadly, in the second half of last fiscal year, we funded several major deep discount promotions, particularly in our frozen business. These kinds of deals can drive big spikes in low margin promoted volume. And given are deliberate plan to reduce our reliance on deep discount promotions and given the promoted volumes like embedded in our year ago comps, we expected lower promoted volume. What we were counting on though was solid performance on most base consumption trends and strong margin expansion broadly and that is basically what we got. You see the entire segment’s margin expansion in the release but it is important to note that on Banquet we saw over 200 basis points of gross margin expansion despite investments in higher quality. Further, we also made other below the line investments to build the brand the right way for the long haul, namely A&P support. These collective investments do not have the same immediate impact of promoted price points below a dollar but they represent the right way to manage a branded asset for long-term value creation. This notion has been missing for too long at ConAgra. We’ll be relentless as we continue these efforts because at the end of the day, we want sustainably stronger margins, which require strong brands; and strong brands don’t compete on the back of giveaway deals. As a result of our efforts, on a comparable basis, operating profit was $340 million, up about 17%. Operating margins were up more than 300 basis points from the year ago period driven by these three factors, price mix; supply chain productivity; and modest material deflation. Our focus in Consumer Foods will continue to be on expanding margins. The cornerstone of this effort is strengthening the brand that generates the best return. By focusing on our strongest brands, we’re getting better price realization and trade efficiencies. As you’ve heard us discuss before, our approach provides the fuel to reinvest in brands that have the right fundamentals, are consumer relevant, and have accretive margins. And we’re not just talking about investments, during the third quarter we supported our brands in a highly disciplined way as evidenced by our 12% increase in A&P support. We’ve increased A&P spending 13% year-to-date. We’ve been investing in brands with clear differentiators and relevant consumer benefits like Marie Callender’s, Hunt’s, RO*TEL, Reddi-wip, Slim Jim and PAM. I’ll talk in a moment about our efforts in the frozen category but in the center of the store, we continue to make good progress with our real food initiative around the Hunt’s brand and we are very pleased with the progress we’re making with RO*TEL, which delivered very strong results during the Super Bowl. In addition, through focused execution, we increased sales, built share and won the holiday season across Marie Callender’s pies, Reddi-wip and PAM. Our investments are also coming in the form of innovation and renovation. As you heard me discuss, we intend to continue enhancing our portfolio with the focus on further premiumization, wellness, and authenticity. We expect to achieve this through a combination of organic innovation and smart acquisitions. A great example of our investment in innovation comes from our Healthy Choice Simply Steamers line, which you heard us discuss previously. This is a clean label, nothing artificial version of our Café Steamers offering, and we’re continuing to drive wellness based innovation with this line. In the fourth quarter, we’re adding four new premium varieties including three cheese tortellini, a sweet and spicy Asian style noodle bowl, creamy spinach and tomato linguine, and an unwrapped burrito bowl. Consistent with the consumer focus on authenticity these new recipes will spotlight organic, non-GMO ingredients. Renovation will also be a driver of margin expansion, building on an example we touched upon last quarter, our work to restage the Banquet franchise continues. As I noted earlier, Banquet represented the vast majority of our volume decline in the third quarter, as we reduced our reliance on deep discount promotions and raised our everyday shelf price above $1. While we recognize it will take time to rebuild the buying rate among households that are long accustomed to $1 Banquet, we’re confident that the higher price points enable us to invest in product enhancements and higher quality A&P that reeducates consumers about the brand. Not all consumers will transition with the brand and we’re okay with that. But given the higher quality, we expect to attract new consumers to the franchise in time. We continue to believe our plan for Banquet is the right one for its long-term brand health and financial strength. And this highly disciplined approach to margin expansion is one we plan to methodically apply to other brands with similar opportunities. Another primary staging candidate is Bertolli, which we see as right for the same type of targeted investment. With Bertolli, we are stepping up our work to renovate our frozen skillet business and make the brand even more relevant to today’s shoppers. We’re expanding occasions through the addition of Family Size Skillets within our lineup. And looking ahead, we are embarking on major renovation investments in the Bertolli brand to upgrade proteins, such as all natural chicken and dramatically simplify the ingredient label. As we continue to renovate around the brand, we will support the product upgrades with increased marketing spend to drive profitable growth. As I’ve said many times, unlocking the full value potential of our branded portfolio will be a process, not a flip of the switch. But it is a battle tested process and it will succeed. It all starts with the unwavering belief that strong margins are the key to maximizing value and that strong margins are the byproduct of executional excellence across disciplines, spanning everything from supply chain productivity to pricing and trade analytics to mix management and targeted high ROI marketing to exciting innovation. Make no mistake about it, ConAgra is becoming much stronger in each of these disciplines and you are seeing the impact in our margin expansion. Over time, as we wean ourselves off of our historical overreliance on deep discount trade deals and rebuild our innovation pipeline supported by more effective marketing, you will see sales grow but in a much higher quality fashion. We are confident that there is a lot of room for progress and we are relentlessly focused on continuing to execute against our goals. It is about the delta, meaning the change we can drive as opposed to a snapshot assessment. Overall, I’m very encouraged by the work going on in Consumer Foods. Investment creates a virtuous cycle. Over time, stronger brands will lead the better pricing power and higher margins, and we are clearly on the right path to maximizing value. Now, turning to Commercial Foods, net sales were approximately $1.1 billion in the quarter, up 6% compared to the prior year. The Commercial Foods segment’s operating profit was a $175 million, up 21% on a comparable basis. While the Commercial Foods segment posted strong results across the board, Lamb Weston was particularly strong. Sales for Lamb Weston’s potato operations grew across North America during the quarter as well as in international markets. International sales performance for Lamb Weston was noticeably strong, reflecting the lapping of the impact of the West Coast port labor dispute in the year ago period as well as improving demand in key Asian markets. As we’ve 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. 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 innovations and customer service and our breadth of diversified products continues to position this business as a clear market leader in North America. Now, before I turn it over to John, I want to take a moment to acknowledge our talented team as we work to transform ConAgra into a stronger, more consistent Company with a more valuable future. While there has been significant change during the past year, our people are energized and focused on serving our customers, and I’m excited about the path forward. Over to you, John.

Thank you, Sean, and good morning, everyone. In my comments this morning, I will address several topics including a recap of our fiscal third quarter performance including discontinued operations, comparability matters, cash flow, capital and balance sheet items, and our outlook for the balance of the fiscal year. I’ll start with some comments on our performance for our fiscal third quarter. Overall, diluted EPS from continuing operations as reported was $0.41. After adjusting for items impacting comparability, diluted EPS for the fiscal third quarter including discontinued operations was $0.68, which is ahead of our expectations and compares favorably to our prior year quarter’s comparable earnings per share of $0.59. Both our Consumer Foods and our Commercial Foods segments performed very well. In our Consumer Foods segment, net sales were approximately $1.9 billion for the quarter, down about 2% from the year ago period. This reflects a 4% decline in volume and a negative 1% impact from foreign exchange, partially offset by a 3% improvement in price mix. Segment operating profit adjusted for items impacting comparability were $339 million or up about 17% from the year ago period. Operating margin on a comparable basis expanded about 300 basis points versus the year ago quarter. Margin expansion reflects pricing discipline, mix management, supply chain efficiencies, and favorable input costs offset by higher marketing and incentive costs. Foreign exchange this quarter had negative impact of $28 million on net sales and about $12 million on operating profit. On marketing, Consumer Foods advertising and promotion expense for the quarter was $91 million, up about 12% 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, up about 6% from the prior year quarter. The Commercial Foods segment operating profit was $175 million, or 21% above last year’s third quarter operating profit. The operating results largely reflect a strong profit increase in our Lamb Weston business, driven by strong volume performance, both domestically and internationally, margin expansion, and the benefit of lapping the West Coast port labor dispute in the year ago quarter. Equity method investment earnings, excluding the impact -- excluding items impacting comparability, were $27 million for the quarter and $33 million in the year ago period. The year-over-year decrease reflects lower earnings from our Ardent Mills joint venture, principally driven by unfavorable weak market conditions, which, from time-to-time, can impact margins. Moving on to the corporate expenses, for the quarter, corporate expenses were approximately $155 million. Adjusting for items impacting comparability, corporate expenses were $73 million versus $52 million in the year ago quarter. The increase principally relates to higher incentives, reflecting the significant improvement in operating performance this year, and the timing of the related incentive accruals year-over-year. On our SG&A cost savings initiatives, we are making good progress and expect to see significant benefits over the next couple of years. I would note that our fiscal third quarter results from continuing operations reflects some initial benefits from our cost savings programs, partially offset by modest stranded cost from our private label divestiture. Further, I would highlight two other points related to our cost savings initiatives; first, the benefits of our previously announced cost savings programs are concentrated in the consumer business; and second, we have developed aggressive targets and plans so that we can offset modest stranded costs as they arrive, as well as selectively invest back into the business to build capabilities that will expand operating margins over time. Discontinued operations posted EPS of $0.05 per diluted share this quarter. It reflects operations of the private label business through February 1, 2016, or about 9 weeks of the fiscal quarter. After adjusting for items impacting comparability, the private label discontinued operations earned $0.11 per share this quarter, including about $0.05 per share of benefits related to the elimination of depreciation and amortization expense. Expected comparable earnings from the private label operations were included in our earlier guidance for the quarter. Also, at this time, we estimate that the divestiture of the private label operations gave rise to a capital loss of approximately $4.2 billion pretax or $1.6 billion after tax, which can be utilized over the next five years. We remain confident that the Company will be able to realize significant tax benefits in the future as we work to reshape our portfolio in a disciplined manner. On comparability items, this quarter included four items; first, approximately $0.16 per share of net expense related to restructuring charges; second, approximately $0.04 per share of net expense related to transaction costs incurred in connection with debt reduction this quarter; third, approximately $0.03 per share of income related to a pension settlement gain at a joint venture; and finally, we included incomparable earnings of approximately $0.11 per share of income related to items in discontinued operations for which we have provided additional details in our Regulation G disclosures in the release. On cash flow, capital, and balance sheet items, we ended the quarter with $503 million in cash on hand and no outstanding commercial paper borrowings. Total operating cash flows through the fiscal third quarter were approximately $695 million versus $740 million in the year ago quarter. The decrease is principally driven by higher tax payments in the current fiscal year. 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 flows in the latter part of the fiscal year. We remain confident in our ability to generate attractive operating cash flows over the balance of this fiscal year and expect total operating cash flows from continuing and discontinued operations to be in the range of $1.2 billion for the year. On capital expenditures, for the quarter, we had capital expenditures of $100 million versus $83 million in the prior year quarter. Net interest expense was $77 million in the fiscal third quarter versus $80 million in the year ago quarter. And dividends, for this fiscal quarter, were $109 million versus $107 million in the prior year quarter. On capital allocation, we remain committed to an investment grade credit rating and a capital allocation strategy appropriately balanced between further debt reduction, a top-tier dividend, share repurchases, and additional growth investments. As we previously noted, we completed the divestiture of our private label operations this quarter. We received proceeds in excess of $2.6 billion and deployed about $2.15 billion to repay long-term debt. We expect to deploy the majority of the remaining proceeds for debt repayment over the next several months. During the fiscal third 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. Given that we have sold the private label operations, we are now citing guidance in terms of earnings per share from continuing operations. We have given you the quarterly and annual details of EPS from continuing operations for this fiscal year and last fiscal year in our Regulation G tables and in our written Q&A documents. For the full fiscal year 2016, we expect EPS from continuing operations adjusted for items impacting comparability to be in the range of $2.05 to $2.07, this compares with $1.93 for fiscal year 2015 on that same basis. So far in fiscal 2016, we have earned $1.56 from continuing operations after adjusting for items impacting comparability items. To reach our full year guidance, we are expecting fiscal fourth quarter comparable EPS to be in the range of $0.50. This guidance reflects continued strong fundamentals in our Consumer Foods and Commercial Foods segments. This guidance is lower than the prior year comparable amount of $0.55 and the decrease is due mainly to the extra week in the prior year, the impact of FX, higher marketing investments, and higher incentives this year. I’ll also note the guidance for fiscal 2016 EPS from continuing operations should not be taken as a beginning point on which to make fiscal 2017 estimates for either ConAgra brands or Lamb Weston, as there are several details that we need to finalize including capital allocation and financial policies, the phasing of our SG&A savings and trade efficiency benefits, brand investment targets as well as the short term impact of any stranded costs associated with the Lamb Weston spin-off. We will offer details on those items in due course at the investor day events we plan to hold ahead of the spin. In closing, while we are working through a great deal of change, we are pleased with our performance so far this fiscal year in 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 interest in ConAgra Foods. Sean and I along with Tom McGough and Tom Werner will be happy to take your questions. Before we turn it over for questions, Chris would like to share a few remarks. Chris?

Thanks John. Before we turn it over to Q&A, I want to take a minute to update our listeners on investor relations here at ConAgra Foods. As pretty much everyone knows, our Company is moving its headquarters to Chicago and a lot of you have asked me personally if I am moving to Chicago. And while the decision to move to Chicago is best for the Company and its future, it has come with some changes on the people side of things for all the reasons that you would expect; family, stage of carrier and a host of other elements that play a part in evaluating major moves. Along those lines, I am not relocating to Chicago. I’ll be transitioning out of ConAgra Foods over the next few months, but I’ll still be your point of contact until we have all of the IR resources in place with the new organization. I have worked with many of you for more than a decade and a half and gotten to know several of you well. As well my more than 16 years at ConAgra Foods had me in the mix of plenty of the Company’s ups and downs, it’s been very satisfying to play a part in helping advance the Company’s mission. Looking back on all of this, I tremendously value the relationships that have come with the job. And I am thankful for the personal growth opportunities that have come with serving more the 16 years in this capacity. I will certainly miss the day-to-day interaction with great people inside and outside of this Company. And I want to emphasize that I feel very good about what the future holds for this organization, given its leadership and its mission.

Chris, I appreciate that and I appreciate your 16 years of service at our Company. You have been an important part of our team and we wish you continued success in the future. So, thank you and best wishes. And with that operator, let’s open it up to Q&A.

Thank you. Now, I would like to get to an important part of today’s call, taking your questions. [Operator Instruction] And it looks like our first question comes from Andrew Lazar with Barclays.

Chris, I want to wish you all the best moving forward and thank you for your help over the years.

Thanks.

Yes, sure. Two quick questions from me; I think first, Sean, at Hillshire, you had focused much of your effort on really raising what you would call the center line profitability of the business. As input cost moves can play with margins in any given period of time and we certainly know that deflation among other things is helping sort of industry right now, but I guess most important, where do you see the center line consumer margin now, given your reported consumer margin this quarter is really as high as I think I have seen it how and how high can that move going forward? And I’ve got just a quick follow-up.

I’d say, Andrew, I am very pleased with our progress obviously and in no way is our work done. Clearly, there is some benefit in our margins from the absence of inflation but that is far from the whole story. We absolutely cannot discount the benefit of increased discipline across the margin expansion levers that we talked about earlier, things like pricing; trade; productivity; mix; stronger brands. We do expect the center line of our profitability to go north over time. We also expect that the standard deviation around that center line will decrease over time. And you are absolutely right, in any given quarter, margins could be impacted by short-term inflation or deflation. And what I would say is you won’t see you get overly exercise by that because we will stay focused on what’s right for the long haul. But yes, there is some benefit in there from the absence of deflation but our work is not done; we see further opportunities, and that’s why we are going to be relentless in pursuing.

Okay, thanks for that. And then I think John’s comments around being careful not to maybe use fiscal 2016 as necessarily the right or on appropriate base for thinking about 2017 earnings and you mentioned a number of things that could little impact things. I guess I’m trying to get a little bit more color on that. And if is it -- this is kind of a sense of sort of kicking a reset year so to speak, given maybe the need around brand investment to kind of prime the pump on a lot of these things or am I reading too much into that? And then one of the items you did not mention as a possible impact also would be maybe portfolio offering here and there. So, I’m just trying to get a sense, I guess I had a sense of what your comment was trying to imply but I want to get little more color on that if I could.

I think couple of thoughts. A lot of this just has to do with we’ve got work to do to make sure that we finish our analysis and have a good view of the year and finish our planning process, so we can provide our investors and analysts the right information around those drivers. On the brand and the brand investment targets, let me come back to that. I would see on the portfolio, again, we are not going to speculate on anything there, but clearly, we think there are going to be opportunities for us to change this portfolio going forward. We would share those impacts certainly if and when then come about. On the brand investment targets, specifically that you mentioned, I might turn it over to Tom for a few comments but we are going to continue to make the right investments in our business behind the brand. So, I think it’s really about how do we do that with discipline. And as we finished our plan, those numbers could go up or they could stay flat or it could come down a little bit. But I may turn it over to Tom just to reiterate kind of what our philosophy is around how we are going to invest behind these brands in a discipline way.

Let me jump in first John. To your question, Andrew, I wouldn’t read anything into John’s comments in terms of where we are going to be. We obviously have a lot of communication with investors upcoming at our respective investor days for ConAgra Brands and for Lamb Weston. And our plan all along has been to get into some of the great detail at that point in time. Obviously it will be after our 10 filings et cetera. We also are going to our typical annual operating plan process. So, we’re evaluating where we want to invest, the magnitude of those investments. All of that is a work in process. And the numbers will continue to get lock up here in the months ahead. And as that happens, we will have a more definitive view on where to go here. So I wouldn’t read anything into it beyond that at this point. Tom, do you like to add to that?

Sure. I think just principally, we believe in investing in brands, but doing it in a very disciplined way with the strong ROI mentality. We’ve talked about segmenting our portfolio so that we’re investing behind the best opportunities and this notion of brands being A&P ready. Our investments are earned, they are not an entitlement. And while we don’t have a targeted spending level for the entire portfolio, we look at each individual brand, based on the segmentation and readiness for investment. I think you see that in our results today where our A&P is concentrated on a focused group of brands like Marie Callender’s, Hunt’s, Slim Jim, and Reddi-wip. You see that we’re growing sales and share, and they are contributing to overall improvement of our portfolio margins. So, our intent is to continue to invest to grow through renovation and increased marketing over time. That’s our approach, and our results in this quarter are an indication of that.

Thank you. We’ll move now to David Driscoll with Citi.

Great, thank you and good morning. I’d like to say thanks to Chris Klinefelter. Chris has fantastic; he’s been terrific to us. So, best wishes in all your future endeavors. I wanted to ask a question about the implied fourth quarter guidance. This $0.50 number, consensus is out there at like $0.57. You’re gaining some factors in terms of kind of maybe why it’s weaker but I’d just like to go a little deeper here. I mean the third quarter margins, they are pretty terrific. If these margins carry forward into the fourth quarter and you would be way above that kind of number, so obviously you are not -- it’s not going to happen as implied by your number but can you talk to us why? Why does the Commercial Foods margin go down so much, why would Consumer Foods margins go down so much when you are in such a clear positive environment of margin improvement through, both net deflation and then all the other levers that you are pulling, Sean?

Yes. Let me jump in, Dave, on a couple of factors just to address them. So, one thing I would remind folks is that especially in our Consumer Foods business last year in the fourth quarter, we put through a pretty strong quarter. So, we’re lapping a stronger quarter relatively speaking. The other thing is we do have some seasonality in our business in terms of the mix of products we sell in our consumer business, which impacts the margins. So, when you look at sequential margins from third quarter to fourth quarter, you should expect to see the seasonality mix impact come down some. And I think we’re still looking at some margin expansion year-over-year in the fourth quarter. So, I don’t think the trends are reversing or significantly flattening out. I really view it as again a number of these mechanical issues, in particular the 53rd week, some FX, so, higher incentives and then we’re going to continue to have some higher marketing investment. So, that’s kind of how we see it right now. And again, I don’t think we see any significant breaks in the trend on Lamb Weston business either.

And just a follow-up, John, can you quantify the effect of this inflationary environment in the productivity? I mean by our math, it would be something like a $0.10 benefit to the quarter, because of lower commodities and the normal productivity that the Company produces. Is that about the right neighborhood to be in?

Well, let me just share a few numbers; I haven’t converted them all at cents yet. But, I think productivity was about $30 million in the Consumer segment. Net inflation -- or net deflation all-in was about $20 million. In addition, we are lapping about $20 million hit we took last third quarter, because of the derivative matter that you all may recall. So, I think those are kind of the drivers of the COGS, if you will. So that’s why it gets you in that range.

Next, we have J.P. Morgan’s Ken Goldman.

I’m sorry to continue on the same line, but if your margin expands year-on-year in the fourth quarter, you’re going to get something like $400 million in operating income. I don’t know where your sales are going to be unless they really collapse. That implies an EPS number well above what you’re guidance to. So, I guess my question is, you haven’t provided EPS guidance for the year, but I think it’s really important to get guidance [ph] rather, I think it’s really important to get a sense what you’re thinking for this line item. We’re backing into what we think for the year’s operating income; we’re looking at something in the mid $1.5 billion range. Is that a reasonable figure to consider or am I way off there?

You’re probably not way off, Ken.

Okay.

Again, I think, we feel good about what we said here and how we look at the fourth quarter. And there again are some significant matters we’ve got to deal with after we look at how we think the business is going to continue to perform pretty well.

Okay. And then shifting subject, Sean, I’m sure, all my peers have done this as well. We’ve all been talking to investors about the spin-off of Lamb Weston. Just from my perspective, most investors I speak with would rather you sell the business than spin it. And maybe I’m not talking to the right people and of course I don’t know if there is any actually any buyers out there. So, maybe this is a moot [ph] question. But to what degree, I’m just curious, are you feeling pressure if any from your largest holders to maybe monetize Lamb in a different way?

Well, I think we’ve talked about this quite a bit, Ken. And from the beginning and as always, our focus is on maximizing value. And as we think about maximizing value, you should expect that we’re going to consider just about every option that you can dream up and then we will add into the analysis, all the information we know about our business and all the information we know about whether or not somebody’s an interested party. And our conclusion, as a management team and a Board, having looked at our options is that the spin is clearly the best way to maximize value here. And that’s our goal. All of this has been considered.

And we’ll move now to Matthew Grainger with Morgan Stanley.

Hi. Good morning, everyone. And Chris, best of luck to you as well.

Thanks Matthew.

So, I guess one follow-up just on Lamb Weston, I mean the magnitude of top-line growth in the Commercial Foods segment was surprising, even with the benefit of lapping the port disruption last year. Could you remind us whether those tailwinds will continue a bit further into the fourth quarter? And then in terms of your comments on improving international demand, can you elaborate a bit on where are you seeing improvement and how sustainable you think that might be?

Sure Matthew, this is Tom Werner. I will tell you a couple of things, as you think about our Commercial segment. The good news is across all of our business units in the Commercial segment, we grew year-over-year. So, while Lamb Weston was obviously disproportionately, a lion’s share of that, the rest of the operating units performed well as well. I think in terms of capturing international growth and domestic growth, the business, as I’ve said before, is well-positioned. We’re aligned with the great customer base across, both North America domestic and international. We feel good about the momentum we have in the business through the first three quarters and we see this momentum carrying into Q4 and into fiscal ‘17. So, we feel great about the business. It’s a fantastic business; it’s performed great this year; and we expect that to continue going forward.

Sean, if I could ask you one question, I just wanted to get your thoughts on the consumption trends at the broader industry level. In the past two months, we’ve seen retail take rate that looks incredibly soft in February and recovered a bit in March but was benefiting from Easter timing. So, from your standpoint just curious if there was any major change in trend or slowdown at the industry level?

Well, I think from our standpoint, I -- clearly, a good part of what you’re seeing is really what’s embedded in the base. I mean we saw -- you saw the consumption data back in February didn’t look particularly pretty for us. That was as much of a function of being very aggressive in terms of deep discounted promotion in a year ago period and choosing not to do it this year, as well the fact that you’ve got some baseline -- the base driver elasticity because we’ve raised price on a number of businesses. Obviously, you saw that that was kind of a short-term effect because of the last consumption that was just released kind of showed that bounce back. So, look, growth has been allusive in our industry, it’s why we are so focused on innovation, it is why we’re so focused on margin expansion and efficiency, and we absolutely plan on expanding margins going in the future and we plan on improving our growth trends the right way as we continue to unfold this plan.

And our next question comes from David Palmer with RBC Capital Markets.

Hi, good morning; Kevin Lehmann here for David Palmer. Quick question on Commercial Foods and perhaps building on Kens’ question a bit but perhaps from a higher level. Can you expand on the strategic rationale behind spinning off Lamb Weston? On the case of private label, already that business can be viewed as a distraction to core U.S. retail but many other food periods have food services division. So, how would say ConAgra differs from others in that regard? Thank you.

I’ll take that. We have a traditional food service division that we’ll retain as part of ConAgra Brands which is really to what we referenced in our peer set. So that will carry on and it won’t be -- that was a business that had a good quarter this quarter as well and that will continue to be part of our branded business, because it’s incredibly intertwined, think of large sizes of food service packages of the stuff that we sell in the retail channel tray. In the case of Lamb Weston, it is a focused, largely disintegrated business. And we believe that by being a pure play and being focused, it will continue to not only perform well but perform better. And it is very, very different from our traditional food service business which is really what you described as being embedded in our peer set.

We’ll now hear from Jonathan Feeney with Athlos Research.

Sean, I wanted to dig into the reception at retail, and at retailers and versus your expectation with consumers to this pricing up strategy. I know a lot of centre store package food companies are pursuing this pricing up strategy, particularly you mentioned the Banquet brand, an important brand, a lot of consumers seeking value. Are retailers -- I guess the trends and the profits are coming through great but is there a risk or are you getting pushed back from retailers, maybe losing space, losing attention to the category, anything like that, particularly at a time when costs broadly are deflationary and may be things around the perimeter of the store are -- they are not going up and prices are coming down? Just your general impressions of that, high level reaction, the consumer versus your expectations and the conversations you have with the retailers?

I’m very glad to answer this question, because I think it’s important to demystify what we are doing and what we’re not doing with respect to average pricing. Keep in mind, average pricing is a function of shelf price or our list price, but it’s also a function of our promoted volume price. And we’ve actually been active on both fronts. I think with respect to merchandising and a $100 million efficiency that we talk about within trade, sometimes what I read is that it sounds as if that’s coming across as if it’s just a cut, as if we’re ripping trade out, that nothing could be farther from the truth. We spend a lot of money on trades, we’ve identified a $100 million in trade spend that we don’t think does much to help us or our retailers. So, when we talk to our customers about being more efficient and impactful with that trade, they’re as interested in that as we are because it helps drive quality sales, it helps drive margins et cetera. And then separately, I’d say, our customers also value quality volume as much as we do. They understand that inefficiency isn’t helping anybody. So, if we can redeploy inefficiency into brand building, innovation or even more effective merchandising, everybody wins. So, think of the payoff as better margins and stronger brands versus cutting merchandising. Then, when it comes to shelf price, there are three pillars to our pricing actions. Number one is what we call inflation justified list price increases, meaning if we got inflation we feel totally justified in taking a list price increase and that’s we’ll do. The second piece of pricing is the trade efficiency we just talked about which in large part means, reduced reliance on deep discount merchandising and redeployment of those funds toward more effective, more efficient activities. And then the third piece of our pricing strategy is higher quality driven pricing, meaning we improve the food we’re selling and we charge more for it. And in any given quarter, we’re likely to have a mix of all three of these things, but the ratios could change within each quarter. So that is this strategy that we’re pursuing. Our customers are aligned with us on it, they’re supportive on it, they believe as we believe, it’s ultimately going to lead to better sales, better profit than a higher quality volume base.

Next we have Bryan Spillane with Bank of America.

Hi, good morning everybody and Chris, all the best to you. I guess just two questions, one just a point of clarification. I think, John, you’d said there was $30 million of productivity in the quarter. Was that gross or net productivity?

We measured all net.

All net, okay. And then I guess the second just as a follow-up to I think it was Ken Goldman’s question about the decision to sort of split or spin off Lamb Weston. As we kind of think about the value of that also in relation to having the tax credit that you have, is it right to think about the value not just of Lamb Weston but also in the context of what other optionality there exists because you’ve got that tax credit to potentially do other things with? So, I guess I’m trying to say is the way it works we should be thinking about the value creation potential more than just one step with Lamb Weston but maybe the potential to use that asset to do other things?

Yes, the way I think about it is, not having value destruction through tax leakage is a good thing and having a tax asset that you can deploy in the future as we think about reshaping our portfolio to be more contemporary, higher margin, higher performing, is a good thing. Now clearly, the tax asset is one of the tools we can leverage in that reshaping process. I won’t speculate on when that could happen, I’ll just say that we’ll do what makes sense for the long term value creation potential of the company.

And our next question comes from Jefferies’ Akshay Jagdale.

Good morning, this is Lubi filling in for Akshay. I’m wondering, could you give us a sense of how much cost savings initiatives contributed to the margin expansion that we had in Consumer Foods this quarter?

We’re not going to provide specific numbers. I would say we have some modest early delivery from our cost savings program. I would also say a chunk of that was offset by some modest stranded costs that came back into the consumer business. So, I’d say net-net that wasn’t a huge driver of the margin expansion; it was more at the gross margin line.

As we said before that the bulk of the savings we’re going to generate through our programs hits in ‘17 and ‘18. One of the reasons why we don’t want you to start building a model necessarily right now is we’re in the process of pinning down exactly how much of that’s going to hit in ‘17 versus ‘18 as we continue to morph our organization design and things like that. So, a little bit of benefit now but the bulk is coming in the next couple of years.

Thank you. We’ll hear now from Jason English with Goldman Sachs.

Hey, good morning folks. Thanks for the opportunity to ask question. And let me echo the sentiment from others; Chris, it’s been great working with you, good luck on the next venture. I thought Jon Feeney had a very sound line of question I want to build on a little bit. In response to his question on trade budget optimization, you referenced to as more of a shell game to optimize efficiency, and I guess my question is why. You’re squeezing SG&A, you’re trying to squeeze COGS through productivity and here’s roughly a $2 billion expense line on your P&L. Why does it need to be a shell game, why can’t you shrink it?

Jason, I think you might have called into a different call, I don’t remember mentioning anything to shell game. We’ve got a significant spend with customers that we collaborate with very carefully and we have a zero loss mindset when it comes to analyzing that spend and partnering with our customers on how to put a red circle around funds that we think are doing little for our customers or us, and then collaborating with our customers in terms of how do you redeploy that funding to continue to support our brands and our categories in ways that are better for overall volume trends and overall margins. So, there’s waste there; we’re going to be as aggressive as anybody in the industry in terms of getting after that waste. And we’ll be open-minded with when we identify waste -- where it goes. If we’ve got a high ROI way of redeploying it, we will redeploy it; if we don’t have a high ROI way of redeploying it, we’ll drop it right to the bottom line. We’ll be very pragmatic around what to do in the lieu of waste based on what maximizes value.

And next we have Eric Katzman with Deutsche Bank.

Thank you, good morning. Chris, best of luck. I guess, Sean, I wanted to ask a little bit more about Banquet and its, what seems like a really big impact for the brand on the consolidated. If it’s 90% of the volume hit, the elasticity by going over $1 dollar must have been really-really significant, and I understand why you’re doing it. But I guess my question is as you kind of move through the rest of the portfolio, should we expect similar levels of elasticity as you try to make your promotion more efficient or is it a function of as you improve the product, eventually get into consumer to recognize that but it just seemed like a very big drop on one brand. Thank you.

Yes, Eric, great question and it’s important that we demystify that. I think Banquet is quite a big different from our other brands, and I am going to have Tom kind of share some of our detailed thinking on this business. But the impact you see on Banquet is, if again you come back to the notion that there are two things we are dealing with here; one is shelf price, which is baseline volume; the other is promotion strategy and that’s promoted volume. We have actually made a meaningful difference, a meaningful change on both. And part of what you are seeing is how aggressive we were in the year ago period in promoted activity and the choice not to do that. For example, events that might sell at $0.80 instead of $1 dollar, as you might imagine, that drove some pretty significant spikes in the year ago period. And when you don’t repeat that, obviously, you’re not selling on profitable volume, but you’re going to see it show up on the promoted volumes side of the volume ledger. At the same time, we also have shelf price increases which shows up as a baseline elasticity factor. So, when you get both, it kind of compounds and that’s what a bit of what you saw in the results. But again, that was entirely planned. We knew what we’d expect there. And we’ve got to migrate to a higher quality consumer base here over time because there were clearly plenty of consumers in that exact window year-ago who were in our franchise for one reason and one reason only, and that’s because we were basically doing giveaway pricing, or giveaway merchandising. And that’s effectively what you saw. Tom, did I miss anything there?

No. Sean, I think that really nails it.

Thank you. Our next question comes from Rob Dickerson with Consumer Edge Research.

Thank you very much. Just a follow-up question, so all the questions have been said and asked now on the trades and opportunities. Very simplistically, Sean, I am just curious you mentioned the red circles, you draw red circles around the areas where we think we can gain efficiency and then you then redeploy back for higher ROI on those brands. Over the past, I don’t know let’s say, as you have done this especially on Banquet, do you think there is realistically more upside to the $100 million that you have given us and therefore there are more red circles, or there’s more of an opportunity to drop some of that to the bottom line? Thanks.

Rob, I’ll interpret that along the lines of the question I’ve received sometimes before, which is in total, its’ more than 300 in our overall cost efficiency program, 200 SG&A, 100 in trade. And I think my answer before, which will remain intact today, is we’re only going to look for more. If we can find any inefficiency, we are going to try to get it out, whether it’s SG&A, weather it’s trade. Now, today, I can tell you, we are squarely focused on hitting that 300. We are on track. We feel good about the progress we are making. And we want to make sure we don’t get any slippage in that before we start getting stars in our eyes around going beyond that. But I think philosophically and culturally, we don’t view cost efficiency as a project, we view it as a way of life because it provides us fuel for investment and innovation. And it’s just helps us culturally be more performance oriented. So, we are going to continue to be relentless in that. Certainly on trade, it’s actually great to see the teams do it. Our teams get together as customer teams. They plan these events using significantly improved technology, post -- analytics tools, better systems. And we go through literally event by event, hundreds if not thousands of events. We know what they’ve done in the past now. We’ve got visibility to it. We know what we want to get rid of. We know what we want to change. We know what we want to add. And we do that by customer and it’s making a meaningful difference. So, we’re going to continue to work it. So, if there is more there, we will get it. We’re not ready to speculate on that right now, but philosophically, that’s our view.

We’ll hear now from Credit Suisse’s, Robert Moskow.

Hi, thank you. And best wishes to you, Chris. So, I guess a two-part question, the first is I understand that we don’t want to use fiscal ‘16 as an EPS base. But, if I just look at operating profit in the two divisions, both had very strong years in ‘16. And I guess I am just trying to do the big picture math of -- they’re both going to have pretty significant SG&A savings. The trade productivity will continue. And then that’s going to be offset by some dissynergies. So, I guess just big picture, like should we expect kind of a normal year because these two things kind of trade-off against each other? Can it be an above normal year, below normal year? And maybe I am supposed to wait until the Analyst Day for all of that, but just a way to put it like a big picture format.

Rob, we’re not going to get into anything that could look like guidance for next year at this point, because we are not ready to do that. Clearly, we feel very good about the direction that we are headed in terms of margin expansion, in terms of our ability to rebuild the innovation funnel. So, we are moving in the right direction, and we’ll look forward to going through each of the businesses in detail and giving some detailed guidance for you, as we do these Investor Days.

Can I ask an interest expense question also? I thought interest expense will be down quite a bit more than what the guidance implies for fourth quarter and then maybe into next year. Can you give us a sense of what interest expense would look like for fiscal ‘17, John?

Well, let me start with the Q4. I believe interest expense is down about $20 million. Just as a reminder, we had deployed the proceeds from private a brand until fairly late in the year and then also the debt we’re taking out is fairly low interest debt. So, that’s both the beauty and the curse of these interest rate environments. Certainly, as we go forward next year, you can look at the full year impact of the debt we just repaid but all we don’t know right now is the capital allocation around some of these other transactions that are still in progress. So, it’s not possible for me at this point or responsible for me to say here is what the other interest rate impacts of some of that capital deployment is going to be. Certainly, I would think those net-net would be favorable to interest expense next year. But we just can’t quantify at this point.

Thank you. Next we have Chris Growe with Stifel Nicolaus.

Hi, good morning. Chris, best wishes to you as well. I may echo the earlier talks there. I had just two questions, if I could. If you look at the gross margin performance, it was stronger than expected; it was very strong obviously benefitting from the absence of private brands. Could you talk about whether that was more consumer driven or commercial driven? I know consumer has a number of things that are benefitting the gross margin, was that the majority of the upside there? And then the second question, just around you’ve had some very weak IRI and Nielsen data, it was the question earlier. I am just trying to understand when I even look at some categories that I regard as sort of focus categories for ConAgra, we are seeing those -- the way to decline in those categories accelerates, and is it the matter of increased spending or maybe taking some of the tray torsion saving and reinvest those back in the business? I am trying to understand what you could do behind the focused categories, those you may focus on the future to really reignite revenue growth there?

Yes. Let me start on the gross margin side. We don’t talk a lot about gross margin details, why, to tell you directionally is that both segments have strong gross margin increases. There was proportionally more in consumer than you get in commercial business, but both of them had strong margin expansion.

Chris, this is Tom McGough. When you think about consumption performance, we break it down into two components, what’s non-promoted and what’s promoted. And as Sean said, in February specifically, there was a lot of noise on our numbers. What it was, was the deliberate choice not to repeat some low ROI events from the previous year. And what it wasn’t, was a fundamental weakness in the foundation of the base non-promoted volume. Obviously, we’ve taken price on Banquet, as Sean said, it impacted both base and promoted. When you take out Banquet and look at the rest of our portfolio, our non-promoted base sales were essentially flat. So, we are going through a period, not just our sales in terms of looking at trade productivity, investing it in the right return activities, but the customer environment is also changing. And there is a move for less promotional activity from some customers. I think inherent and what we are driving against is selling more off the shelf and relying less from push activities. So, I think that’s some of the noise that you see in the most recent results, certainly ours but I think more broadly some of this has been driven by changes in customer strategies as well.

Thank you. Our next question comes from Alexia Howard with Bernstein.

Hey guys, good morning. This is Elyn Rodriguez on for Alexia. So, how worried are you about the impact of an introducing voluntary GMO labeling at a national level, when the GMA spent millions of dollars in recent years, so why this happening? Thanks so much.

Well, obviously our position when it comes to GMO labeling is we need a federal standard, anything else makes no such. At the end of the day, we are for the consumer and we believe in transparency but we think it’s got to be done at a federal level. That said, there has not been a federal preemption and there is a law in Vermont. And we have to do what’s necessary to make sure that we are in compliance. For us to carve out inventories and think we can control what goes into Vermont, is not pragmatic, it’s not really doable at least with any reasonable cost. So we are in a position where we’ve got to do what we’ve got to do. And hopefully where we are right now is not the end of the story, there will be an evolution, there will be a federal standard and there will be a common communication strategy around this. So, ultimately that’s we care most about but there is no consumer confusion, there is no unnecessary increase in cost of the foods that our consumers are buying, things like that.

And we will hear now from Todd Duvick with Wells Fargo.

Just a quick question on the balance sheet; you have definitely been busy and you talk about additional debt reduction. So, I guess two part question, one is, should we assume that cash on hand and commercial paper will be used to take out the July maturity? And secondly, should we expect any incremental debt reduction as a function of the Lamb Weston spin?

Yes. So, again, as some of this gets into kind of capital allocation plans, we have to finalize. So, I don’t want to get specific on exactly what we will be on the July maturity. I think if you can kind of do a math little bit, I think there is a couple of guide post I would point to. One is we continue to be committed to an investment grade credit rating on the ConAgra Brands business. Certainly what that implies is as we spin out pieces of business or otherwise change the portfolio where we would lose EBITDA, we would naturally then look to further debt reduction to make sure that our debt to EBITDA ratios are in line with what’s required to be investment grade. So, I think it’s a reasonable assumption that as we take pieces of business out and so off EBITDA or spin them off, it will have some additional debt reductions, but more details to come on that going forward.

And this concludes our question-and-answer session. Mr. Klinefelter, I’ll hand the conference back to you for final remarks or closing comments.

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

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