Sean Connolly - President & CEO Darren Serrao - Chief Growth Officer Dave Marberger - CFO Johan Nystedt - VP Treasury & IR

Andrew Lazar - Barclays Capital Ken Goldman - JP Morgan David Driscoll - Citi Alexia Howard - Bernstein Jonathan Feeney - Consumer Edge Research Rob Dickerson - Deutsche Bank Matthew Grainger - Morgan Stanley Jason English - Goldman Sachs Robert Connor - Credit Suisse Lubi Kutua - Jefferies

Good morning and welcome to today's Q3 FY '17 ConAgra Brands' Earnings Call. This program is being recorded. My name is Candice Griven, 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 hosts from ConAgra Brands for today's program; Sean Connolly, Chief Executive Officer; Darren Serrao, Chief Growth Officer; Dave Marberger, Chief Financial Officer; and Johan Nystedt, Vice President of Treasury and Investor Relations. Please go ahead, Mr. Nystedt.

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 directions, we do not have any guarantee about the results that we will achieve. So, if you would like to learn more about the risks and factors that could influence and impact our expected results, perhaps materially, we'll 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, or in the earnings slides, both of which can be found on our Web site at conagrabrands.com/investor-relations. Now, I'll turn it over to Sean.

Thanks, Johan. Good morning, everyone, and thank you for joining our Third Quarter Fiscal 2017 Conference Call. On today's call, I will cover a few highlights from the quarter and touch on the overall progress we are making against our strategic plan. You will also have the opportunity to hear from Darren Serrao, our Chief Growth Officer, who will provide an update on our new innovation pipeline. And finally, our CFO, David Marberger will get into the details of the quarter and our fiscal '17 outlook before we take your questions. In the third quarter, we continued to make good progress reshaping our portfolio, capabilities and culture. This resulted in a solid Q3 performance and sets us up for improved competitiveness for the long term. Importantly, we continued to make strides in improving our margins this quarter, our intense focus on cost control, alongside other important margin levers like pricing, productivity and trade efficiency contributed to our results. Equally important with our progress on innovation, we effectively sold into customers a robust new product slate for fiscal '18, which Darren will speak to in a few minutes. Our team has delivered three solid quarters so far this year and we are now in position to update our full year guidance. We expect EPS to be at or slightly above the high end of our previous range and sales to be at or slightly below the low end of our previous range. Our EPS expectations reflect the beneficial timing of certain costs while our top line expectations reflect the soft near-term macro environment our industry is facing. You previously heard me discuss the importance of our portfolio management principles and how they continue to guide our actions. Specifically, we have moved from a focus on volume at any cost to a focus on value creation from our reliance on trade-driven push tools to a reliance on stronger brands and in turn consumer pull. We're also working to eliminate lower-performing lower-value SKUs that act as a headwind to margins and brand equity building. Additionally, we are implementing a disciplined approach to A&P and innovation which is now more consistent and tied to ROI. We continue to be aggressive at executing LEAN -- not as a project, but as a way of life and a permanent part of our culture. This relentless focus on cost and efficiency is the foundation of our efforts to drive consistently stronger margins and provide the fuel for profitable growth going forward. Complementing our organic efforts is a disciplined approach to M&A. As you saw last week, the next additions to our stable of brands will be Duke's, smoked meat snacks and BIGS seeds. If you aren't familiar with them, Duke's is a fast-growing on-trend premium meat snack brand; BIGS is a line of premium seed snacks and partners with some of America's best-known brands to bring big bowl flavor to seeds. We expect Duke's and BIGS will be terrific closed-in additions to our portfolio because they extend our existing meat snacks and seeds capabilities into faster growing more premium segments. We expect to close this acquisition this summer. Turning to the third quarter performance highlights on Slide 7, excluding the impact of divestitures and foreign exchange, net sales were down 4.8% reflecting the beginning of our anticipated improvement and top line trends. Adjusted gross margin increased 180 basis points to 31.6%. This was driven by supply chain productivity, improved pricing, input cost favorability and the divestitures of lower margin businesses. We delivered adjusted diluted EPS of $0.48 for the quarter, up 37.1% from the prior year's quarter. This was driven by lower SG&A expenses, lower interest expense and improved profitability in the Ardent Mills joint venture. It's worth-noting that these benefits were partially offset by volume declines and the impact of the divestitures of the Spicetec flavors and seasonings, as well as J.M. Swank businesses in the first quarter. Slide 8 highlights the strong progress we're continuing to make on margin improvement. As compared to Q3 of last year, we have driven 180 basis points of adjusted gross margin improvement behind our pricing and trade promotion discipline and strong supply chain productivity, as well as some input cost favorability and the impact of divestitures. On the right side of the slide, you can see our adjusted operating margin improvements which grew by 300 basis points compared to Q3 of last year. Moving to Slide 9, I am pleased to report that our trade efficiency and SG&A cost reduction programs are squarely on track. On SG&A, we have made enormous progress and Dave will talk more about this in a few minutes. We have meaningfully changed our promotional practices to adjust pricing while investing in improved quality, updated packaging and A&P support. We've also been using a disciplined process to examine the value every SKU delivers to our brand, so that we can eliminate laggards and remove unnecessary complexity and cost. And the value of our supply chain productivity programs is clearly coming through. Overall, our actions have led to stronger and more consistent bottom line performance. But as we've told you previously, we know there is more we can do. We remain focused on continuing to drive the center line of our profitability north over time. Looking ahead, we see no major structural issues that would prevent us from delivering our long term targets and we will continue to chip away at our margin opportunity. While we have been relentless on cost reduction and improving efficiencies in order to build a strong foundation on the bottom line, we know that we can't cut our way to prosperity. We've got to grow, but we've got to grow the right way, which is all about profitable volume growth in a more modern-looking portfolio, relative to where we were. To illustrate the point on value over volume, the left-hand side of Slide 10 shows how we've been willing to walk away from lower ROI promotional activities and thus our incremental volume sales have declined as we anticipated. I would like to note that we began to reduce our alliance on promotions during the middle of last year, so we're in the process of lapping these results. The chart on the right show the steady increase in base sales velocity trends demonstrating that our efforts are working to build a stronger foundation to build from going forward. Simply put, our brands, while leaner, are presenting better and therefore turning better in a non-promoted context. This will continue to progress from here. Overall, our disciplined approach to the top line is beginning to bend the trend. As you can see on Slide 11, our next sales results have begun to improve which we expected. Clearly, the near-term macro environment has softened industry-wide, which has been a bit more of a headwind to our progress than we anticipated, but not in a way that alters our game plan. We remain focused on execution and continual progress. Our process of upgrading the revenue base will give us a strong point from which to grow. That growth will be aided by an exciting innovation slate that Darren will cover now. Darren, over to you.

Thanks, Sean. Good morning, everyone. Although the food sector has been under pressure as growth rates have slowed, we remain convinced that the aggregate performance of the food industry does not reflect the underlying growth opportunities. A more granular view as seen in this graphic reveals significant and accessible pockets where substantially higher growth can be realized. We have taken a series of actions across our portfolio in order to reach these opportunity areas including the creation of the demand-based innovation and M&A program. These efforts that helped us build a revitalized and extensive innovation pipeline which we expect to begin shipping into the market beginning this summer. Before I get into the innovation, I'd like to spend the moment on our portfolio segmentation because it guides much of what we do, including resource allocation from A&P, to M&A, to innovation. You'll recall that this work assesses the relative potential of the categories and brands by considering category momentum on one access and brand momentum on the other. Together, the two accesses provide four distinct quadrants of performance, each with their own unique challenges and opportunities. As you'll see, our innovation pipeline aligns well to the overall segmentation priorities. However, you'll even see some innovation in the reliable contributor's quadrant reflecting an opportunity to continue to modernize strategically important brands that have been previously neglected. We have successfully leveraged innovation to modernize and extend the Healthy Choice brand upmarket, segmenting our business across the good, better, best continuum, not only moves existing consumers to more premium offerings, but introduced these younger consumers to the brand through these more contemporary products. You can see the shift occurring from the classic dinner's business, to cafe steamers, and from cafe steamers to simply steamers. In fiscal '18, we will take the next step in migrating this brand upmarket through the introduction of new range of products that we're calling Power Bowls. These new Power Bowls reflect more contemporary food values and packed more ingredient diversity and density into each meal. We've combined antibiotic-free [indiscernible] proteins, ancient grains, vegetables and dark leafy greens with pulses and seeds in a variety of delicious and bold flavors -- all of which is served up in a bowl made from plant-based fibers. Our customers have responded very positively to this new line up and we're looking forward to the launch this summer. Although banquet resides in the reliable contributor quadrant, we're continuing to modernize and premiumize it to improve its brand relevance, category competitiveness and performance at shelf. This work began last year with a broad-based restage of the brand. You'll recall that that restage significantly enhanced the taste and quality of banquet meals while enabling higher price realization and margins. In fiscal '18, we will restage the mega meals line and introduce a new range of mega bowls to create a premium tier of contemporary protein-packed meals. Mega meals are larger than the classic banquet meals with substantially more protein and mega bowls adds contemporary fast casual restaurant-style options like buffalo chicken, mac n' cheese and chicken fajita bowls. Although we continue to modernize and premiumize banquet, we continue to maintain banquet's role as a value meal within the category. The recent acquisition of Frontera Foods gives us a strong brand within the high growth territory of gourmet Mexican cuisine. The business founded by Chef Rick Bayless has been experiencing strong growth over the past three years and is firmly rooted in salsas and sauces. However, starting this summer, we expect to begin shipping two new extensions of the Frontera brand into the frozen meals category. As shown here, we've worked with Rick to create these authentic gourmet Mexican meals in both single-served bowls and multi-served skillet. While I don't have time today to review all the innovation that we escalated for fiscal '18, I want to be clear. We believe in our brands, in our discipline in demand-centric innovation program and in our ability to drive profitable growth across the portfolio. We're just getting started so there's a lot more on the works for the years ahead. Thank you and I will turn it back to Sean.

Thanks, Darren. Turning to Slide 18, as we move through the remainder of fiscal 2017 and beyond, we will continue to execute against our portfolio management principles. As we discussed earlier, we're now lapping last year's pricing actions and expect to see further improvement in our top line trends while we continue to expand our margins. Our innovation progress is also accelerating and we expect to see our new products begin to hit the market in early fiscal 2018. Again, we will continue to chip away at the gross margin opportunity while we deliver profitable growth. Finally, we will continue to look for opportunities to reshape our portfolio. This could include exiting brands in an efficient manner and using our tax asset. We expect it will also include continuing to enhance our current portfolio to a disciplined approach to M&A. We still have a lot of work to do, but we are pleased with the progress we're making. We're confident that the strategy we have in motion is the right one to drive improved consistency in our performance and profitability while delivering long term value for our shareholders. Now before I turn the call over to Dave, I want to thank our talented and dedicated ConAgra Brands employees who continue to embrace change and execute our strategy while doing a tremendous job at serving our customers. With that, Dave, over to you.

Thank you, Sean, and good morning, everyone. Before I start, I want to note some key points related to our basis of presentation. Lamb Weston and the related joint ventures have been reclassified as discontinued operations starting in the second quarter of fiscal year 2017. The commercial reporting segment for the third quarter and ongoing will have no current operating results. It will only include the historical results, the Spicetec and J.M. Swank businesses we divested in the first quarter of 2017. References to adjusted items refer to measures that exclude items impacting comparability and a reconcile to the closest GAAP measure and tables that are included in the earnings release and presentation deck. The Spicetec and J.M. Swank businesses are included in the historical results and are not called out as items impacting comparability. As you can see on Slide 19, reported net sales for the third quarter were down 9.9% compared to a year ago. Net sales excluding the impact of divestitures and foreign exchange were own 4.8% for the third quarter, which is an improvement from the first half of 2017, which was down 5.8% versus the prior year as Sean just mentioned. Adjusted gross profit dollars were down 4.4% versus the third quarter a year ago. Of the 4.4% decline, 2.6 percentage points were from the profit that left the business with the sales of Spicetec and J.M. Swank in the first quarter of 2017. The remaining decline was from lower volume and unfavorable FX, partially offset by the gross margin rate improvement. Adjusted gross margin was 31.6% in the third quarter, an increase of 180 basis points compared to a year ago. Approximately 80 basis points of this improvement came from divesting the lower margins Spicetec and J.M. Swank businesses. The remaining increase came from supply chain input cost reductions and productivity gains and improvements in pricing and trade efficiency. These gross margin gains were partially offset by unfavorable sales mix and unfavorable FX due to the weakening of the Mexican peso. Adjusted operating profit increased 9.3% due to the large reduction in SG&A, which more than offset the gross profit dollar decline. I will discuss the SG&A in more detail shortly. Importantly, adjusted operating margin was 16.8% for the third quarter, up 300 basis points from the third quarter a year ago. This is the third consecutive quarter of adjusted operating margin improvement of plus 300 basis points versus the prior year. Adjusted EPS was $0.48 for the third quarter, up 37.1% from the prior year due to significant SG&A reductions, lower interest expense due to the significant reduction in debt and an increase in equity earnings driven by favorable third quarter performance in the Ardent Mills joint venture. Slide 20 shows the drivers of our third quarter net sales change versus a year ago. Net sales excluding divestitures and FX were down 4.8%. Volume declines contributed 5.5 points of the decrease, partially offset by a 70 basis point improvement in price mix. As highlighted on Slide 21 and as Sean mentioned, we continue to improve both our gross margins and operating margins. Both Q3 and year-to-date third quarter have delivered improved margins driven by our relentless focus on SG&A, supply chain input cost reductions and operating productivity. We are also driving favorable pricing and trade productivity to supplement our improvement. I will discuss our outlook for both adjusted gross margin and adjusted operating margins shortly. Slide 22 highlights our continued strong SG&A performance. These results began with the restructuring we started in fiscal year 2016 and continue because of our growing culture of LIN everyday everywhere. Note that this chart represents adjusted SG&A excluding ANP expense. ANP is included as part of SG&A on the phase of the financial statements. Adjusted SG&A was $202 million in the third quarter, down 21% versus a year ago. SG&A was down $183 million or 24% year-to-date. In the third quarter, we continue to benefit from timing on certain SG&A expenses, which are mostly related to open headcount, along with some nonrecurring favorability in the area outside the services. The SG&A reductions are on-track to deliver the total targeted savings of $200 million by the end of fiscal year 2017 and we are very pleased with our overall performance as we are realizing our cost-savings goals a bit faster than we planned. Moving to Slide 23, this chart outlines the drivers of adjusted EPS improvement from $0.35 in the third quarter a year ago, to $0.48 this quarter, a 37% increase. As we expected, the EPS impact of the 5.5% volume decline was mostly offset by the adjusted gross margin rate improvement of 180 basis points. As I mentioned previously, we obtained approximately 80 basis points of improvement by divesting the lower margins by Spicetec and J.M. Swank businesses. The remaining gross margin improvement came from supply chain input cost reductions and productivity gains. Pricing and trade productivity partially offset by unfavorable sales mix and unfavorable FX. As I just discussed, SG&A reductions are on track and contributed $0.07 of earnings per share improvement this quarter. EPS improvement was also driven by lower interest expense in the third quarter of approximately $31 million versus the prior year driven by a $2.5 billion reduction in debt from the end of fiscal year 2016 to the end of the third quarter 2017. EPS also benefited from lower weighted average shares outstanding due to the repurchase of approximately $15 million of our shares through the end of the third quarter. The adjusted effective tax rate for the third quarter was 31.5%. This tax rate was favorable to our estimates primarily from tax benefits generated upon the exercise of employee stock compensation awards. Slide 24 highlights our net sales and adjusted operating profit by reporting segment. In our grocery and snack segment, net sales were $850 million for the quarter, down 5%, reflecting a 5% decline in volume. Twice and trade productivity contributed 50 basis points of net sales improvement, but this was offset by unfavorable sales mix. Adjusted operating profit was $212 million for the third quarter, an increase of 8%. The increase in adjusted operating profit reflects continued progress on gross margin expansion and reduced SG&A cost, partially offset by the impact of lower sales volume. In our refrigerated and frozen segment, net sales were $666 million for the quarter, down 6% reflecting a 6% decline in volume. Twice and trade productivity contributed 90 basis points of net sales improvement. This was offset by price reductions in our pass through brands and unfavorable sales mix. Adjusted operating profit was $128 million for the third quarter, up 5% versus the prior year period. The increase reflects continued progress on SG&A cost and gross margin expansion efforts that were partially offset by volume declines and the impact of benefits in the third quarter a year ago from higher Avian flu related volume and sales for egg beaters. Our egg beater product supply was not impacted by the Avian flu outbreak last year, creating a sales opportunity. The negative impact on the change at adjusted operating profit in the third quarter this year versus the prior year from the decline in egg beaters was approximately 5 percentage points. In our international segment, net sales were $205 million for the quarter, down 3%. This reflects a 4% decline in volume, a 3% improvement in price mix and a negative 2% impact from foreign exchange. Adjusted segment operating profit was $18 million for the third quarter, up 7% driven primarily by favorable pricing and lower SG&A expenses. In our food service segment, net sales were $260 million for the quarter, down 3% as a result of exiting a non-core food service snack business. Adjusted operating profit was $28 million in the third quarter, which was flat versus a year ago. As mentioned earlier, there were no sales or adjusted operating profits in the commercial segment this quarter given the Spicetec and J.M. Swank divestitures in the first quarter of 2017. Adjusted corporate expenses were $53 million for the third quarter, down 23% versus a year ago, reflecting the benefits from our cost savings efforts. Slide 25 summarizes select cash flow and balance sheet information for the third quarter fiscal year 2017 versus the year ago period and versus 2016 year end. We ended the third quarter with $3 billion of total debt and approximately $700 million of cash on hand. This results in net debt of approximately $2.3 billion with no outstanding commercial paper borrowings. Year-to-date through the third quarter, total debt was reduced by approximately $2.5 billion. As we have stated in the past, we remained committed to an investment-grade credit rating for the business. Net cash flow from continuing operations was $804 million year-to-date third quarter versus $274 million for the same period a year ago. This significant increase was driven by an increase in income from operations, benefits from the timing of tax payments, and very strong working capital improvement in the areas of accounts receivable, inventory and accounts payable, given our strong focus on managing working capital as a source of cash. We had capital expenditures of $159 million through the third quarter of this year versus $171 million in the comparable period a year ago. We are in-line with our internal targets for capital spending. IN Q3, we paid a quarterly dividend of $0.25 per share to shareholders of record as of October 31, 2016. This record date was before the spinoff of Lamb Westin. As previously announced, the board of directors approved its first dividend since the completion of the spinoff at the quarterly rate of $0.20 per share. During the third quarter, we purchased approximately $11 million shares of stock at the cost of approximately $425 million. Year-to-date third quarter, we repurchased approximately 50 million shares of stock at a cost of $595 million. At the third Q3 run rate for our share repurchase activity; we would expect to reach our previously announced fiscal 2017 target of repurchasing $1 billion of company stock in the fourth quarter. In addition, I would like to note the following items. Advertising and promotion expense for the quarter was $91 million, down 3% versus the prior year. Advertising and promotion is a percentage of net sales was approximately 4.6% for the third quarter, up from 4.3% a year ago. Equity method investment earnings were $22 million for the current quarter, up $13 million versus the prior year, due to the improved performance of the company's Ardent Mills joint venture. Net interest expense was $46 million in the third quarter versus $76 million a year ago, a decrease of 40% due to the significant pay down of debt through the third quarter of 2017. For the third quarter, foreign exchange negatively impacted net sales by $4 million and operating profit by $300,000 versus the year ago quarter. I will now summarize the items affecting EPS comparability for the third quarter, which we exclude from our adjusted financial measures. We incurred restructuring expenses totaling $14 million or $0.02 of EPS. We executed a pension settlement approximating $14 million or $0.02 of EPS. We retired high interest senior debt resulting in expensive $33 million or $0.05 of EPS and finally we recognized the tax benefit related to foreign tax incentives in our Ardent Mills joint venture. You can see more detail in this morning's release. Slide 26 summarizes our full year fiscal 2017 financial outlook, which have been updated from the initial outlook we provided at Investor Day in October. As we communicated as Investor Day, that outlook was based upon a pro forma fiscal year 2016 P&L base which excluded the Lamb Westin and J.M. Swank and Spicetec results, and it also excluded any estimated impacts from FX. Adjusted diluted EPS is expected to be at or slightly above high end of the $1.65 to $1.70 range we previously shared. Net sales excluding the impacts of divestitures and foreign exchange are expected to be at or slightly below the low end of the range of down 4% to 5%. Adjusted gross margin is expected to be within the previously provided range of 30.4% to 30.6%, and adjusted operating margin is expected to be slightly above the previously provided range of 15.3% to 15.5%. So in summary, ConAgra Brands continues to make progress executing our strategic plan. We are upgrading our volume base. Gross margins are expanding and our SG&A cost reduction program is progressing well. Our balance sheet is strong and gives us the flexibility to evaluate acquisition opportunities to drive share owner value. And our updated outlook for fiscal year 2017 continues to support the progress we have made year-to-date. Thank you. This concludes my formal remarks. Sean, Darren Serrao, Tom McGough and I will be happy to take your questions. I will now pass it back to the operator to begin the Q&A portion of the session.

All right. For those of you who are still on the line, we just learned we've been having some technical difficulties and some of our audience has not been able to hear. We are going to go ahead and proceed with Q&A, hoping that the folks who are in the queue for Q&A can get their questions through and we'll stay the course here and see if we can get this done. Let's open it up to Q&A, Operator.

Thank you. Now we'd like to get to an important part of today's call, taking your questions. [Operator Instructions] It looks like our first question comes from Andrew Lazar with Barclays.

Good morning, everybody.

Hey, Andrew.

Good morning.

Good morning. Thanks for the question. I guess just two things. First, it's obviously good to see the base velocity accelerating as you've pointed out for a couple of quarters, but obviously, ConAgra is still losing overall distribution points -- much of which I know was by choice -- even though you've begun to lap these actions. I guess is it that you're finding a greater amount of ineffective SKUs than you initially thought so that you're still reducing it? I'm really trying to get a better sense of I guess how much more we have to go on distribution points until we start to see the velocity begin to show through more fully in the top line? Is this also as implications obviously for how we think about organic sales in fiscal '18?

Yes, Andrew, let me tackle that. We're not going to get into fiscal '18 this quarter. We'll tackle that next quarter, but on TPDs, as we've talked before, a lot of this is exactly what we've been planning to do. Let's put the volume in its proper perspective. We are fundamentally rewiring a 100-year-old company here for higher margins better growth prospect, and that wasn't going to be done without unwinding some legacy practices. If you think about what we've done so far this year, we've materially reduced our reliance on promotion, we've raised prices, we pruned low value skews as you pointed out and we essentially pushed pause on launching new items so we could begin the heavy-lifting of rebuilding our innovation pipeline based on new analytics and Darren showed you some of that work today, which will hit the shelves next year. The upshot of all of this is that our top line is pretty close to what we anticipated with perhaps a bit more challenging recent environment across the industry, tied to some of the transitory dynamics that have been discussed. But the bottom line is we are making very good progress overall in this company for better margins and stronger brands going forward and we will continue to look for progressive improvement on the top line.

Got it. And then on SG&A, I think it has been a couple of quarters now where you've been looking for the spending to kick in the coming quarter and it's gotten pushed off and I think some of that as you mentioned was open headcount and things like that. Is that spending that then, you do expect to kick in during 4Q or hit 2018, or we're now at a structurally lower point from a relative SG&A standpoint.

Yes, Andrew. We do have some plumbings. We have opened headcount and we will continue to fill those. We will see an uptake as we get into Q4 and into F'18. But having said that, we feel very good about how quickly we were able to cut the cost and that we're going to hit our target earlier than we expected, but there will be some increase into Q4 as we fill some of the headcount.

Thank you.

Thank you. We'll move now with Ken Goldman with JPMorgan.

Hi. Thank you. Just to follow up on Andrew's question. I appreciate that there will be some incremental spending in 4Q in the SG&A line. But if you look at the implied margin for the fourth quarter, it's not really much above I guess by my math, you'll be 13.5% or so. It's really up less than 100 basis points year-on-year. But to your point, the operating margins up over 400 basis points due to the first three quarters. Are there any other headwinds we should be aware of as we think of the fourth quarter? Are you spending a lot behind the new product launches? I know not everything has been totally restated, just feels a little bit conservative to me and just trying to get a better sense of maybe why that is?

Ken, we've got some spend in the fourth quarter and this is part of you've got to see it's going to split across fiscal years, but some of our new item introduction costs do hit right around the end of the fiscal year, beginning of the new fiscal year. So that's one of the variables that we were dealing with right now. It's why we gave the guidance the way we gave it on the top line. It didn't try to tread the needle any more closely. But this will be our typical going forward new item timing, where we'll talk about our upcoming innovations in Q3, we will shoot to get some of that out the door and incur some of the startup cost in Q4. But some of that also typically would be lead across fiscal years. So that's where you don't want to get overly precise, but that is our launch window.

Okay. And then Sean, you may have talked about this. I missed the first maybe 15 minutes or so of the presentation because of the technical difficulties, but like many of you as food companies, your shipments came in ahead of Nielsen and there has been a lot of speculation about maybe why this is happening. I was just curious for your take within ConAgra. What are you seeing? Are there any non-measured channels maybe picking up steam in the less few months? Just trying to get a better understanding of where that gap is coming from.

There has clearly been a shift to non-measured channels, Ken, but I wouldn't put it all on the last few months. Obviously this is a hot topic in our industry right now around the recent softening of consumption. The way I think about what we've seen recently is that it's largely driven by transitory dynamics, like for example, the tax refund timing notion that has been widely discussed and even the warmer winter, we're not particularly exercised about those transitory drivers. What we are focused on is this simple notion that's old as the hills and that is the fact that consumer behaviors in case are perpetually changing with the obvious implication being that if we want to be a high performing branded company, we need to evolve with them and that's what we're doing. We have conducted an analysis as to what's going on with our consumer. We see clear shifts toward things like healthier, more convenient meals, things like more snacking and more shopping to your point and unmeasured channels; as well as things like more multi-cultural consumers. We're tracking all this. We're also interestingly seeing that the foods that are growing are premium-priced relative to those that are declining, meaning interestingly, quality is an important consideration in the consumer calculus around value, not just price. So these findings, whether it's non-measured channels or other things, it's informing our innovation and go to market agenda. The way I think about it is in terms of the macro issues you're seeing; these are not what some might call [indiscernible] times. These are times that companies like ours need to be externally focused on innovation and that's what we're doing.

We'll move now to David Driscoll with Citi.

Great. Thank you and good morning.

Good morning.

Hey, David.

Great. Glad you can hear me. I had that same difficulties the others had. I'd like to ask two questions. The first one, it will pick up the thread from Andrew and asking about the revenues, but I just wanted to be specific to the fourth quarter. I think the implying numbers here or something like minus 3 to minus 3.5 year-to-date revenues are down about 6. Can you just call out the factors in Q4 that you expect to occur, such that the sales declines moderate in accordance with how you've given the guidance?

Yes. You may have missed it in the presentation, David. I apologize for the technical difficulties. What you saw in Q3 was the beginning of a trend-bend on the top line. We expect that to continue. We may have some above-the-line sliding expenses in Q4 tied to new items, but we're beginning to see the trend bend and we just anticipate that's going to continue as we get some of our new items in the marketplace as we wrap more of some of the stuff in the year-ago period. That's what we expect and that's what's implied on our guidance. Dave?

Yes. It's Dave. Just to clarify your point, you're right. The guidance implies that for the fourth quarter, sales will be down 3.5% to get the down 5% for the year. As we said down 5% or slightly below, that's where there could be a little bit of difference there. But as Sean said, we're going to continue to bend the trend, but that's how you get to the number.

And then specifically in terms of the new products -- because there's a lot coming -- the pipeline fill for these new products will occur in the first fiscal quarter of next year, or will you catch some of it in the fourth quarter?

I think bulk of it will be next year, David.

Last question for me as input cost. Clearly, it's been very favorable for you. Can you just -- and apologies if you did quantify it -- but can you quantify fiscal '17 input cost where it's coming in and can you just give us any thoughts just looking forward? Again, what I'm really getting after here is input. You call it out as one of your top factors. Just want to get a sense from you on what longevity can input cost have for the company?

David, so as we've said at the Investor Day for fiscal year '17, we expected our inflation to be about 1% for the year. That is what we're seeing. If you look at the gross margin improvement this quarter, up 180 basis points or 110 if you exclude the divestiture. A good percentage of that was driven by overall supply chain productivity which includes input costs reduction. We feel really good about this year. We're in the process of putting together fiscal year '18, so next quarter; we'll give more specific guidance as it relates to next year. But for this year, that 1% is what we're seeing and that's a big part of what's helping drive the [indiscernible] ability in gross margin.

We'll hear now from Alexia Howard with Bernstein.

Good morning, everyone.

Hi, Alexia.

Hi, there. Can I ask about the promotional spending? It seems as though you started off this process really trying to clear out some of the ineffective promotional spending and obviously, SKU reductions as well. We're hearing from others that retailers at the beginning of this year are kind of asking for sharper priced points, more reinvestment back in promotion. Are you seeing any of that and are you seeing retailers push the private label side of things a little harder this year? Thank you.

Sure. Thanks, Alexia. On the private label piece, first of all, obviously, that is a category-by-category dynamic. Fortunately in our categories on average, we don't have huge private label development so it tend to be less of a factor for us. In terms of the promotional environment, clearly we have cut back materially on our promotional activities, but you got to put it in perspective. That's relative to an excessively promotional posture as a company. We still do plenty of promoting; we still have a large trade budget. It's just more efficient and it's more practical than it was historically. So to the degree that we need to be competitive in our categories on promotion -- we are -- we're just not out over our SKU as much as we were historically. It's not been an abandon in any way, shape or form of promotion. Promotion plays a role and it obviously plays a different role on different categories, but it's been more of a right-sizing of the way we promote particularly around depth of promotion and at some brands, it's a frequency issue as well. There are still plenty of promotion out there. There are customers who continue to have more of a promotional strategy than perhaps others. That tends to be on average [indiscernible] a little bit, but it's still out there and some of those are regional dynamics.

Great. Just as a follow up, you mentioned an interest in pursuing acquisition opportunities and I think you've said this for some time now. How rich is the environment in terms of the opportunities out there? Can you just remind us of what the key criteria are financially for those?

Clearly, M&A will be a part of our playbook. Whether it's small or modernizing acquisitions like Frontera, or Duke's, or larger synergistic acquisitions. As we weigh these moves, we will be disciplined strategically and financially. In terms of the environment and when we might make an acquisition, it really depends upon the situation, but certainly, if a value-creating opportunity were to emerge, we've got the balance sheet and the organizational capacity to act.

Great. Thank you very much. I'll pass it on.

We'll move now to Jonathan Feeney with Consumer Edge Research.

Thank you very much. I appreciate the question. A simple question. I don't expect you to give us gross margin by segment, but if you could give us some flavor for how, the means by which you're coping with the volume deleverage in refrigerated, and frozen, and grocery, just those segments particularly with 5% or 6% volume declines -- and yet you're beating at the profit line, how much of that is coping with that with manufacturing productivity and how much of that is on the SG&A side because I'm trying to figure what inning you are in this journey. Maybe if you could tell us how that's working right now, it might give us a better sense. Thank you.

Jon, both the SG&A programs that we've been working and our productivity programs and the supply chain have been critical to us, being able to expand our margins and being able to offset absorption issues. But one of the benefits we've had a company which may be a bit different from what you see elsewhere in the industry is we plan for this volume reductions. We plan for pull back and promotion, we plan for SKU rationalization. So our supply chain team in particular has been out way ahead of this from day one, looking for ways to take out cost so that we could offset the deleveraging associated with walking away from this low-quality volume that was embedded in our base. I tip my hat to them because they have done nothing short of an extraordinary job. So we're putting a pretty significant dent in this overall effort this fiscal year and I think we are doing what as I've said before, it may not be pretty optically, but if you're ConAgra and you want to get to what we're all trying to get to which is a higher margin stronger growth profile company, you have to go through these moves. You can't get there without taking this course and our supply chain team has done an outstanding job in helping us navigate it this year.

Thank you.

We'll move now to Rob Dickerson with Deutsche Bank.

Thank you. Just come back, I guess on Q4 in SG&A and the incremental spend. I guess in line with Andrew and Ken's questions, just in terms of how much incremental you would expect to spend given you said it's toward the very end of the fiscal year. Is this a year-over-year increase on advertising of $20 million or $30 million? Is this a substantial step up or not that much? Again, it's really just trying to reiterate a wider questioning around how much we really should expect this or how much incremental spend should we expect to see in Q4 given the margin guidance? Thanks.

Rob, maybe what would be most helpful is just to describe what we're going through. As we reset this company, redesigned their organization and we also moved geographies, we created some vacancies and then fully recognizing that we are building new capabilities around insights, innovation, integrated margin management, et cetera, and that we would need to bring in some folks who are exquisitely skilled in these areas that we call differentiating capabilities. We are very particular in terms of who we bring on to our team. We are very patient to get the right people on the bus and we have operated that way this year, which is why we have lived with some of these vacancies, but we continue to hire people and continue to bring new people in. That's going to continue in Q4. It's a directional thing. It's more of a small migration than I would say -- any kind of use the word rebate -- so I wouldn't think in that regard at all.

Okay, fair enough. And then as we think about '18, it seems like you're obviously by the end of this fiscal year that you're then at a point or you've been more comfortable with overhead is. I think the original guidance over the next few years was that SG&A's percentage of sales would essentially be flat, so obviously it's more of the top line operating leverage and gross margins toward off of '17. That flattish SG&A as the percentage of sales for '18 that [indiscernible] completely rational.

Rob, we'll get into more granularity on our next call for '18. We did at Investor Day say that SG&A as a percentage of sales would be flat over the three-year horizon. It's 10.8%, so we're obviously more favorable to that year-to-date as a percentage of net sales. So as we close the fourth quarter and then look forward, we'll give you more detail on that '18, but generally, that's the way we're looking at it, yes.

Okay, great. And then just a quick follow up on balance sheet, M&A, buy back. I know you virtually said $1 billion ASR for the year, I'm assuming that's on track or you're on track to complete that to Q4 would be the balance of what's left. That's one; and two, just leverage now was trailing 12 months is about four quarters is about 1.5x net debt. As we think forward into acquisitions, I know you want them to be value-added ROIC creative, etcetera. But should we be thinking more of what we've seen so far? Like a number of smaller growth year acquisitions to help you leverage your current capacity and supply chain? Or you're potentially open to whatever great value, big or small?

Well, let me take the first part of that and I could pass it to Sean. As it relates to the share repurchase -- it is not an ASR, by the way, its open-market -- so year-to-date, we've repurchased about 50 million shares of stock at about $600 million. With the run rate that we've seen for Q3, we'd expect to reach our previously announced part of the billion dollars for the fiscal '17 in the fourth quarter. That's where we are and you can see the details in the earnings release. Sean?

On your M&A question, Rob, at Investor Day, we talked about two kinds of acquisitions we're open to modernizing acquisitions which are still more on trend brands like some of what you've seen us do. We also talked about larger synergistic acquisitions that would have more financial impact near term. I don't want to apply in any way that our strategy deals one way or the other and that is a string of pearl strategy and you said it's not. We're open to both and either side of that ledger makes sense for us and whether or not there's actionability in a way that makes sense financially for us. So we've got to be in a position of readiness or either kinds of deals and I feel like we are should the right opportunities emerge. In the most recent case with Pinacci [ph] Foods, it happened to be a modernizing acquisition.

We'll move now to Matthew Grainger with Morgan Stanley.

Hi. Good morning, everyone. Thanks. One more on the M&A environment. I guess for Sean and Dave, both. On the larger synergistic deals, just curious, does the uncertainty around corporate tax reform in the effect that it's dragging on here present any significant hurdles as you've potentially try and have discussions about that size of transaction in a disciplined way?

Hey, Matt. When we look at acquisitions, we start with the strategic rational. So if you're talking about a synergistic acquisition, we're going to go through our acquisition criteria to make sure it makes sense strategically and then obviously all the financial metrics makes sense. Like every other company, we are all looking at what's on the table right now in terms of potential tax reform. Obviously there's nothing solid-right. So all you can do is scenario-plan, but that is clearly not driving what we're thinking about for acquisitions. It starts with strategy and financial hurdles and then we just look at scenarios and how it could impact acquisitions as we move forward.

Okay. Great, thanks, Dave. I'm not sure if you can give any sort of guidance or additional color here, but just on the performance of Ardent Mills in the near term outlook there, Q3 was pretty significantly improved over anything we've seen for the past 12-15 months. Should we take that as a sign that the worst of the issues that you're facing in the milling industry are now in the past? Or will there continue to be some volatility there over the next few quarters?

I think despite nature, there is some volatility in that industry, but if you look at Ardent Mills for the third quarter, we had a very solid third quarter -- the volumes increased, they took advantage of market opportunities to build share and they're recognizing operating efficiency with the plans which a year ago they were actually investing in their infrastructure. So we're seeing some of that pay off. So, pleased with the progress they're making for sure.

Okay. Thanks again.

We'll move now to Jason English with Goldman Sachs.

Hey, guys. Thanks for letting me ask a question. Like many, I missed some of the prepared remarks and perhaps I missed this, but top line, I know there's been a bit of a drag from some of your past few categories and allowing the overall mixed benefits of your innovation and then net price benefits, the trade spend shine through fully. Is it safe to assume that that was still a drag this quarter? If so, can you give a sense of maybe how big it's been and what the floor looks like? When we can expect maybe some of that pressure from our optics and top line to abate?

Let me start, Jason, with as you look at the quarter, overall, we had that 70 basis points of priced mix benefit as a company, really coming from our international business and price increases that we took there in the last quarter. If you look at both grocery and snacks and refrigerated frozen and you peel the onion back, we did have price realization benefits in both of those segments. So we had 50 basis points of price benefit in grocery and snacks in 90 basis points from refrigerated-frozen. We did have some offsets related to mix and that really just comes down to that certain items had a higher average net sales per unit than the average. That's really a timing thing for the third quarter. We feel really good about the progress we're making in both our pricing and our trade efficiency and we are seeing that this quarter may have, too, a little bit by the mix, but that's a timing thing.

Okay, that's helpful. And then higher order. First, you guys deserve some kudos, congratulations, for navigating this transition so well from a bottom line perspective. It's been impressive to see the EBIT growth continue in the phase to some of the top line transitions. I think a lot of the questions have gotten around the idea of sort of what's next. You're running pretty hard on productivity, you're delivering quite well, you're delivering fast from expected, but the top line turns are probably going to take a little bit longer to get there and I guess during that some of us have is that maybe we enter a bit of a pause period where the top line is not quite there and the productivity well is dripping out a little bit less. It's hard without being able to talk about guidance, but can you give us a sense, sort of higher level of whether or not you think those are reasonable concerns, or whether as you look at the productivity, you still think you have ample fuel to navigate through this transition?

Jason, I feel really good about where we are. We'll obviously get into specific guidance next time, but just principally, if you think about it, when you reset your top line for a higher quality foundation, it ought to be just that. It ought to be a higher quality foundation from which you can build. And then when you initiate a new innovation program like the one that we've really mobilized and some of you got to see it [indiscernible] and you layer it on top of that stronger foundation where you've taken out a lot of the things that were holding you back previously, I think it sets you up for success. That's why we at our Investor Day gave the long term top line algorithm that we did. We believe that what we're doing this fiscal year is essential in terms of creating a foundation off of which to build and what we're doing in Darren's area with the growth center of excellence is an important investment so we can actually lay those bricks on top of that stronger foundation. Our supply chain team has been doing an outstanding job of delivering productivity for years now and as Dave Biegger pointed out at our Investor Day, we anticipate additional benefits in realized productivity going forward as part of our program. You put all that together and I think ConAgra remains a very compelling investment for our investors and we've got a very solid shareholder value creation potential here.

And we'll now hear from Rob Moskow with Credit Suisse.

Good morning. Thank you for the question. This is Robert Connor on for Rob Moskow. Just a quick clarifying question. You talked a lot about the innovation rolling out in the first quarter 2018. Are you actually expecting your advertising budget to increase for 2018?

Well, we're not giving guidance for 2018 today, but I have spoken on market many times about how I think about our A&P spend. These are the some other companies I work for. Our A&P budget, I think it's very robust. It's competitive and we've been in the mid fours. It's not the kind of A&P rate that in my mind require some kind of A&P rebate. Now what we have been doing on A&P though is trying to get more effective and efficient within our existing expense. Darren's team has a very aggressive program to ship more of our A&P budget from non-working dollars to working dollars. That is happening very effectively and then within the working dollars, we are changing the way we use A&P. Not only are we very disciplined in which brands we apply it to, but we're much more digital, social today than traditional TV. The mix of marketing tools that we use is different, it's more effective. The net of all of this is I feel like our overall A&P level is about right while it continues to get more effective.

Thanks.

We'll now move to Akshay Jagdale with Jefferies.

Good morning. This is actually Lubi on for Akshay and I apologize if you've already addressed this, but I did have some of those same technical issues that some people are experiencing. But just wanted to ask a question on sales. When do you expect to fully lap the portfolio repositioning efforts that you guys are doing and how soon do you think we might be given to see positive sales growth for the total company [indiscernible]. Just related to that, if you can talk a little bit about what the drivers of that potential sales growth might be, whether it's primarily innovation-driven or something else? Thanks.

Yes, Lubi, we're not going to give guidance in terms of sales next year or by quarter. But what I do want to point out -- I've said this before -- is that as you think about a big part of what we've been doing is walking away from deep discount promotions. Promotional activities are long LEAD time planning items with customers. So there's not one given quarter where we lap it and it's over. It varies by customer. Some customers have their event flocked in out farther into the future than others. So we'll continue to tight rate-off of these types of superhot deals and that will go on for a while until we get it out of our base. But obviously, a lot of the heavier lifting in that regard will be behind us as we exit this year. We still have certain customers and certain regions on certain SKUs, who even this past year have done deeper discount deals and we'll navigate our way out of those over time. That's kind of a principle point around how this thing unfolds. In terms of the building blocks to aid and improve top line, one, is to get some of the weaker businesses out of our base to create a more stable foundation; and two, is to begin to really reengage the consumer to shop our brand off of the shelf based on the merits of the brands, not based on the depth of the discount on deal. You're seeing that begin to happen already. As you look at the velocities on base that we're seeing today, they are higher and what that really is indicating is that we are succeeding in reconditioning our consumer, the shopper, to re-experience our brand in a whole price non-merchandized condition and when you then layer on top of that new marketing and new innovation, we think that's the right way to run a branded portfolio.

Thanks. That's very helpful. And then if I could ask a question on guidance. I think you've mentioned that your revised outlook, there are some timing, there are some benefit related to timing of certain cost. Can you elaborate a little bit on what exactly those costs are and what's causing the timing issue? Thanks.

Yes. That was related to our SG&A and as we mentioned, that our SG&A is very favorable and that has been planned, but we've had some additional favorability, primarily from open headcount. We're filling a lot of positions and we're in the process of doing that. So as we continue to fill them, more those cost will come in Q4 and into next year. That's really what we're referring to there.

Okay, thank you. I'll pass it on.

Thank you. This concludes our question-and-answer session. Mr. Nystedt, I'll hand the conference back to you for final remarks or closing comments.

Well, thank you and apologies again for the technical difficulties we had. As a reminder, this conference is being recorded and will be archived on the web as detailed in our news release. As always available... [Call ends abruptly]