ConAgra Foods' CEO Presents at Consumer Analyst Group of New York Conference (Transcript)

| About: ConAgra Brands, (CAG)

ConAgra Foods, Inc. (NYSE:CAG)

Consumer Analyst Group of New York Conference Call

February 18, 2014, 09:15 AM ET


Gary Rodkin - Chief Executive Officer

John Gehring - Executive Vice President and Chief Financial Officer


Robert Moskow - Credit Suisse

Robert Moskow - Credit Suisse

I want to thank ConAgra for coming to CAGNY today, and for sponsoring last night's reception. Thank you very much to ConAgra. Here at the dais is Gary Rodkin, CEO; and John Gehring, CFO.

Since coming to ConAgra in 2006, Gary has created value for shareholders, by taking the ag out of ConAgra, and brining a brand management discipline to the company. Gary and team have exited commodity businesses, they've invested in marketing and rewired the organization for growth.

Last year Gary went where brands rarely go by acquiring the Ralcorp private-label business in a bold move to better meet consumer demand for value. Please, help me welcome Gary Rodkin. Thank you.

Gary Rodkin

Thank you, Rob. Well, good morning, and thanks for joining us. As Rob mentioned, I am Gary Rodkin, and with me today is John Gehring, our CFO.

Before we get started, here's the standard forward-looking statement disclaimer. If you want the full language, it's here on the slide and in our SEC documents.

Let's begin with a quick snapshot of who we are. Our annualized sales are about $18 billion. We have a portfolio of well recognized consumer brands in our Consumer Foods segment, very strong business-to-business brands and product lines in our Commercial Foods segment and North America's largest private label food operations in our Private Brand segment. We have deliberately considered our portfolio in a manner that will make us a very strong partner to customers across a wide range of channels and open up sizeable growth opportunities in the process.

As you may know, this makeup of our company is dramatically different than just over a year ago, due to the acquisition of Ralcorp, a large private-brand company, last January. This part of our strategy to play at scale in Private Brand, a proven growth segment of the food industry, that is absolutely what has changed the tenor of this company.

And as we began integrating Ralcorp last year, this kicked off a significant transformation and we've made significant progress, but we've also encountered some challenges, and we're not satisfied with the performance. I'll recap those challenges for you as well as a couple of others that have contributed to our recent performance.

As most of you know, we revised our fiscal '14 outlook last week, and I'll review the reasons for that. Importantly, we're confident that we will overcome these challenges and significantly improve our performance as we go forward.

First, the integration of Ralcorp. Let me start by saying that when we acquired Ralcorp, it was a collection of business units, going through the early months of a restructuring, and that resulted in some tougher issues to work through than we had anticipated. Specifically, prior to our acquisition, the sales force was cut too deeply, pricing was done too bluntly and there were supply chain related customer service issues.

We didn't have visibility to the full extent of the issues, so we were slow out of the gate in stabilizing business. In addition, given the competitive pressures, we deliberately chose to make some pricing concessions to stabilize volume trends and that frankly has weighed on our earnings this year.

Within our Commercial business, we've had a significant profit mix driven by the loss of a major foodservice customer and an unusual potato crop quality issue that's resulting in less efficiencies in our plants. And within our Consumer Foods segment, we continue to see overall competitive pressure and a fight for share. But most importantly, we have several large brands that are disproportionately weighing on our performance. I'll say more about this in a few minutes.

So clearly, there are issues impacting us now, but we are making progress and we view most of them as short-term and fixable. I'll go deeper into each segment, so you'll have a better picture of not only the issues, but the progress we're making and the opportunities ahead.

Our Private Brands segment is about 24% of our net sales. And we're in 30 categories at retail, ranging from cereal to a wide variety of snacks to refrigerated and in-store bakery products.

Within Private Brands, we're making progress in key focus areas. We have the right organization and leadership now in place, and that speeds decision making and ensures better connectivity. We have an integrated sales team in place with one voice to the customer. And a customer-by-customer, category-by-category approach, it's not one size fits all.

As I mentioned, we have taken some pricing actions to stabilize volume in the business. These near-term pricing investments have contributed to our earnings shortfall. And while we are certainly not happy with that, these moves were deliberate and necessary and they put us in a better position for success longer-term. To restore momentum, we will protect existing volume and drive new opportunities for growth, including pursuing meaningful distribution.

Within our new Private Brand supply chain some manufacturing network adjustments, notably several plant consolidations that were underway prior to our acquisition, simply weren't executed well, and we let down some retailers on fulfilling certain orders. In some cases that meant lost business.

This has been an all hands upon deck effort to fix, and we are clearly making progress, integrating processes and systems, improving forecasting and getting order fulfillment back on track. Just in the last six months, our service levels have improved from 97% to almost 99% in Private Brands in aggregate. While, there is still work to do to regain customer trust, we're in a better spot today than we were a few months ago.

So that's a recap of the issues that we're correcting. Let me share a few points on a couple of other big focus areas, cost synergies and customer relationships. We are on track and moving along at the pace and magnitude we anticipated in regard to cost synergies and we'll continue to deliver on our commitments.

John will say more about the specifics of cost synergies gained via the Ralcorp acquisition, and I'll share an example. We recently finalized agreements for enterprise-wide maintenance, repair and operations or MRO equipment for our plants. MRO includes things like lab supplies, piping and compressors, and our new agreements will generate over $50 million in savings over the next five years.

These savings will come from a significant consolidation of suppliers. In fact, we're going from hundreds of MRO suppliers to a very small number. And obviously, this means we've applied our largest scale to leverage those agreements.

Beyond this MRO example, we have many other procurement-based savings opportunities, from packaging to pallets to ingredients. We also have operations based savings to capture such as those related to transportation and warehousing. So again, we feel very good about the synergy savings in the pipeline, importantly they are very tangible.

Retailer partnerships are another big focal point for us, and our story resonates well strategically with our customers. Many retailers have been increasing their focus on Private Brands to drive growth. I'll say more about that in a minute. Our focus has been to begin to build relationships with customers that create win-win opportunities.

We've spent a considerable amount of time with retailers, as part of our work to get our Private Brands business up and running. They are interested, they are listening, they are fully engaged during these conversations, because they see the growth opportunity that ConAgra Foods' Private Brands' portfolio and capabilities can offer, and that we are unlike any other private brand supplier.

Let me step back for a moment. We're all well aware of the decades of continual growth of private label in the food industry. It has flattened over the last year, as it has ever so often, but we are highly confident that the growth will pick up again. Why? For starters, the retailers who have prioritized Private Brand have enjoyed growth that is dramatically better than the rest of the retail fields.

Specifically, the customers with the heaviest focus on Private Brand are growing almost twice as fast as the rest of the top-30 retailers. Retailers are clearly looking for growth in a very competitive marketplace and are trying to differentiate however they can. Those who have gone to Private Brand in a bigger way have seen stronger growth than those who have not.

Beyond unique product differentiation, there are advantages to the retailer. Lower prices of Private Brand products, particularly those designed to emulate the large national brands, appeal to budget conscious consumers, and there are many, many millions of those. And the lower cost of Private Brands to the retailer, help their margin dollar and margin percent. Those gross profit dollars are hard to come by in this highly competitive marketplace and where the retailer can capture more profit, that's good news.

When the retailer has the opportunity to combine national brands with Private Brands, we believe the dynamic is even more compelling. National brands draw shoppers into the store. They clearly are very important, particularly when they are a strong value, like what you'll find in the ConAgra Foods brands. We've seen the power of this combination in action and are in the market with a number of retailers to help them truly leverage this model.

One way to use Private Brands and national brands together is in-store displays, put together based on occasion or categories. Our portfolio of snack foods when we combine Private Brand offerings with our Consumer Foods brands is very deep and broad, and each combination pallet provide a way for retailers to capitalize on the perimeter of the store purchases, which tend to be more impulse oriented.

These ready for the floor display shippers include the retailer Private Brand that we make and our Consumer Brands, and the enhanced retail effectiveness for our customers. In fact, solution selling displays, such as the one with our Private Brand pasta and our category-leading Hunt's tomatoes, delivers a 37% increase versus comparable merchandising of similar products displayed separately.

The reason these programs work is that consumer acceptance of Private Brand have grown over the years, while the value is certainly critical, Private Brands have grown in status. A large majority of consumers view them as good as national brands in terms of quality. That mindset is what accounts for 87% of consumers making store brands part of their purchases.

Consumer demand and retailers' recognition of that demand and the advantages that Private Brands bring to them is part of a staying power in Private Brands' growth. Private Brands had outpaced national brands' growth in a meaningful way over the past decade, with an average compounded annual growth rate of two times larger than national brands in recent years. That's quite compelling. We are very confident there is more growth to come and we are positioned to be a big part of that.

As we look forward, we have identified significant distribution opportunities. For example, we look at each of our key customers that we've identified Private Brand categories with plenty of room for growth. And the example shown here, customer A, significantly under-indexes the market in terms of Private Brand share of a number of categories that we already plan. These opportunities are significant, and as our new sales team gains more traction and connectivity in the Private Brand space, we will start pursuing these opportunities in earnest.

The key to being a successful supplier in the Private Brand space is becoming more than just a supplier. We are operating the way that we know, we can. We will bring the consumer packaged goods capabilities to retailers for their own brands, something that no one has done in a big way.

The Private Brands space continues to be highly fragmented with small players servicing particular geographies. As retailers grow their Private Brands business, partnering with a supplier with scale, one with sophistication in shopper insights, food-safety practices, supply chain efficiencies, all of these things are becoming increasingly important, what we offer in a different way to different retailers fit this wide space.

Our capabilities in Private Brands will help us differentiate ourselves from other suppliers, large and small, and give us the opportunity to compete on more than just price. For instance, quality has become increasingly important in Private Brands as these brands are a true reflection of the retailer.

Going after Private Brands in this way and at scale is a disruptive model, one that can change the dynamics of the industry and provide a way for both the retailers and manufactures to grow more profitably, that will serve as well over the long-term in developing strategic relationships on Private Brands with key customers.

Our vision is to be the premier value-added supplier and partner for retailers, as they interestingly embrace Private Brands. We believe, we can be the best in this space across a multitude of capabilities, in supply chain reliability and efficiencies, in analytics and category management, and many more.

So while we know, there is still ground to make up in our execution on Private Brands, we are making progress and we are firmly committed to the strategy because of the growth opportunities and our transformative model. And as we look ahead, beyond the next 18 to 24 months, there are significant opportunities for more consolidation in this very fragmented Private Brands industry.

Moving on to our Commercial Foods segment, where we have our Lamb Weston frozen potato business, our milling business and our foodservice businesses. This segment delivers $6 billion in annual revenue, making up about 35% of our total revenue. And it's also a strong profit contributor. Another important role for Commercial Foods is that it diversifies our portfolio. It's a major player in providing food eating away-from-home, complementing our Private Brands and Consumer Foods segments.

Within Commercial Foods, we serve major restaurant chains and foodservice providers across the globe. We participate in the away-from-home segment in nearly every channel with menu options expanding breakfast, lunch, dinner and snacks.

Following the Ralcorp acquisition, we moved all of our foodservice businesses including branded and private-branded in the Commercial Foods to be managed in a more connected and complementary way. With the foodservice industry shifting to a category management approach, we're beginning to present ourselves to costumers as a unified team offering our full capabilities and scale. For example, our combined business with a major global chain restaurant now spends across potatoes, bakery and breakfast products, flavors, seasonings and toppings.

We're in the early stages of becoming a more valued partner by bringing the full capabilities of ConAgra Foods' to payer as we shift from a historically transactional relationship to a strategic world-class partnership.

Within Lamb Weston, specifically, it's the biggest part of our Commercial Foods. We are a well-known leading supplier in frozen potato products. We've traditionally enjoyed very strong results from Lamb Weston and we expect no different in the future. But right now, we're focused on getting passed two challenges.

First, we are working hard to recover lost business from one major foodservice distribution customer. We shared this news earlier and our plan has been to gradually recoup volume by selling more in other channels. Clawing back, profit and volume is taking more time than we originally thought and this is weighed in our overall results.

Our second challenge is dealing with the potato crop that was adversely impacted by weather last summer, specifically, in the Columbia Basin where Lamb Weston sources most of its potatoes. The crop is simply not the quality that we need to get the efficiencies out of our production facilities.

The unusual crop situation and the resulting inefficiencies in our asset base is a significant margin detriment. The good news is, this is clearly a short-term issue and it's not something we've seen very often. Backed on an absolute basis, the yield from this year's crop is the lowest we've had in several years.

To replace the volume from the customer loss, I mentioned, we're increasingly turning to our international business, where we are seeing double-digit growth for Lamb Weston sales. Lamb Weston international, which today, including JVs is a billion dollar business. There is a great opportunity for us and it has been the source of a lot of Lamb Weston growth in recent years, despite some temporarily slow downs in the Asian market.

One of the reasons for the strong growth is that our customers, their very large, multinational quick-serve restaurant chains continue to expand rapidly across the globe. And with that growth, comes an opportunity for our Lamb Weston business, as consumption of frozen potato products, mostly French Fries, but other products as well continuous to decline.

Lamb Weston continues to be the largest frozen potato supplier in North America. We have a very strong supply chain and terrific customer service. Customers who are growing both domestically and internationally continue to partner with us to meet their needs, which vary from market-to-market, requiring unique product innovation. The capabilities that Lamb Weston has developed position us very well for growth in this segment.

Our Commercial Foods segment also currently includes our milling business, soon to be part of a joint venture as we announced last year. We view this as a long-term strategic win that will enhance ConAgra Foods' shareholder value overtime.

The Ardent Mills JV allows us to take part in financial gains, without the sales volatility of a commodity-oriented business in our base results. Ardent Mills will focus on expanded innovation capabilities, supply chain efficiencies and other customer centric solutions. We're highly confident in making this transaction a reality, and we are on track for it to be complete by the second quarter of the calendar year. Long-term, we expect good accretion from this transaction. This is financially and strategically a very sound move.

Our final segment today is our largest, Consumer Foods, which many of you know well. It includes packaged foods sold at retail under brand names like Marie Callender's, Hunt's and Slim Jim. To succeed in this segment, we've established a strong focus on what we call, perfect at retail.

This is critical to growth, and the initiatives go across the Consumer Foods portfolio. We will, of course, use some of these strategies and tactics to course correct on a handful of brands I had mentioned that are disproportionately weighing on our results, which I will talk about in a minute, and I'll share how we're using this perfect at retail approach across Consumer Foods.

Perfect at retail incorporates our own version of the Four Ps that are very retail specific. You may have noticed by now that we believe strongly that being customer centric is absolutely critical in today's environment.

While traditional marketing still works on key brand equities with true points of difference like PAM, Reddi-wip, Hunt's tomatoes or Marie Callender's, overall traditional marketing is not as effective as it once was. And what we do in-store, close to the shopper, at the moment of decision making is key to driving growth for both the retailer and us. This requires us to optimize our promotional and merchandising actions.

First, pricing. Over the last few years, we have developed much better capabilities in pricing analytics, as part of an overall revenue growth management approach. This helps us to be more proactive and disciplined in regard to pricing, deploying strategies that take into account a number of factors, including competitive pressures.

Our focus is on making sure we have the right pricing of our products every day, so they can deliver value to the consumer, velocity and profit for the customer and a good return for us. That also means that we make smarter decisions about promotions, which in some cases means we may forego some volume. While we're not perfect at this yet, we are making a headway and following the overall premise that with our portfolio we have the opportunity to be a very strong value provider at multiple price points.

Let me give you an example. We simply can't underestimate the power of good food at a terrific value in today's economy. With more people, frankly of all income levels, searching out a good deal, with cuts in SNAP, which impacts all players in the industry and with all food makers and retailers fighting for share being able to make and sell good wholesome food at a strong value is essential.

So that's a component, not only of our Four Ps, but who we are as a company. We sell over a 140 meals for under $3, and here's a couple of examples. Banquet pot pies, sell for a less than $1 and Marie Callender pot pies are around $2.50. This shows that our capabilities as a company, using a deep and strong asset base to create variations of products at scale and at different price points to address the competitive dynamics within a category. Getting that price right at retailer's key and our analytics play role, as does our ability to make good food at the right price.

Packaging, graphics and functionality, plays a big role in being perfect at retail, because it's so critical, when shoppers are making a choice. Our packaging has to have clear and compelling benefits and that can come to life in the way the packaging actually functions for the consumer.

Evolving packaging to the way consumers want to use the product such as the new resealable tetra packages for Hunt's tomato sauce, which also happens to make the product more accretive to our margins to new bag that we're using for Bertolli meals, designed specifically for the club channel. These bags have driven a dramatic increase and velocity for Bertolli in that channel. Being perfect with our packaging creates one more reason for shoppers to pick up our brands versus the ones next to them.

Perfect at retail also requires management of placement. This can range from assortment changes that are designed to improve base velocity, to simplification and SKU rationalization strategies, meaning devoting more space, more facings to the best selling items.

Placement also includes innovating with merchandising like snaking displays that make choices and purchases easier for the shopper. In a large test of this kind of display at retail, Slim Jim sales increased 40%. And of course, promotion is being part of perfect at retail.

We are having success with occasion-based promotions such as the Hunt's chili chip display, and promotion for brands like RO*TEL diced spiced tomatoes and Hunt's as well as our win with dinner promotion. These promotions are driven by insights on what shoppers want and what retailers need.

For instance, dinner is the most valuable eating occasion for retailers, representing 44% of dollars spent in the store. And shoppers said that they want to bring their family together for dinner, welcoming in-store solutions to take time and share ideas. We customized win with dinner for retailers, making it seasonally and regionally relevant and this represents an opportunity also to include Private Brands with our Consumers Brands.

While getting it right with our Four Ps as a major thrust, we also are keenly aware that we have more work to do, as we mentioned before, on a few brands that are negatively impacting our Consumer Foods segment. Specifically, these are Healthy Choice, Chef Boyardee and Orville Redenbacher's. So what are we doing to course correct? There is a common theme on these brands, besides their underperformance. We have spent too many resources on these brands trying to penetrate new consumer segments by overcoming their perception barriers, and frankly, it hasn't worked.

We are changing that approach and are now increasing our focus on core users in these broad categories. And there are many millions of these engaged consumers. And we are confident that we can stabilize our share and with a maniacal focus on these consumers, we can potentially drive brand preferencing growth.

This obviously will take a bit of time and it will require optimizing our promotional and merchandising actions against that core user base. So let me give you one example that's underway, Healthy Choice. A brand that we created a few decades ago has long been a significant player in frozen meals category, specifically in what we call the healthy segment.

This healthy segment is a big important area within frozen single-serve meals, which is a $2.5 billion annual retail sales, comparable to the hot dog category or the cake cup category, and it's a category that's seen a significant drop in sales, which clearly hasn't helped us. But with a category this big and a brand like Healthy Choice, we know we have opportunities for growth. That means shifting our strategy in a few ways.

First our target, we are changing our focus from trying to reach new users to focusing on the Healthy Choice core. Baby Boomers have already represented more than 60% of this category's volume, and as we know this is a growing segment of the population and Healthy Choice actually plays really well with his audience, it over indexes and always has. So rather than spend millions of dollars on resources on trying to get new users like Millennials, who simply don't represent enough of this category's volume for us to chase, we are focused on driving more profitable purchases from that core user.

Second, we are employing our perfect at retail mandate to Healthy Choice, as I mentioned. This approach takes into account price, packaging, placement and promotion. Specifically for the Healthy Choice turnaround, we are getting focused on getting the right product on the shelf.

Our Café Steamers have been a terrific performer for us since being introduced five years ago. They are unique in the frozen aisle with the tray-in-tray format, which delivers very clear superior quality and their higher margin that are on trade. So with that strategy, we are proactively reshaping our line by discontinuing slower selling SKUs and rebuilding it around Café Steamers. As a result, we'll have a more focused, differentiated and stronger product range.

To wrap up on Consumer Foods, we will accelerate our perfect at retail strategy across the board and make strong headway on improving the three brands that have disproportionately hampered overall growth, along with strong productivity, smart brands supported the consumer and trade level, we are confident that we can grow in this segment and have it continue to be an important cash generator for us.

In summary, while there are short-term challenges in each of our segments, we expect to be past them soon and our near-term executional issues should not be confused with the strategic fundamentals of where we're headed.

Our conviction about our long-term opportunities continues to be strong and well-founded. We have some great brands, products and capabilities across our portfolio. We remain very confident in the growth trajectory of the Private Brands business for all the reasons that we've discussed. We're enthusiastic about its differentiating advantages for us. And we know our Commercial Foods business will be an ongoing profit and growth contributor.

We've learned a lot of tough lessons this year and as we move past these nearing issues, we are becoming stronger, which adds to our well-grounded conviction about our sustainable profitable growth opportunities for success in the years to come.

Thank you for your time and interest in our company. And now I'll turn it over to John.

John Gehring

Thank you, Gary, and good morning everyone. I appreciate the opportunity to be here. Today I am pleased to update you on some of the key financial aspects of our plans, including some additional details on our productivity initiatives and opportunities over the next few years.

As you are aware over the last year, we have dealt with a number of challenges, but it has been a transitional year and while we have made some good progress from an integration and organization standpoint, our financial results, thus far, in fiscal 2014 have not been up to our expectation.

I can assure you that our leadership team is very focused on addressing the challenges that Gary highlighted in his comments and in driving long-term profitable growth.

We remain optimistic about the future of our business and we're confident that the fundamental strength and scale of our company will enable us to drive attractive top and bottomline growth over the next few years.

So here are the topics that I'll cover today. First, I'll cover our financial priorities, including our capital allocation plan. Next, I'll spend a few minutes on productivity initiatives, then I'll say a few words about our EPS outlook, both near term and long-term.

Let's start with an update on our financial priorities, which serve as foundation for our business plans and performance. While, we have made some significant and transformational changes to the company over the last several years, we have done so while maintaining a consistent focus on the following financial priorities, which we believe are important to our stakeholders.

First, strong earnings and cash flow. Second, a healthy balance sheet and strong liquidity, including our commitment to an investment-grade credit rating. And third, a capital allocation approach that emphasizes debt repayment over the near-term, while we continue to pay a strong a dividend.

Next, I'll cover each of these priorities in more detail. Cash flow has been a central focus for us and that will certainly continue, as cash flow is the fuel for our highest financial priority over the near-term debt repayment. And we will therefore continue to focus on the key drivers of cash flow. First, earnings growth, driven by executing the topline fundamentals in our business and those are sales, customer service, marketing, innovation and pricing.

In addition, we expect that our productivity including both base productivity and synergy benefits from the Ralcorp acquisition will favorably impact our earnings growth for the next several years. I'll say more about synergies and overall productivity initiatives in a few moments.

And finally, we have increased our focus on administrative efficiency and effectiveness. While the current fiscal year earnings growth has been less than we expected due to the matters that Gary addressed, we are confident that the combination of modest topline growth, improved business execution and continued strong productivity will support strong EPS growth over the next few years.

Working capital efficiency, the second component of cash flow has been an area where we have made significant progress over the last few years. We believe the opportunity to apply our working capital discipline to the larger enterprise will provide modest contributions to operating cash flow over the next few years.

And finally, a disciplined approach to capital expenditures. We currently expect our base capital expenditures to be approximately $600 million a year for the next several years, as we continue to support key growth and cost reduction efforts.

I would note that our restructuring effort may drive some incremental spend in certain years. However, we are confident that these projects will be impactful to our productivity effort and we will remain very focused on return requirement and financial discipline, as we developed and execute our plan.

So how do we see our cash flow over the next couple of years? Well, first, we believe our earnings growth as well as our working capital and CapEx discipline will drive strong growth in annual operating cash flow and free cash flow. And with that cash flow we will focus on a new priority.

First, our near-term capital allocation priority is the repayment of debt. And excluding any proceeds from the Ardent Mills transaction, we expect to repay at least $1.5 billion of debt through the end of our fiscal year 2015. And while, our lower earnings expectations for this fiscal year will modestly reduce cash flows, we still expect cumulative debt repayment through the end of fiscal year 2014 to be approximately $950 million. And based on our expectations of stronger operating cash flow in fiscal 2015, we remain confident in achieving our $1.5 billion repayment target next year.

Second, we are committed to a strong dividend. And finally, as we make progress on strengthening our balance sheet and credit metrics over time, we do expect to have more flexibility to increase the portion of free cash flow, allocate it to dividends, share repurchase and earnings growth.

In addition to cash flow, we remain focused on two related financial priorities. First, a healthy balance sheet. We have obviously leveraged our balance sheet in support of attractive, strategic growth. However, we have not compromised on our commitment to an investment-grade credit rating. We are targeting a debt-to-EBITDA ratio of less than 3 over the next few years. Secondly, on debt repayment, as I noted we are on track to achieve key debt repayment target.

We also have very good liquidity and we have in place a $1.5 billion revolving credit facility, which is in place until September 2018. And while we might choose to draw directly on our revolving credit facility from time to time, we have accessed the commercial paper markets over the past year at attractive interest rates.

With our short-term borrowing capacity and our cash generation capability, we expect that our overall liquidity will continue to be more than sufficient to meet our operating requirement including our seasonal working capital needs.

And lastly, we have very manageable debt maturities. So when it comes to our balance sheet and our liquidity, we are very comfortable with our capacity to support our business initiative and plans.

Next, I'd like to spend a few minutes on a critical driver of performance, productivity. Productivity has been a foundational element of our financial success over the past several years and will continue to be critical going forward.

Given our prudent capabilities and our opportunity, driven in part by the Ralcorp acquisition, we are confident that our productivity initiative will provide fuel for top and bottomline growth over the next few years.

We have two principal sources of productivity, supply chain productivity including synergy capture and SG&A efficiency and effectiveness. First, on supply chain productivity. As we look ahead, we believe that we have significant opportunity to drive cost reduction from base productivity across the entire business as well synergies from the Ralcorp acquisition.

Base productivity is a key element of our ongoing margin management framework and it is an essential tool to offset modest inflation and to help us remain competitive in the marketplace. We have a consistent track record of delivering base productivity over the past several years.

The synergies from the Ralcorp acquisition also represent a significant opportunity for productivity and we expect to realize approximately $300 million of synergies related to the Ralcorp acquisition by the end of fiscal 2017. We are on track to deliver over $30 million of synergies in fiscal year 2014, slightly better than our expectations. Importantly, we have done a lot of heavy lifting this fiscal year to position us for significantly higher synergy capture in fiscal year 2015 and beyond.

Both base productivity and synergy capture, leverage our cost reduction capabilities and experience across all three elements of supply chain; procurement, manufacturing including network optimization and logistics. I'll say more about these elements in a bit.

So how much benefit do we expect to realize from these supply chain productivity initiatives. Well, we currently estimate that supply chain productivity, including synergy capture for all three of our operating segment in total will be the range of $350 million to $375 million annually, over each of the next three fiscal years or in the range of about $1.1 billion of cumulative savings over that period, which will help us offset inflation and improve margins.

Now, let's go a little deeper and provide a few details on how we will drive efficiency in these areas. There are several key levers for driving supply chain productivity. In procurement, we have been successful at leveraging the scale of our entire direct and indirect buy, working collaboratively with suppliers to reduce their costs, and also leveraging our innovation and supply teams jointly to improve product design for both value and consumer preference.

In addition, we have very strong commodity procurement and risk management capability. In manufacturing, we have leveraged our ConAgra performance system capability to significantly improve reliability and eliminate losses day in and day out.

We will continue to leverage these capabilities across all of our plants, as there are significant incremental benefits available as we apply these discipline to the legacy Ralcorp plants over the next few years.

We also expect to pursue more opportunities to optimize our manufacturing network. We have initiated several projects as part of our restructuring program we have disclosed previously and we will continue to evaluate opportunities to further optimize our network and drive cost reduction.

In logistics combined, we now operate one of the largest food distribution supply chains in North America. We will leverage the scale, especially in collaborative transportation sourcing and with our third-party logistics providers to drive significant benefit, including fewer miles, fewer touches and high utilization of truck and warehouse capacity over time as we consolidate to an integrated distribution footprint.

In addition to supply chain productivity, we are also focused on SG&A. We currently have an SG&A restructuring initiative underway to substantially improve both our administrative efficiency and effectiveness.

The benefits will be driven by an organizational design, focused on being more responsive to customers and driving faster decision making as well as aligning resource allocation with clearly established business priorities. We expect that these efforts will enable us to lower our annual SG&A expense run rate by at least $100 million by the end of fiscal year 2016.

We do expect to incur some one-time costs to achieve these savings over the next two years or so. However, based on our preliminary estimate, we currently expect that these costs will not exceed $80 million. We will continue to update you on our restructuring effort and will provide more details on the anticipated impact of fiscal 2015, in connection with our fourth quarter's earnings release.

Before I move on to the next topic, I do want to emphasize, that we expect to design and implement our plan in a manner that will not materially impact our ability to repay debt or reinvest in our business. Overall, we are confident that given our cash flow and our disciplined approach to capital allocation, we can improve our competitiveness as well as our balance sheet strength over the next several years.

Onto our outlook. We now expect our fiscal year 2014 diluted earnings per share, adjusted for items impacting comparability, to be in the range of $2.22 to $2.25. Also, the company currently targets fiscal 2014 third quarter EPS to be in the range of $0.60 and fiscal 2014 fourth quarter EPS to be in the range of $0.65, each of these adjusted for items impacting comparability. Also, due to the delay in the closing of the Ardent Mills transaction until the second quarter of calendar 2014, we no longer expect any impact from this transaction on this year's fiscal result.

While we are not in a position today to provide a detailed outlook for fiscal year 2015, there are a few key elements I'd like to address. First, on the topline, we are focused on reversing the volume trend on the challenged brands that Gary mentioned. We are also focused on stabilizing and ultimately driving volume growth in Private Brands and leveraging the international growth opportunities in our Lamb Weston business.

Second, on margins, we believe that our strong supply chain productivity, including both base productivity and acquisition synergies, along with low anticipated inflation, will provide us with the opportunity to expand margins and protect market shares. And on SG&A, we expect to realize some initial benefits from our restructuring effort and modest incremental SG&A synergy.

While we expect to see significant progress against our specific business challenges during fiscal 2015, we do expect that higher incentive and a full year of Ardent Mills related dilution as well as other factors will impact fiscal 2015 EPS growth. We continue to expect EPS growth for fiscal 2015, but we currently expect that it will be less than the double-digit rate we've previously estimated. We will provide more specific comments about fiscal 2015 outlook, in connection with our fiscal 2014 yearend release, when our plans have been completed.

Onto our long-term expectations, which we have summarized here on this slide. So why do we expect stronger EPS growth after fiscal 2015. Well, first we expect to have the significant challenges we face today behind us and over the long-term we believe we can drive annual sales growth in a range of 3% to 4%.

We also have a strong pipeline of productivity opportunities, including significant synergies from the Ralcorp acquisition and incremental benefits from our SG&A efficiency and effectiveness initiative. We also expect an increasing contribution from the Ardent Mills joint venture after fiscal 2015. And finally, over time, we will have more capital allocation flexibility to impact earnings growth.

Now, let me summarize a few key takeaways. First, we are committed to a consistent set of financial priorities, including strong earnings and cash flow, a healthy balance sheet and strong liquidity and balanced capital allocation. We remain on track to achieve our debt repayment target of $1.5 billion by fiscal yearend 2015, and that's excludes the use of any proceeds from the Ardent Mills transaction.

Second, we expect to continue to deliver strong productivity, further enhanced by the significant synergy opportunities from the Ralcorp acquisition and our restructuring initiatives. And finally, we are confident that we can improve our performance as we work through fiscal year of 2015 and deliver strong EPS growth over the next several years.

In closing, despite our near-term challenges, we are confident in our future based on our capability, our financial resources and our portfolio, which provides us with exciting opportunities for growth across branded, private branded, and foodservice and business-to-business channel.

At this point, let me turn it back over to Rob, for the Q&A session. Thank you for your time and interest in ConAgra Foods.

Question-and-Answer Session

Unidentified Analyst

Has your experience with Ralcorp, Gary, changed your view on using Ralcorp as a private label consolidation vehicle, after your debt repayment plans? If so, where does the cash go? And if not, did some of the Ralcorp issues maybe caused you to miss some consolidation opportunities, particularly in the closer-end timeframe, as we've got still low interest environment and what seems like a pretty active sort of deal environment currently?

Gary Rodkin

I'll start and then let John provide a little color. I would say our strategy all along has been to delever over the next several years, that's job one. Because we got a big job on our hand, just integrating the complexities of Ralcorp going through the transformation, so I don't think anything has really changed much on that.

I do believe that as we get past that, our long-term plan is to continue to look to make smart consolidation moves in an industry that is extremely fragmented. There are many, many smaller companies out there and we believe once we get past this period we'll be back in that game.

John Gehring

The only thing I'd add to that is, we just emphasized that this is a highly fragmented industry, and I think the pipeline of opportunities over the long-term is pretty significant. We will maintain a fair amount of discipline here over the next year or so, consistent with our previous comments we made. And so I don't think the world is going to pass us by in terms of those opportunity strategically, and those are long-term.

Unidentified Analyst

Good morning. You mentioned focusing more on the core consumer with regard to the three brands. I'm wondering what does that mean, where would spending go, what sort of tax exclude you'll employ to turn those pretty correct?

John Gehring

David, first it's really important to recognize that we've gone with a very approach on these brands, trying to, as I said, overcome barriers, that frankly we've said, no more trying to beat our head against the wall. There are many, many millions of customers in these categories defined fairly broadly that still are highly engaged in these kinds of products.

So all of our marketing will be very specifically targeted, some of that will be digital and some of that will be highly promotional in nature. We are working through those plans now, but it will really be to gain share within those categories rather than to try and go after uses that basically are just too low of a payback.

Unidentified Analyst

Gary, we're hearing two very different strategies or tactics, if you will, from the two companies that you've talked this morning, right. General Mills is talking about a consumer focus and you mentioned a customer focus, not that it's mutually exclusive. Two questions around that. First, is there anything much more to that beyond the euphemism for advertising more versus spending more in promotions? And second, when do you get out of that, because you seem to be doing this reluctantly, understandably. How hard is it to get off that promotional needle, if you will? And what do you have to see to shift back toward where you want to be in terms of strategies?

Gary Rodkin

I think it's really important that, when we talk about a customer focus, certainly that includes some promotion and in-store merchandising. But let me be extremely clear, that is that not the only plus there. What we're really talking about to get really practical is our innovation. So the historical, traditional model of innovation is manufactures decide what they are going to launch, many, many products, and they push them out to customers, retailer, who then figure out how they work in their stores.

What we are saying is, certainly, we'll still have some of those national launches, but our focus is really on much more having a customer work with us to tell us what they want, what they need, what fits into their programs, and we will customize for them, in many cases being almost brand agnostic. So there are cases that are already in play, where we have offered to do it either as a brand or as a Private Brand or a particular large customer.

We have the capabilities to do it either way. Whatever we do in that customer, we will have as a platform that we will scale up for other customers and might turn it 10 degrees to the right for another customer, change the packaging a little bit, change the flavor a little bit, but basically use those same assets. But it's really a customer pull from us and we believe that is absolutely the right way to go and we are already going down that path. So that is a large part of when we say customer centric.

Unidentified Analyst

My question is about the organic growth story in private label. It doesn't seem to have played out and to the public results of Ralcorp and three else for that matter, when deal just dried up. So why do you think that's the case? I mean why do they tend to lose share within the categories they're in and under perform the overall private label growth? And I know you have been saying that you think you're going to be successful turning that around, but especially given the issues you've had recently, what's still giving you the confidence to say that that's going to change going forward?

Gary Rodkin

First, I'll just reiterate and won't go into detail, but Private Brand is going to continue to be a big growth vector in this industry. I am absolutely confident of that. You can look to other markets. You can look to what the consumer tells you. You can look to the economics of it. There are many, many factors, high confidence in that, why is it kind of flattened out right now, because that's where the industry is. Frankly, it's because the manufacturers have been bringing the price gap down with the discounting intensity and frequency and the dynamics between the customer and the manufacturer are unsustainable.

What that means is the price points that have to be in the store to compete with the store down on the other corner is a race to the bottom. The economics are not good, because the retailer needs to invest some of their own margin historically to get down at those price point and they're starting to say, I'm not going to do that anymore.

The much better strategy, and we have to take time to deliver that story, because it's a very strong analytical story, the right balance, if the everyday value of a very good quality Private Brand, along with more rational merchandising of manufacturer brands, that model economically delivers a far better profit story for both sides is a much more sustainable model and that's what's working in the customers that are winning. So that's why we have this short-term flattening out, that's not sustainable. Better modeled and it's very quantifiable, is the one that I laid out.

Unidentified Analyst

I just wanted to follow-up on your answer to [ph] Ken Goldman's question. I thought it was actually kind of a radical answer. That set you up for the possibility that a retailer might ask you to crate a private label version of a branded product that you have in your portfolio, private label frozen, private label popcorn or Chef Boyardee.

Gary Rodkin

It's a really good question, Rob. The answer is yes. And we are working on establishing internally, our own guidelines on how far we will go on that. So there will be some protectable technologies that we will not do that. There will be other places where we believe sweating our assets is the right thing to do. So we are working through that. So it's a fairly gray area.

I would be very candid in telling you going into this, it was more black and white for us. But as we get into it, and we see the power there is, it's more of a gray area. So we're going to have to have guardrails, but the answer is, it's something that we would at least consider in some cases.

Unidentified Analyst

You gave us a lot of information on cost savings numbers. I seem to recall that you had ongoing productivity savings that were something like $225 million. If I do the math right, John, when you take the $300 million Ralcorp out over that three years, just simple math, it looks like the core productivity number is in fact higher than what you use to do on initial guidance.

So I think the core number used to be something like $225 million, if I do quick math here correctly, it looks like its something now like $250 million, $275 million and then on top of it you have this one-time SG&A synergy capture coming in. Do I have this all about right?

John Gehring

Yes. What I pointed out to you, David, is typically in the past, we've talked about productivity, we've generally focused the comments on our legacy consumer segment. The numbers I quoted today would include all three of our segments now. So it includes the commercial segment, which typically we didn't talk a lot about, so that's probably the biggest reconciling point.

Unidentified Analyst

And then you just reconciled it for us, so then we shouldn't think if there is an additive amount of synergies or core productivity savings coming in, it's just simply the way of presentation?

John Gehring

That's correct. I wouldn't say we've raised the degree of difficulty. We've got great capabilities, and I know my supply chain guys will say, it's darn difficult everyday. But in terms of apples-to-apples, we're about the same level.

Unidentified Analyst

John, you mentioned that there were times where you may have to spend more in capital to achieve the cost savings. So I am wondering if you go into a little bit more detail. And I am not sure that between today's presentation and at the time of the Ralcorp acquisition, you've talked about what are the cash costs of all these activities?

John Gehring

The comment I made today is principally related to network optimization opportunities. Those tend to be fairly complex projects, which require a fair amount of due diligence and planning. And my point is, we continue to look for those opportunities from time-to-time, we expect that there will be some additional projects there.

I think the important thing is as we've done kind of some scenario planning on those, we don't expect that that's going to result in a significantly elevated level of CapEx in any given year. Or differently said, we think we can certainly manage it within the range of our CapEx budgets today and certainly the range of our expectations for cash flow and free cash flow.

Robert Moskow - Credit Suisse

Thank you very much. We all thank ConAgra for presenting here today. Thank you very much.

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