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ConAgra Foods, Inc. (NYSE:CAG)

Q4 2014 Earnings Conference Call

June 26, 2014 9:30 AM ET

Executives

Gary Rodkin - CEO

Chris Klinefelter - VP, IR

John Gehring - EVP and CFO

Tom McGough - President, Consumer Foods

Paul Maass - President, Private Brands and Commercial Foods

Analysts

Andrew Lazar - Barclays Capital

David Driscoll - Citigroup

Ken Goldman - J.P. Morgan

David Palmer - RBC Capital Markets

Jonathan Feeney - Athlos Research

Robert Moskow - Credit Suisse

Jason English - Goldman Sachs

Eric Katzman - Deutsche Bank

David Lee - Bank of America/Merrill Lynch

Akshay Jagdale - KeyBanc

Operator

Good morning, and welcome to today's ConAgra Foods Fourth Quarter's Earnings Conference Call. This program is being recorded. My name is Jessica Morgan, and I'll be your conference facilitator. All audience lines are currently in a listen-only mode, however our speakers will address your questions at the end of the presentation during the formal question-and-answer session.

At this time, I'd like to introduce your host for today's program, Gary Rodkin, Chief Executive Officer of ConAgra Foods. Please go ahead, Mr. Rodkin.

Gary Rodkin

Good morning and welcome to our fourth quarter earnings call. Thanks for joining us today. I am Gary Rodkin and I am here with John Gehring, our CFO; and Chris Klinefelter, our VP of Investor Relations. Before we get started, Chris has a few words.

Chris Klinefelter

Good morning. During today's remarks, we will make some forward-looking statements, and while we’re making those statements in good faith and are confident about our company's direction, we do not have any guarantee about the results that we will achieve. So if you'd like to learn more about the risks and factors that can influence and affect our business perhaps materially, I'll refer you to the documents we file with the SEC, which includes cautionary language.

Also, we'll 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, the Q&A or on our web site.

Now I'll turn it back over to Gary.

Gary Rodkin

Thanks Chris. As we shared in our pre-announcement last week, fourth quarter diluted EPS from continuing operations on a comparable basis was $0.55 versus $0.60 a year ago, and as reported EPS showed a loss due to impairment charges, which we will talk about in a few minutes.

Our shortfall to our expectations was driven by two key factors; one, weaker than planned Consumer Foods volumes, and two, significantly lower profitability in our Private Brands operations.

As we reevaluated the current and near term profit trends for our private brands business, we concluded that we will be below original estimates for several years, which is the main reason we lowered our EPS outlook for fiscal 2015 to 2017.

To state the obvious, we are disappointed with these results. We didn't live up to our expectations, and the year and the quarter were unacceptable. In my book, there are no excuses for that.

I want to take the time this morning to explain the root causes of the miss and some details on the improvement initiatives underway. There is nothing more important for me than ensuring we drive improvement in fiscal 2015.

We have a tremendous amount of company-wide engagement, resources and energy devoted to improving results in fiscal 2015 and beyond. While fiscal 2014 was not what we wanted in terms of profits, our operating cash flow exceeded $1.5 billion, and we repaid $600 million of debt, both of these items exceeded expectations, and are important factors in the ability for us to succeed going forward.

We did this while continuing to pay a strong dividend, and I will emphasize that we remain committed to the current $1 per share annual payout, and a strong dividend policy as well.

At a segment level, we will start with our Consumer Foods results. Net sales were approximately $1.8 billion and operating profit was $177 million as reported. That reflects a sales decline of 7%, comprised of a 7% volume decline, 1% favorable price mix, and 1% unfavorable impact from foreign exchange.

In Q4, our Consumer Foods volume decline was worse than the 3% to 4% decline we were expecting. Why? The continuing poor performance of several large brands we have discussed previously, very soft packaged food industry performance in May, and some late shifting of promotion timing into the first quarter of F 2015. As has been the case for a few quarters now, the biggest portion of our volume decline relates to a handful of brands that we have talked about before, namely Healthy Choice, Orville Redenbacher's and Chef Boyardee. We have begun making changes with these brands to improve performance. We are confident we are doing the right things to make an impact, and we recognize the need to move faster. We believe we will see better overall performance on the top and bottom line from this trio in fiscal 2015.

One of the softest categories is Healthy Meals, which obviously impacts Healthy Choice. The Frozen Healthy Meal segment is a big important area within frozen single serve meals at $2.5 billion in annual retail sales, comparable to the hot dog category. This particular part of frozen single serve meals has seen the biggest drop in sales. There is plenty of room for better performance in a category this big by gaining share via differentiated product.

In terms of specific initiatives, we have started improving product mix, meaning moving to more of our proprietary Cafe Steamers offerings and discontinuing a number of other Healthy Choice slow moving SKUs. Those discontinuations are contributing to the brand’s current volume declines, and that will continue in the first quarter of fiscal 2015, but better volume performance should start to show in the second quarter.

For context, Cafe Steamers is a truly differentiated product line, has proven staying power, and has good margins. So growing that specific product line is good all around for our results.

Moving on to Chef Boyardee, we had eliminated at the beginning of fiscal 2014, the Easy Open lid on Chef Boyardee cans and in retrospect this was a mistake. So we have very recently added it back, and that inventory is now getting on shelf. We strongly believe Chef Boyardee can do a better job with core category users by leveraging its protein content about 16 grams in a can that costs on average, about $1.

In addition, we have retooled our merchandising programs customer by customer to get more lift with a renewed focus on the core user. We are seeing good growth in Chef Boyardee microwave cups, so we believe the Chef equity still has strength, and are looking forward to leveraging that.

In regard to Orville Redenbacher's, our strategy over the past several years has been to grow overall microwave popcorn usage and we lost share as competitors did a better job executing in-store. We have shifted our focus to be more competitive and to be more perfect at retail. This is a work in progress, but we believe the strategy shift will improve our performance.

While overall volume in Consumer Foods was disappointing, we had good sales performances from some brands within the portfolio, including for Totally Frozen meals, Slim Jim Meat Snacks and Reddi-wip, all of which continued to respond well to our marketing spend.

In the overall Frozen category, consumer buying is down, but we are taking share in single served meals. We continue to be a strong player there overall, and we saw good share performance as well as volume growth during the quarter, from Marie Callender's and Bertolli.

Of course, the volume declines have weighed on profits in Consumer Foods. For the fourth quarter, adjusted operating profit of $268 million was 3% below the comparable $275 million last year. The impact of the volume decline on profit was lessened by cost savings in excess of inflation, as well as lower advertising and promotion expenses.

Looking ahead, we do have confidence in stabilizing Consumer Foods volume, getting sequentially better in fiscal 2015 for three reasons; one, we expect to see gradual improvement in those three bigger brands that have weighed on volume; drew the specific plans we have in place for each of them. Two; we are well positioned to grow and build share in faster growing customer channels, where there is significant opportunity for us.

We have been underdeveloped here in simply capturing our fair share of these faster growing retail outlets, specifically Club, Dollar and C-Store will provide a meaningful boost; and as we shared with you at CAGNY, we are actively innovating and designing products, packaging and promotional strategies to be a bigger part of that channel growth. We have shifted R&D and supply chain resources to ensure that we have the right focus on channels, and are already seeing some success with brands like Bertolli in the club channel.

And third, we see upside coming from our international Consumer Foods business, while still a small part of our portfolio, we can see it starting to make a difference in our overall results as our global customers grow around the world. Many of our brands do well in emerging markets, particularly in Latin America, Mexico and India. Our focus is specific by geography and product platform to capture growth in products like tomatoes, popcorn and hot cocoa.

We have rewired our organization to get sharper and faster in our execution. We have significantly intensified our focus on customers with stronger joint business planning, we are fine tuning our promotions to reconnect with loyal consumers more effectively, and we are continuing to drive supply chain productivity.

When we think about other efficiencies, specifically trade and marketing spend, we have realistic expectations about growth in this segment, given our center of store categories and product lines. We balance our trade and marketing investment with all this in mind, so that we are structuring our spending for an appropriate return. We do have a number of strong brands with effective advertising. We now have a more laser-like focus on the true effectiveness and impact of our marketing and trade spend, and we will continue to fine tune for maximum impact.

In summary on Consumer Foods, we believe the plans we have got in place will drive better top and bottom line performance in fiscal 2015.

Now I will move on to our Private Brands segment, where sales were approximately $1 billion in the fourth quarter, in line with prior year amounts. Profits for the Private Brands were soft at about $60 million below comparable year ago amounts.

We made significant pricing concessions in the previous nine to 12 months that combined to drive down margins. Those were significant investments we chose to put into this business to stabilize customer relationships and preserve a sales base, as we work through some customer service and manufacturing issues inherited from the legacy Ralcorp business. Those were our issues, not broad, private brand industry challenges.

It's also worth noting that some of the quarter's operating profit decline came from what I will call concentrated costs, as we made a handful of integration changes and other transitions. We have begun the closure of three plants as part of our network optimization plan. We have made significant distribution center changes and we have created new supplier arrangements. While there is costs associated with these moves, they create longer term value. In other words, this quarter had some costs that progressively lessened throughout fiscal 2015.

Looking ahead, we expect profit to improve in this segment in fiscal 2015. We will lap most of the 2014 pricing concessions in the back half of fiscal 2015. We have corrected the service issues. We are regaining customer confidence and we are beginning to win new business with the opportunity to win more business with better pricing and an improved mix. We will also benefit from a more efficient organization.

We believe margins will improve starting in the second half of fiscal 2015, as we lap our pricing and accelerate our cost synergies. Let me be clear, the profit headwinds and these specific integration issues that we have been discussing for a while now, are not a result of owning both a branded and private label business. The issues reflect the fact that we brought a roll-up company that was beginning a restructuring, and that company was made up of many parts that weren't functioning together and needed fixing. We knew there would be work to do, but underestimated the degree of difficulty and the amount of time it would take to course correct.

We have paid lots of tuition in terms of learnings. Frankly, we have been back on our heels reacting, and are now in the very early stages of leveraging our strengths proactively.

We are turning this business into one that operates more effectively, and has a better more sustainable marketplace footing. This will be well worth it, as we look out a few years.

We made a bold transformational move in acquiring Ralcorp, rooted in our continuing strong belief in our Private Brand strategy. It has been an intense learning experience, but in the end, the insights we have gained will make us better and stronger over time. Rebuilding customer trust and confidence required some difficult investment choices and trade-offs. A higher level of customer responsiveness required significant organizational rewiring. We are confident in long term growth opportunities for the Private Brands segment. We are confident that our investments designed to create healthy customer relationships, and preserve a substantial portion of our sales base, will serve us well for the long term.

That said, the profit performance for this segment over the next several years will not be as strong as we originally expected. That impacts our overall EPS commitments as we indicated in last week's preannouncement, but we are committed to getting back on track and accelerating growth in fiscal 2016 and beyond with productivity, synergies and organic business expansion.

Regarding synergies, we are comfortable with our original goals, we still should generate $300 million by fiscal 2017 from the Ralcorp transaction and we have taken that into consideration in our revised outlook. We are confident that we will gradually improve mix, see margin expansion and spend less money and time on course correcting.

Within our Commercial Foods segment, our fourth quarter sales and operating profits were up slightly. In Lamb Weston, which is the biggest part of our Commercial Foods business, we are dealing with a suboptimal potato crop, but have quickly recovered volume that we had lost earlier in fiscal 2014 due to a customer transition. In addition, we are gaining even more momentum internationally. In fact, Lamb Weston's international sales grew at a double digit rate in the fiscal year, as we capitalize on the international expansion of key customers.

While we continue to deal with last year's potato crop, we will continue to deal with last year's potato crop for a few months of fiscal 2015 we expect to have a very good year in our Commercial Foods business.

In our Milling business, sales declined in Q4, reflecting the pass-through of lower wheat costs and the profits declined due to market conditions. Shortly after the quarter ended, we completed the Ardent Mills transaction. The Ardent Mills JV will allow us to take part in financial gains of a more efficient milling business, without the sales volatility of a commodity oriented business in our base results. I am very confident that this will be a long term strategic win that will enhance ConAgra Foods' shareholder value over time.

As a reminder, we have a 44% interest in Ardent Mills. Long term, we expect good accretion from this important portfolio move, making this a financially and strategically sound transaction.

Looking ahead, we are basing our confidence in recovering in fiscal 2015 and growing beyond that on a number of well grounded factors. One of those is our cost reduction work that we are doing across the company. As we told you in February, we have committed to saving $100 million in SG&A costs by the end of fiscal 2016, and we are projecting to be ahead of schedule in fiscal 2015. These savings are in addition to our strong productivity and synergies which we have talked to you about before.

The SG&A savings come from what we call our effectiveness and efficiency work. The purpose is to create an organization that's more agile in its decision making and execution, extremely customer focused and more effective in resource allocation. When we became a bigger company with the acquisition of Ralcorp in fiscal 2013, we needed to take a hard look at how our resources were allocated and designed organizations and processes that more effectively and efficiently met the needs of customers. So this is about overall workflow and how we go to market in a way that best leverages our resources and speeds decision-making with the customer as our focal point across the organization. We have designed more effective and efficient ways to operate, leveraging our standards of expertise which are designed to scale across the company.

As an example, we have brought together our supply chains from across the company, as well as our research, quality and innovation team under one leader, Al Bolles. We have done this for end to end alignment with better linkage across our operations. Creating one seamless technical organization allows us to move faster, cut through obstacles, make better holistic decisions and win more with our customers.

In another leadership change, we wanted to let you know that Doug Knudsen who led our sales team for many years has retired. Many of you knew Doug from CAGNY and other events. We thank Doug for his tireless work and commitment, he was a key contributor to the company for 37 years and we wish him well in his retirement.

Taking over from Doug is Derek Delamater, our new President of Sales for our Retail Selling organization. We are excited about the capabilities Derek brings to the role. He has spent many years in the field representing ConAgra foods with some of our biggest customers, and was most recently inside our headquarters, fine tuning our analytics, and designing improvements on our joint business planning processes. He knows the current state of the marketplace first hand, and will help us build even more winning partnerships with customers, as we go forward.

The SG&A savings and better organizational design across the company are foundational to our year of rebuilding, and an important source of confidence in our EPS outlook. But they are not the only reason we are confident in our growth projections for fiscal 2015. In addition, we expect to have significant ongoing cost synergies from the Ralcorp acquisition, a strong commercial business led by growth from Lamb Weston, as we lap the food service customer loss, plus continuation of the good international growth, and a transition to a more normalized crop.

Private Brands volume growth, and the beginning of margin expansion in the second half of fiscal 2015, due to numerous improvements underway, and stabilization of the big consumer foods brands that have weighed on results, plus a sharper focus on growing channels and international markets.

We are confident these factors will continue to benefit results in fiscal 2016 and 2017 where we plan for EPS growth acceleration due to the foundational work we are doing now. And of course, will continue our debt reduction progress, all while keeping our commitment to a strong dividend currently at $1 per share annually.

In closing, we are using what we learned in fiscal 2014 to make headway. Establishing specific milestones for improvement and stabilizing the business in fiscal 2015. We are confident in our ability to make progress due to the factors we have mapped out and have shared with you this morning.

John will share additional details now, but before I turn it over to him, I want to thank you for your time and attention this morning. We are working hard to be transparent, provide the level of detail needed to ensure you have a good understanding of our results and plans.

Now I will turn it over to John.

John Gehring

Thank you, Gary, and good morning everyone. I am going to touch on five topics this morning. First, I will start with a brief discussion of the intangible asset impairment charges we recorded this fiscal quarter. Then I will address fiscal fourth quarter and full year performance. Next, I will cover comparability matters, and then on to cash flow, capital and balance sheet items, and finally, I will provide some comments on our outlook.

Let's start with our intangible asset impairment charges; in our Private Brands segment, as a result of the continued decline in our gross margins through the second half of the fiscal year, and more modest expectations relative to the timing of improvement in profit margins, as reflected in our recently completed fiscal year 2015 plans, our fourth quarter impairment analysis indicated that goodwill was impaired. We then performed additional analysis to measure the impairment, and as a result, the company recorded non-cash impairment charges of approximately $605 million or $1.35 per share after tax.

This charge is principally related to the impairment of goodwill, but also includes some immaterial impairment charges related to certain brand or trademark assets in the Private Brands segment.

We also recorded additional non-cash charges of approximately $76 million or $0.12 per share after tax, principally related to the impairment of the Chef Boyardee brand in our Consumer Foods segment. This impairment reflects the impact of lower volume and margin trends for this brand. The total impairment charge of $681 million or $1.47 per share after tax is being treated as an item impacting comparability. The company believes that these non-cash charges will not impact the company's ability or plans to execute these businesses in the future.

Next, I'd like to comment on our performance. Overall, the fiscal fourth quarter and full year results were below our expectations and reflect continued challenges in several areas of our business. First, for the full fiscal year, we have reported fully diluted earnings per share from continuing operations of $0.70 versus $1.85 last year. Adjusting for items impacting comparability, fully diluted earnings per share were $2.17 versus $2.16 in the prior fiscal year.

Turning to our fourth quarter results; for the fiscal fourth quarter, we reported net sales of $4.4 billion, down approximately 3%, driven by volume softness in our Consumer Foods segment, and the impact of lower year-over-year weak prices in our flour milling operations, offset somewhat by stronger volume in Lamb Weston.

For the quarter, we reported a loss per share from continuing operations of $0.76 versus earnings per share of $0.45 in the year ago period. Adjusting for items impacting comparability, fully diluted earnings per share were $0.55, versus $0.60 in the prior year quarter, an 8% decrease.

While Gary has addressed our segment results, I would also like to touch on a few items; starting with our Consumer Foods segment, where net sales were approximately $1.8 billion, down about 7% from the year ago period, reflecting a volume decline of 7%, positive price mix of about 1%, and about 1% of negative FX.

Our Consumer Foods segment operating profit adjusted for items impacting comparability was $268 million or down about 3% from a year ago period. The operating profit decline reflects the weak volume performance, largely offset by lower marketing and SG&A costs, including incentive compensation.

The impact from foreign exchange on operating profit for the segment this quarter was approximately $5 million. Our Consumer Foods supply chain cost reduction programs continue to yield good results and delivered cost savings of approximately $50 million in the quarter. For the fiscal fourth quarter, we experienced inflation of about 3%, as cost increases on certain inputs such as dairy and protein accelerated. On marketing, Consumer Foods advertising and promotion expense for the quarter was $53 million, down about 36% from the prior year quarter.

In our Commercial Foods segment, net sales were approximately $1.6 billion or up about 1% from the prior year quarter. The net sales increase reflects stronger volume performance, offset by the pass-through of lower wheat costs in our flour milling business.

The Commercial Foods segment's operating profit adjusted for items impacting comparability was $190 million, or slightly above the year ago period. This primarily reflects stronger volumes and lower SG&A costs, offset by negative price mix across the segment.

As Gary noted, subsequent to fiscal 2014 year-end, we completed the formation of Ardent Mills, which included the divestiture of three flour mills at the end of fiscal 2014. In connection with the sale of these three flour mills, we recognized a gain of approximately $91 million, which we treat as a comparability item. The company will also record a significant gain in connection with the formation of Ardent Mills in the first quarter of fiscal 2015. This gain while preliminarily estimated to be in excess of $500 million will also be reflected as an item impacting comparability. I will say more about the impacts of the transaction on cash flow, debt repayment and future earnings in a few moments.

Our Private Brand segment delivered net sales for the quarter of $1.0 billion and operating profit excluding items impacting comparability of approximately $44 million. The results reflect significant margin compression, driven by the pricing concessions over the past several quarters, which were made to protect volume in the business. The results also reflect unfavorable mix and higher costs related to the operational challenges we have faced. While more than offset by the negative impact of pricing and operational challenges, we have realized over $30 million of COGS and SG&A synergies in fiscal 2014.

Moving on to corporate expenses; for the quarter, corporate expenses were approximately $65 million. Adjusting for items impacting comparability, corporate expenses were $62 million versus $93 million in the year ago quarter. The year-over-year decrease reflects lower incentive compensation and pension costs, and the impact of efficiency initiatives.

Now I will move on to my next topic, items impacting comparability. Overall, we have approximately $1.31 per diluted share of net expense in the quarter's reported EPS related to several items. As previously discussed, we recorded $681 million or $1.47 per share of non-cash charges related to intangible asset impairments.

In addition, in our Commercial Foods segment, we recorded a gain of approximately $91 million or $0.13 per share, related to the sale of three flour mills in connection with the formation of Ardent Mills; and $5 million or $0.01 per share related to a gain on the sale of a non-operating asset.

Next, we recorded approximately $59 million or $0.08 per share of net expense related to integration and restructuring costs. On hedging, for the fiscal fourth quarter, the net hedging gain, included in corporate expenses was approximately $14 million or $0.02 per share.

We also recorded a tax benefit of about $27 million or approximately $0.06 per share, primarily related to benefits from changes in legal structure and state [indiscernible] positions and the resolution of certain foreign income tax matters. And finally in the fiscal fourth quarter, we recognized the net benefit related to historical legal matters of $10 million or approximately $0.02 per share.

Next, I will cover my third topic, cash flow, capital and balance sheet items. First, we ended the quarter with $183 million of cash on hand, and $142 million in outstanding commercial paper borrowings. We continue to emphasize cash flow within our business, and for fiscal year 2014, we delivered operating cash flows of approximately $1.55 billion, better than our expectations.

On working capital, for fiscal year 2014, working capital changes contributed modestly to operating cash flow. On capital expenditures for the quarter, we had capital expenditures of $131 million versus $163 million in the prior year, and for the full fiscal year, our CapEx was approximately $602 million. Net interest expense was $93 million in the fiscal fourth quarter versus $102 million in the year ago quarter. dividends for the quarter were $105 million versus $104 million in the year ago quarter.

On capital allocation, as we have noted previously, our capital allocation priority through fiscal year 2015 will be the repayment of debt. In fiscal 2014, we repaid in excess of $600 million of debt, exceeding our previous estimate of $550 million. In connection with the formation of Ardent Mills, in the first quarter of fiscal 2015, we received proceeds from the sales of three mills and distributions from Ardent Mills, which totaled approximately $569 million, or about $527 million after estimated tax liabilities.

As we have previously discussed, we expect to use the proceeds, primarily to accelerate our debt repayment and to increase our target to approximately $2.0 billion by the end of 2015.

By the end of fiscal 2015, we expect to have repaid around $2 billion of debt, since the closing of the Ralcorp transaction, and with a stronger balance sheet, we expect to have more flexibility in our capital allocation to consider dividend increases, share repurchases, and additional growth investments.

We remain committed to a strong dividend, and we will maintain our current annual dividend rate at $1 per share as we delever. However, during this period, we will limit our share repurchases. This quarter, we did not repurchase any shares. And while we expect limited acquisition activity in the near term as we repay debt, we will continue to prudently support the right investments for our business.

Now I'd like to share some comments on our fiscal 2015 outlook and our long term algorithm. First on our fiscal 2015 outlook, we currently expect fiscal 2015 diluted earnings per share, adjusted for items impacting comparability, to grow at a rate in the mid single digits, from our fiscal 2014 base of $2.17.

Here are a few relevant points for fiscal 2015; first on Ardent Mills, fiscal 2015 earnings from the joint venture are expected to be about $0.08 per diluted share lower than the fiscal 2014 comparable earnings from ConAgra Mills. As a reminder, after the close of the transaction, earnings from this joint venture will be reported as equity investment earnings, and in fiscal 2015, we will only reflect 11 months of such earnings, due to the transition to new accounting periods for Ardent Mills.

I would also note that beginning in the first quarter of fiscal 2015, we expect to reflect ConAgra Mills as discontinued operations, so our reported results for prior periods will be reduced to reflect the removal of ConAgra Mills results from such periods due to our anticipated adoption of new accounting rules. This treatment does not affect our view of our 2014 earnings base.

In our Consumer Foods segment, we expect sequentially improving volume performance and stronger operating profit performance. This fiscal 2015 outlook also reflects modest gross margin improvement in our Consumer Foods segment, driven by mix improvements and strong cost savings, partially offset by inflation in the range of 2% to 3%. The segment is also expected to realize SG&A savings from our effectiveness and efficiency initiatives.

For fiscal 2015, we expect total productivity including synergies from the Ralcorp acquisition to be about $200 million in our Consumer Foods segment. We also expect a modest decrease in our advertising and promotion costs, as we focus more effort on in-store execution.

In our Commercial Foods segment, excluding ConAgra Mills, which will be classified as discontinued operations, we expect this segment to reflect good sales and profit growth, led by stronger performance in our Lamb Weston business driven by international growth, and improved margins from a better potato crop beginning in the second quarter. We expect that our other food service and commercial businesses in this segment will post moderate growth in fiscal 2015.

In our Private Brands segment, we expect volumes to improve over the course of the year. As Gary noted, we are very focused on margin recovery in this segment, and also expect to see gradual improvement as we move through fiscal 2015, driven by pricing and mix improvements and productivity including synergies and SG&A benefits.

While we are disappointed in the current profitability level, we are confident that the improvements in our business execution over time will drive sustainable profitable growth.

Our outlook also reflects the expectation that cost synergies resulting from the Ralcorp acquisition will reach $300 million of annual pre-tax benefits by fiscal 2017. For fiscal 2015, our effective tax rate will be in the range of 34% for the full year although this rate may fluctuate somewhat quarter-to-quarter.

Importantly, we expect to generate approximately $1.6 billion to $1.7 billion of operating cash flow in fiscal year 2015, which we expect will provide us ample cash to achieve our fiscal 2015 debt repayment target.

We do expect our profit growth in fiscal 2015 to be skewed to the second half, with the first quarter comparable EPS to be slightly below year ago levels, due to several factors, including the timing of profit improvement in our Private Brands segment, and for certain brands within our Consumer Group segment; the timing of the new crop in Lamb Weston, which will benefit earnings beginning in the fall; the timing of Ardent Mills' operations and synergy ramp-up and the loss of one month of earnings from Ardent Mills in the first quarter, due to its change in accounting periods, and the increasing impact from SG&A cost reductions as the year progresses. I reiterate that we expect EPS growth in the mid-single digits for the full fiscal year.

On our long term outlook, after fiscal 2015, we expect comparable diluted EPS to grow at a rate of -- in the high single digits annually. We also expect long term annual sales growth in the range of 3% to 4%.

In summary, fiscal 2014 has been a challenging transitional year for ConAgra Foods. While we are disappointed with our financial results, we remain focused on addressing operational challenges, and ultimately delivering more consistent profitable growth over the long term.

That concludes our formal remarks. I want to thank you for your interest in ConAgra Foods. Gary and I along with Tom McGough and Paul Maass will be happy to take your questions.

I will now turn it over to the operator to begin the Q&A portion of our session. Operator?

Question-and-Answer Session

Operator

Thank you. Now we'd like to get to an important part of today's call, taking your questions. (Operator Instructions). And it looks like our first question today will come from Andrew Lazar with Barclays Capital.

Andrew Lazar - Barclays Capital

Thanks for the question.

Gary Rodkin

Good morning Andrew.

Andrew Lazar - Barclays Capital

Two things for me. I guess first Gary, as you have stated in isolation, it’s fair to say the Ralcorp acquisition hasn't gone well so far. And at the same time, the core business trends have deteriorated further still. So I guess my question is whether management and the Board are willing now to take a harder look at the portfolio, and make some reasoned decisions regarding where you take the business from here and sort of what factors would play into those sorts of decisions and analysis, and then I have got a follow-up?

Gary Rodkin

Andrew, that -- clearly a good question, clear point given this year and I completely understand where that's coming from. But keep in mind, this year was highly unusual. I believe that fiscal 2014 really isn't about our portfolio, it's truly about our execution. We do have, I believe a portfolio that can and will deliver sustainable profitable growth, and generate strong cash flow. Our portfolio has some strong categories, like Private Brands. We have got good opportunities in channels like Club, Dollar and C-Store, and we have got some real strong growing geographies, particularly on Lamb Weston international.

So we are happy with the breadth and the reach of our portfolio. But what we need to do now, now that the turbulence of F‘14 is behind us, now that we are in the implementation phase of our company-wide effectiveness and efficiency initiative is to execute. Our focus in fiscal 2015 is on execution, and we believe that mid-single digit growth in fiscal 2015 as we stabilize and then high single digit growth in F ‘16 and beyond plus continue to pay good dividend should make for pretty good shareholder returns.

Andrew Lazar - Barclays Capital

Thanks for that. Then with respect to the consumer branded business, I guess a lot of the reason why advertising and marketing was down in the quarter significantly was shifting a lot of that over to more promotional spend, in store efforts and such. And yet at the same time, obviously the branded pace of volume decelerated pretty significantly. So it doesn't seem like whatever that process was, you got the results that you were looking for, and I understand there is a piece of this which was some SKUs in frozen coming out and such, but that in theory you would have known about, when you were expecting volume to still be down three or four. So I am really just trying to get, I guess, a better understanding of what really happened there, around the consumer volume piece?

Gary Rodkin

Yeah, let me start and then I will turn over to Tom for a little bit more color. To put it very succinctly Andrew, the industry volume in response to merchandising and just overall post Easter across the industry was very weak, so we did not anticipate that, and secondarily there was some late -- in Q4, some late shifting of merchandising on some of our business to spill over into first quarter 2015. Tom, any more color?

Tom McGough

Sure Andrew. I think what I'd like to add to that is, what we are seeing in store and the impact that it's having on overall merchandising. I think the challenge that many manufacturers face, including ourselves, is that there is more competition for the limited space in stores. And certainly what we have seen is a lower lift as a result of that.

So as we think about it, there is really three components that we are focused on. In Frozen, there has been an increase of overall competitive activity. We have bolstered our support. We have been competitive in our programs, and our market share primarily in the premium and value segments with Marie Callender's, Bertolli and Banquet for the fiscal year are up both in terms of volume and dollar share. We feel like we have struck the right balance there and those are businesses that we will continue to invest in.

The second is, being able to -- in this environment of competition is to find ways to break through, and there are two ways that we are doing that. In Chef Boyardee, we have seen a lot of concurrent merchandising. We have traditionally enjoyed exclusivity in our events, and throughout the year, we have experimented with different approaches to get a higher lift. We had some very positive impacts with that, with some customers in Q4. We are going to be implementing that on a much broader basis, throughout the fiscal year, and we will see a better impact from that.

And then finally, it’s just about ideas, and where we do really-really well is when we bring those consumer insights, particularly around meal solution, and easy to execute solutions for retailers, we win and we see that on Hunt's, ROTEL, many items in our portfolio. So it’s a challenging environment. We are tackling it category by category and we believe ultimately we will have a positive outcome from that.

Operator

And we have a question now from David Driscoll with Citi Research.

David Driscoll - Citigroup

Great. Thank you. Good morning.

Gary Rodkin

Good morning David.

David Driscoll - Citigroup

Gary, I have two questions. The first one relates to the Consumer Foods business and then it’s going to come back to the strategic issue that Andrew was talking about. So Orville Redenbacher in the popcorn category, when I just look at my Nielsen data, you have a fairly sizeable price advantage versus the number two brand, Pop Secret. That business according to our Nielsen data has lost an unbelievable amount of share, 760 basis points a share, down 17% in our data. The category though looks awesome, the category is up 8%, so I can't even feel like we can give this thing credit for a tough environment, because the environment for popcorn looks terrific. The question here is not so specific about popcorn, it’s just popcorn feels like the piece of evidence that says, why not take a much harder look at strategic review on the portfolio, because you are not getting the value out of this that you need to be getting, and given where the stock is, selling some assets and buying some stock back seems to make phenomenal sense from a shareholder value creation. So can you give us some thoughts on this?

Gary Rodkin

Yes, David, fair question, totally understandable and as concerned you are on the Orville Redenbacher performance, it doesn't come close to how frustrated I am with that performance. We need to do better there, and we have a lot of efforts in place to tackle exactly what you are talking about. Now to segue into your other question and what Andrew touched on as well, let me just say, that we are pragmatic. You have seen me demonstrate that in my 8.5 years here with significant transactions and just last week, we closed on the Ardent Mills JV, so we are still believing in our portfolio. We believe that the things we are doing will improve the performance. But we will always look through the lens of creating long term shareholder value.

Operator

We will move now to JP Morgan's Ken Goldman.

Ken Goldman - J.P. Morgan

Hey, thanks for the question. Gary, the SKU reductions in Healthy Choice you referenced, to what extent, I guess, are they driven by your decisions, to focus on higher growth items versus the customer's decision to concentrate a bit themselves on faster turning SKUs? I am trying to get a sense for the risk of further SKU reductions like you saw with Healthy Choice a year ago, versus what's sort of being pulled back on your own?

Gary Rodkin

Yeah Ken. I clearly understand where you're coming from on that. That is totally us. And it's not to say that they don't have a little bit to do with each other, because velocity is what really counts, that shelf space is valuable. But this is something we have been very proactively tackling over the last 12 months or so, because we do have a very strong piece of that business or sub-line of Cafe Steamers continues to grow very strongly, because it's extremely different in the marketplace, and that continues to grow. So we are very consciously culling other sub-lines and slow moving SKUs to give more prominence and more focus to the Cafe Steamers line, and that has been a very big portion of why the volume is down, once we reach the kind of shelf placement that we want, I think we will start to see better performance in Healthy Choice.

Operator

We will take a question now from David Palmer with RBC Capital Markets.

David Palmer - RBC Capital Markets

Hi Gary. I would just simply love to understand better the sources of margin pressure on the retailer branded business. The magnitude of each pressure. For instance, during these calls, you had mentioned the need to reinvest in sales, restore the price gaps, and essentially rebid for some portions of your business with certain retailers. Could you talk about the magnitude of these pressures and perhaps, how these drags may be diminishing the coming quarters? Thanks.

Gary Rodkin

Yeah, let me start on that, and then let me turn it over to Paul, who can get more granular for you. You know that we acquired Ralcorp because of our deep conviction in the long term private brand growth, because of its relevance to consumers and customers and its underdevelopment in the U.S., a whole host of reasons and we still strongly believe in that. And you know that our strategy is to bring our operating capabilities, our infrastructure and our scale to a very fragmented industry. But as you have alluded to, we have dug ourselves a whole in the first full year, and a big piece of what you're referencing is because we had execution and service level issues that really put us on shaky ground with our customers, those are fixed; and our organization is maturing, particularly on the sales front, and what that's going to do, is enable us to partner with our customers, because they are gaining confidence in our reliability, our responsiveness, the capabilities we can bring, and we could be much more proactive, versus as I said before, that we were on our heels.

So we will grow volume this year. We will begin to improve our margins in the second half. We will get past some of these short term cost issues, and we will start to bring some of those cost synergies to the bottom line and accelerate our performance, as we get into F 2016 and beyond. So we still have very strong conviction, but we did have a whole host of issues to deal with, that culminated to oversimplify in a lot of price concessions to stabilize. So Paul, some more color?

Paul Maass

Yeah just, integration itself was challenging; and when you have a situation where your customers are really motivated to change suppliers, because we are letting them down on service and execution issues. You got to really pull the price lever to maintain the volumes. The good news is, we are in a much more stable position. We have fixed service issues and execution issues. Better than me, we don't have a continuous improvement mindset to always look for better ways to run the business and improve. But we are much more stable, and we will drive margin improvement and top line growth here as we go forward.

Operator

Jonathan Feeney with Athlos Research has our next question.

Jonathan Feeney - Athlos Research

Good morning. Thanks very much.

Gary Rodkin

Good morning Jonathan.

Jonathan Feeney - Athlos Research

Couple of questions. Gary, we talked on these calls about some of the really personnel level and management level changes that were made in a different operating businesses of Ralcorp, and how you had to -- you changed some of those, may be put some resources back in, some people back in, so the decisions are getting made closer to the customer. Can you tell me what comfort you have with the team you have on the field right now there and the structure of those businesses?

Gary Rodkin

Yeah, let me turn it over to Paul, because I think he can give you some real live color on that.

Paul Maass

Yeah, we reacted to the reorganization that was done right when we acquired Ralcorp, like it would be beneficial to have decision making, like you said, close to the customer; created six business units with general managers that are running each of those. Yes, disappointed in our fourth quarter results, but have confidence in the structure and the leadership team we have to improve the business and the results going forward, with a really intensified focus on expanding margins.

Gary Rodkin

And I would tell you Jonathan that, a lot of it has to do with the customer interface, and we frankly have done some course correcting very recently in this effectiveness of efficiency work, to make sure that we have got deeper product knowledge on the front line. That's something that I think we tried to go a bit too broad in the first iteration, and now we are narrowing that product focus now, because we have realized just how important it is to really have the expertise at the buyer level, the front line buyer level. So that is a pretty significant change that we have very recently implemented.

Operator

We will move now to Robert Moskow with Credit Suisse.

Robert Moskow - Credit Suisse

Hi thanks. I guess I agree that it's probably too soon to pass judgment on the marriage of private label and brand and as you said, you have been spending the past year, fighting fires. But Gary I was wondering, is it fair to say that you are also stretching some of your resources of your team, more than they have in the past. Like, when I think about your sales function and Doug Knudsen, to what extent was his time being stretched to have to deal with all these customer issues on private label? And do you think that it had an impact on the branded business' volumes falling as well, just in terms of how he spent his time? And then I just wanted to understand what Al Bolles is doing now. He is now taking on the supply chain role; and private label is a very complicated supply chain function, and I want to know to the extent that he is going to be taking that role of the working capital management and all of that, that's entailed?

Gary Rodkin

Yes. That's a very thoughtful set of questions there, as I would always expect from you. On the first one, in any major acquisition, you are going to stretcher organization, so clearly that has happened. But in recognizing as we have gone through fighting so many fires, more than we anticipated, that really was the basis for this effectiveness of the efficiency work, which has really given us a very granular look at all of our processes, all of our structures. We have been extremely granular on that, and have really worked to have the effectiveness drive the efficiency. So we talk about the savings side of that initiative, but even more important is the effectiveness side of it. Culminating in better resource allocation, faster decision making, more customer responsiveness etcetera. So we clearly have -- are in process of making some pretty significant structural changes, to ensure that we can manage through.

Now we are past so much of the fire. It was brutal, to be honest, on the organization in the past year. But I would say that, we are well beyond that. So that's really where I think we are at.

Operator

Our next question will come from Jason English with Goldman Sachs.

Jason English - Goldman Sachs

Good morning folks. Thanks for the question.

Gary Rodkin

Good morning Jason.

Jason English - Goldman Sachs

So you mentioned, you anticipate improvement in Consumer Foods and top line throughout the year. Can you give us a better sense of the volume growth that your guidance is predicated on for that business?

Tom McGough

Jason, this is Tom McGough, and with regard to Consumer Foods volume, what we see is sequential performance improvement throughout the year. It's going to be driven by three factors. Clearly job one is improving the overall volume and share performance on our core business. We have talked about the three challenged businesses that we have, initiatives being put in place and we should see sequential improvement on that. The vast majority of our portfolio is actually done very well in terms of growing share, and we are going to sustain that performance.

I think what's different going into next year will be two other factors; one is just a new focus on winning and growing channels. Whether it's Club, Dollar, C-Store, they are growing at a much faster rate than traditional grocery. Over the last year, we have worked, customized our product, packaging, merchandising programs to succeed in those classes of trade and we are well positioned, going into FY 2015 to see a market improvement in our top line as a result of that.

And then finally, international, while international is a smaller part of our overall portfolio, its starting to have a more significant impact. Our plan there is to grow with our global customers, as they expand globally, and we are seeing good sales acceleration in emerging markets like Mexico and Latin America.

While it's a relatively challenging environment, we expect that our business will show sequential improvement throughout the year.

Gary Rodkin

And Jason, just to put a marker on that, we expect to be about flat to slightly down for the year. So we are not looking for bigger roll-ups, but we are looking for that improvement Tom talked about.

Operator

We will move now to Eric Katzman with Deutsche Bank.

Eric Katzman - Deutsche Bank

Hi good morning. Just one clarification and then a more broader strategy question. The 217 base John that you're using, does that include or exclude the dilution from Ardent?

John Gehring

The 217 base, that's just based off of this year, so there is no dilution from Ardent in the current year. We will be comparing next year, which will have some dilution in it to the 217 base.

Chris Klinefelter

This is Chris, the mid-single digit rate of growth that we are signing up for next year, includes dilution from Ardent.

Gary Rodkin

Eric, did you have a follow-up?

Eric Katzman - Deutsche Bank

Gary if these -- some of these brands like healthy choice and others, you know you put over the last seven, eight years, a tremendous amount of effort to rejuvenate position against the consumer and it has been a struggle. And I am just wondering versus kind of Andrew's point of breaking up the company or something, maybe another option to think about is, why not manage those businesses more for cash, and use that to fund the growth in private label, which obviously you believe in $7 billion plus investment. Why isn't that a viable option for the business?

Gary Rodkin

Yeah Eric, clearly good question. We have built into our guidance, realistic growth expectations, and we do segment our businesses, and as we see rationale for moving things into more of a managed-for-cash mode, which we do in a number of our businesses, they move in there. So I would tell you that the fixes that we have in place on those three problem brands, really are pretty tactical right now, and they really have to prove their mettle with a very high bar to go get any kind of significant marketing investment from this point forward. So that's may be a slightly different way of saying, we are looking at things a bit like you're suggesting.

Operator

We will now go to Bryan Spillane with Bank of America/Merrill Lynch.

David Lee - Bank of America/Merrill Lynch

Good morning. This is actually David Lee in for Bryan.

Gary Rodkin

Good morning David.

David Lee - Bank of America/Merrill Lynch

Good morning. Just had a question on the Private Brands business and some of the pricing concessions that you had taken earlier this year; and given that this work has made progress in stabilizing some of the relationships, is there a sense or evidence or examples that the advantages of having these two businesses under the same roof is coming into play? So I guess customers recognizing the higher quality and what way that's contributing to the better margin outlook for the business? And also I guess my understanding was that, some of these were in part due to the competitive environment, so any detail that you can provide on the overall environment will be helpful.

Gary Rodkin

Yeah, David I would tell you that, we have really been back on our heels this year. So there is no getting around that. We have had to be very reactive in putting out fires and trying to basically maintain our customer relationships. That's pretty much behind us. We put a lot of effort into fixing that, and then a lot of investment into maintaining that business with the price concessions. So we really haven't had the ability in any kind of a big way to take advantage of what we talk about as the one plus one equals three. We do have some specific customer examples where that has worked in combining the two, and that gives us conviction that once we can be much more proactive and have the confidence of our customers, that we will be able to start leveraging those capabilities. But we really haven't seen that, because we haven't been able to focus the energy on that yet.

Part of my confidence on our future and private brands, interaction with the customers and the combined strength of having the branded -- and private branded businesses together in those strategic discussions on things we can do, from a strategic partnership.

Chris Klinefelter

Operator, this is Chris, I'd like to ask that we just have one final question.

Operator

Thank you. And our final question today will come from Akshay Jagdale with KeyBanc.

Akshay Jagdale - KeyBanc

Thanks for taking the question, I will make it quick. Can you -- I am just trying to understand where and how you are going to get improved performance on private label over time? What would be really helpful is if you could just give us some color on what categories or product groups you have seen the share loss in, and may be if you can comment on -- you have lost share at the expense of margin, and you would have lost more share, I guess, if you hadn't given up pricing. So how do we get back share and improve margins from here? That's really the bigger picture question, but if you can give some color on what category and product groups, that would be helpful. Thank you.

Paul Maass

This is Paul. I will just hit on a couple of different things. From a top line perspective, confidence and modest growth, as we go through 2015, distribution gains, improved mix and gaining new profitable incremental business because we are in a much better position from a stable executing environment. What will help drive earnings growth is on the operational side, and Gary had mentioned in his script, the network optimization and some plant closures, the changes in our distribution network. These are really good projects, its really about taking one step back to take two steps forward. There are increased expenses in the short term, benefit us and position us to win long term, and we are accelerating that. Those are good products and -- projects and I could see the benefits on the long haul, and that's where -- we will push them through as fast as we can.

Operator

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

Chris Klinefelter

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

Operator

This concludes today's ConAgra Food's fourth quarter earnings conference call. Thank you again for attending, and have a good day.

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