Operator:

Good morning. This is Melissa Napier from Conagra Brands. Thank you for listening to our prepared remarks on Conagra Brand’s Fourth Quarter and Fiscal Year 2024 Earnings. At 9:30 AM eastern this morning, we will hold a separate live question-and-answer session on today's results, which you can access via webcast on our Investor Relations website. Our press release, presentation materials and a transcript of these prepared remarks are also available there. I'm joined this morning by Sean Connolly, our CEO, and Dave Marberger, our CFO. We will be making some forward-looking statements today. And while we are making these statements in good faith based on current information, we do not have any guarantee about the results we will achieve. Descriptions of our risk factors are included in our filings with the SEC. We will also be discussing some non-GAAP financial measures. Please see our earnings release and slides for the GAAP to non-GAAP reconciliations and information on our comparability items, which can be found in the Investor Relations section of our website. And I'll now turn the call over to Sean.

David Marberger:

Thanks, Sean, and good morning, everyone. As Sean discussed, we made solid progress throughout the fiscal year in a challenging consumer environment. I'll first highlight the full year results shown on Slide 25, before discussing the fourth quarter. Fiscal ‘24 organic net sales of $12 billion were down 2.1%, largely driven by the industry wide elongated volume recovery in our domestic retail business. Adjusted gross profit and adjusted operating profit both improved 0.3% over prior year, despite lower sales, as strong supply chain productivity helped offset cost of goods sold inflation, absorption impacts from our lower volumes, and the brand investments we made during the year. Advertising and promotion expense as a percentage of net sales was consistent with last year at 2.4%. Adjusted SG&A, which excludes A&P, was approximately flat to the prior year as general cost increases were mostly offset by lower incentive compensation expense. We delivered an adjusted operating margin of 16% and adjusted EPS of $2.67 for the fiscal year. And as Sean mentioned, we finished the year at a net leverage ratio of 3.37 times and improved our free cash flow by approximately $1 billion over fiscal ‘23. I'll now discuss our fourth quarter results, starting with our net sales bridge on Slide 26. Organic net sales declined 2.4%, driven by a volume decline of 1.8% and a 0.6% price/mix reduction, reflecting the increased brand building investments. We also saw a small benefit from favorable foreign exchange. Slide 27 outlines Q4 top line performance for each segment. Volume declines in our Grocery and Snacks and Foodservice segments were partially offset by volume increases in our Refrigerated and Frozen and International segments for the quarter. As Sean discussed, we made good progress in our snacks business as consumption trends were positive in the quarter, helping us gain share. In grocery, we've seen positive results in select areas where we've increased investment and innovation, and we continue to evaluate prudent investment opportunities in our grocery business to improve volumes moving forward. We are pleased with the volume inflection we delivered in Refrigerated and Frozen in Q4, demonstrating the consumer impact of our trade investments. Declines in Foodservice volume were driven by a slowdown in QSR traffic, along with actions we've been taking to eliminate low profit business, which is reflected in the strong operating margin performance in Foodservice that you will see shortly. Our International business delivered another strong sales quarter, with volume and price/mix both up year over year, driven by strong results from our Mexico and Global Export businesses. Overall, we are seeing some green shoots from our frozen, snacking and International volumes in Q4 and remain confident that our continued innovation, brand and trade merchandising investments will help this continue in fiscal ‘25. The components of our Q4 adjusted operating margin bridge are shown on Slide 28. Adjusted gross margin improved 62 basis points over prior year to 27.6%. Productivity improvements, which approximated 4% of cost of goods sold in the quarter, more than offset net inflation, which approximated 2.7% of cost of goods sold, which helped fund trade merchandising investments in our brands. Adjusted operating margin improved 22 basis points over prior year to 14.8%, driven by the adjusted gross margin improvement I just discussed, partially offset by increased A&P and adjusted SG&A. Slide 29 details our adjusted operating profit and adjusted operating margin performance by segment for Q4. Grocery and Snacks adjusted operating margin improved 220 basis points, aided by pricing taken earlier in the fiscal year and by a $7 million net benefit related to insurance proceeds for prior year lost sales from our canned meats recall. Refrigerated and Frozen adjusted operating margin declined 172 basis points from increased trade merchandising investments. International adjusted operating margins declined 283 basis points, mainly from transitory supply chain issues impacting our Canadian business, while Foodservice adjusted operating margins improved 427 basis points, a result of discontinuing less profitable business. As a reminder, results from our annual goodwill intangible impairment testing also negatively impacted reported profits, primarily in our Refrigerated and Frozen and Grocery and Snacks segments. The primary drivers of the impairment charges were a combination of higher interest rates, revised net sales projections, and some market multiple contraction seen throughout the industry. The adjusted EPS bridges for the fourth quarter and full year are shown on Slide 30. Fourth quarter adjusted EPS was $0.61, $0.01 less than prior year. Taxes were favorable in the quarter by $0.02, while a reduction in equity earnings from Ardent Mills was a $0.03 headwind. At the bottom half of the slide, you can see that our year over year EPS declined by $0.10, largely driven by $0.07 of headwinds from additional interest expense and a reduction in pension income versus the prior year, as well as a $0.05 headwind from Ardent Mills as that business moves towards a more normalized level of operations. Let me take a minute to talk about our 44% joint venture ownership in Ardent Mills. Ardent Mills is a premier flour milling and ingredient company. The primary business of Ardent is in the milling and selling of flour products at a margin. Most of the remaining business is commodity revenue that is generated by managing volatility in grain markets through trading operations. The decrease in Ardent's fiscal ‘24 results reflects slightly lower volume trends in the milling industry and a move towards a more normalized commodity revenue environment, which hit record levels in fiscal ‘23. Slide 31 reiterates the progress we've made to strengthen our balance sheet and improve cash flow. In Q4, we repaid a $1 billion senior note that matured in May 2024 through a combination of cash on hand, commercial paper borrowings and the issuance of a $300 million one year unsecured term loan. For the fiscal year, our ending net debt was $8.4 billion, a reduction of $777 million, or 8.5% from fiscal ‘23. We delivered strong year-over-year improvement in net cash flow from operating activities, primarily through reduced inventory balances and improved cash returns from Ardent Mills, generating $2 billion in net cash flow from operations and free cash flow of $1.6 billion, an improvement of approximately $1 billion over prior year. Capital expenditures increased 7% over prior year to $388 million. And we paid $659 million in dividends in fiscal ‘24. I'm very proud of these results, which reflect a focused commitment by the entire Conagra organization on cash flow. Reducing debt and lowering our net leverage ratio have been priorities for us. Slide 32 shows the consistent progress we've made, finishing fiscal ‘24 at a net leverage ratio of 3.37 times, well on our way to achieving our targeted 3.0 times leverage ratio by the end of fiscal ‘26. Sean already previewed the guidance metrics shown here on Slide 33. For fiscal ‘25, we are expecting organic net sales growth to be flat to down 1.5% versus fiscal ’24, adjusted operating margin between 15.6% and 15.8%, and adjusted EPS between $2.60 and $2.65. The considerations underlying our fiscal ‘25 guidance are shown on Slide 34. As Sean discussed earlier, we're encouraged by the steady volume improvement and market share gains we've seen from the investments put in place during fiscal ‘24, and we expect to continue these investments in fiscal ‘25. We are projecting approximately 3% net inflation in fiscal ‘25, capital expenditures of $500 million, and full year gross productivity savings of approximately $350 million, or 4% of cost of goods sold. We expect operating margin of 15.6% to 15.8%, which is down from 16% in fiscal ‘24. This decline is driven by higher expected SG&A in fiscal ‘25, mostly from higher incentive compensation expense, which was down in fiscal ‘24. We expect to generate a free cash flow conversion of approximately 90% and further reduce our net leverage ratio to approximately 3.2 times by the end of fiscal ‘25. We expect to resume a minimal amount of share repurchases in fiscal ‘25 to offset dilution from our share-based equity incentive plans. In terms of how we expect the year to progress, we expect Q1 to deliver the lowest volume, top line, and adjusted gross margin of any quarter. While we still receive the benefit from pricing put in place in fiscal ‘24, Q1 will be impacted by continued brand building investments and wrapping on our highest top line quarter in the prior year. We are planning for sequential volume improvement each quarter after Q1 to achieve our full year sales guidance. Also, SG&A in the first quarter will face a headwind from wrapping the Q1 fiscal ‘24 adjustment to reduce incentive compensation expense. This morning, we announced that our Board of Directors authorized the continuation of the company's annualized dividend rate of $1.40 per share, a 53% dividend payout ratio based on the midpoint of our fiscal ‘25 EPS guidance and in line with our targeted payout ratio. That concludes our prepared remarks for today's call. Thank you for your interest in Conagra Brands.

Operator:

Good day and welcome to the Conagra Brands Third Quarter Fiscal Year 2024 Earnings Conference Call. [Operator Instructions] Note, this event is being recorded. I would now like to turn the conference over to Melissa Napier, SVP, Investor Relations. Please go ahead.

Operator:

The first question today comes from Andrew Lazar with Barclays.

Sean Connolly:

Yes. Let me unpack all of that for you, Andrew. As I said in the prepared remarks, things unfolded very much in line with what we expected. And as you heard us say, our investments in frozen have driven a nearly 7-point swing in our scanner volume from Q1 to the most recent 4 weeks where volume came in down a fairly modest 1.2%. So very strong progress in frozen overall which is important because that's been the focus of our investment. What you're seeing and the reason for the optics being a bit confusing is the reason the R&F segment in total numbers don't show the same magnitude of inflection is noise in the refrigerated part of the business which was, by the way, also consistent with what we anticipated. Recall, our refrigerated businesses are predominantly pass-through categories and one of the rare areas in our portfolio where we've actually experienced deflation and rolled back prices accordingly as pass-through categories do. And while that creates some short-term volatility in dollars until it's in the base as deflation passes through. Importantly, margins are preserved due to the lower COGS. The other dynamic that I'll point out there in RNF is, in addition to that piece, our table spreads business benefited in Q3 a year ago due to a large competitor having a particularly weak quarter due to supply chain challenges. So that's kind of some color on R&F and why the divergence between frozen and refrigerated. With respect to Grocery & Snacks segment, we also expected a solid quarter in the GMS segment and we got it. And there were several factors there from pricing in tomatoes to bounce back in canned meat like Chile, Vienna sausage, where you remember we had a recall in the year ago period but also strong innovation like our new Wendy's Chili, where we've grown significant market share. So overall, our grocery brands are great consumer options for people who are seeking to make convenient meals at a great value. It's also a good mix for us. But I think the big picture is one of the benefits of a scale, diversified portfolio is that, as they say, there are horses for courses. So you're inherently hedged when the macro environment is less stable than normal. Big picture for us. I like the volume momentum we saw in Q3. I like what I've seen so far in Q4 and I expect further progress from here.

Sean Connolly:

Well, it's one of the reasons why we're looking at this so closely. It's one of the reasons why I referenced the most recent 4-week scanner data in frozen being down a mirror of 1.2. We obviously are seeing and expect to continue to see further progress. We're not going to draw the line in the sand and say, this is the month, this is the day where it's going to -- it's going to cross over. Next quarter, obviously, when we give '25 guidance and have our annual operating plans fully rolled up, we'll give you that color. But it's moving in the right direction; that's the bottom line. I mean this is a food thing; everybody wants to see volumes go in the right direction. I think companies and investors are willing to see investment in order to do that. But what I think people want to see overall is, can you hold your gross margins while you're making those investments and getting the volume results that you want to see. And that's what was particularly encouraging to me in the quarter is we pretty much got -- we made the investments we intended to make -- we got the volume improvements that we wanted to see, we've got continued volume progress into Q4; and we've done all this while maintaining even expanding gross margins that we work very hard to kind of claw back after the initial compression from all the huge inflation we experienced a couple of years ago. So that, I think, is a positive and I think it foreshadows just continued momentum from here.

Ken Goldman:

Just wanted to ask a quick question about 4Q. Your implied guidance might suggest around minus 2% in organic sales growth. It's pretty similar to what you posted in 3Q. Some might say it's a little prudent though. Just given -- you do have an easier comparison, both on 1-, 2-, 3- and 4-year basis, just looking that through, you have the lapping of the Americold issue. So I'm just curious if it's right to think that's a little bit prudent? Or are there may be some offsets to that, maybe a little bit of less of a help from mix perhaps just throwing that out there? Just trying to get a bit of color on those building blocks as you think about that.

Dave Marberger:

No, I think you pretty much hit it. I mean, Ken, we're expecting sequential volume improvement and we've been talking about that and we've seen it through but we also expect to continue investing. So obviously, both of those things impact the top line and you referenced mix, we do have mix impacts in this portfolio and they can be slightly positive or slightly negative any quarter. So as Sean mentioned, we want to be prudent but they are the 3 key drivers that get us to the -- towards the low end of the sales guidance range for the year.

Ken Goldman:

And then while we're talking about next year, I realize it's too soon to provide any kind of quantitative numbers, I wouldn't ask for them or quantitative information rather. But at CAGNY, you said you're doing what you can to be as close as possible to be on algo. And I was just curious where your level of confidence on that topic stood today? How you're thinking about maybe balancing what might continue to be a challenging consumer environment, I guess, with maybe what also could be some friendly top line comparisons, progress on cost savings, cash flow and so forth. Just trying to think directionally how you guys are thinking about that now?

Operator:

The next question comes from David Palmer with Evercore.

Sean Connolly:

Sure. David, you saw in the presentation today that in Q3 of '24, our frozen single-serve meal business achieved over a 51% market share which is up 1.7 points versus a year ago. And if you remember Tom McGough's comments from CAGNY, we have just -- we've become the leading frozen food producer in the United States, largely because of the success we've had in frozen single-serve meals over the last 5 years. So our performance there continues to be stellar and we continue to gain share. And by the way, I've made the comment many times that we under-index as a company in terms of competing with private label, Nowhere is that truer than in frozen single-serve meals. So for example, the entire size of private label in frozen single-serve meals is 1.8 points. Our business is 51.2 points of market share. And in fact, our growth in market -- unit market share in the last quarter was 1.7 points which is almost the total equivalent private label. So we like our position, our market and the market structure there. We like our brands and we feel great about it and it's been a growth juggernaut for us for the last 5 years and I see no reason why that won't continue. In terms of Birds Eye and vegetables, vegetables is one of the categories where earlier in the year, we saw consumers exhibit value-seeking behaviors. So for example, we saw some trade down from fresh and frozen vegetables to canned vegetables despite the obvious quality trade-offs. But Birds Eye is also one of the businesses that we are investing against with a clear focus on the superior relative value of frozen vegetables versus other choices. In fact, the advertising we're running now is directly comparative as I mentioned to you previously and features the clear benefit of our Stay Fresh flash freezing process which basically freezes time for the consumer and keeps our vegetables at the peak of freshness until the consumer is ready. So it's a clear advantage. And in the most recent 4 weeks of scanner data Birds Eye grew overall share even though our focus is really on the value-added tier. So we've got investments there. We've got momentum there and it's an important brand and you're not going to see us slow down on the marketing support and the innovation front.

Sean Connolly:

Well, I think the way I think about it, principally, David, is we are an ROI-minded management team we are not bashful about putting investments out there to support our brands if they drive the impact that we want to see in the marketplace which in turn drives the return on investment. So where we are in our typical annual operating planning process is brand by brand, looking at the market fundamentals on what's happening within the brand dynamics, the competitive dynamics of the category, what do we know about the need for those consumers in those categories to have some kind of stimulus to kind of nudge them back to their normal behaviors. And what kind of lift can we expect. So we do that on a brand-by-brand basis and that ultimately leads to our investment profile. So we're in the midst of that right now. we are -- we've obviously run a lot of what you might consider to be test markets starting in Q2 in terms of those investments and understanding what those ROIs are. And we're racking it up right now. But I think what's encouraging is we are seeing responsiveness and we are seeing good ROI. And I think that bodes well going forward.

Chris Carey:

One thing that did stand out was that the inflation impact to margins did get a little bit worse quarter-over-quarter -- can you just expand on that if that's driven by commodities, non-commodities, I think you mentioned tomatoes with respect to some incremental pricing. Just any context on what is driving that and if there are any nuances.

Dave Marberger:

Yes, just a little color. So Chris, yes, we -- our inflation rate as a percentage of cost of goods sold for the quarter was 2.9%. And which drive the 1.9% margin impact that you see in the materials. So we're still on track for -- we said full year approximately 3%. We're still on track for that, maybe a tick above that. But the inflationary areas you mentioned, tomato as we've talked about that, we've taken pricing. That was a big driver of the price mix in Grocery & Snacks for the quarter. We've also seen inflation in more broadly in vegetables in different ingredients and sweeteners starches. We have some inflationary areas. These things ebb and flow. We still -- and we've talked about this in the past, we still have inflation in our manufacturing operations, both with our labor and overhead and transportation is relatively flat, a little bit inflationary. So we're pretty much in line. It is slightly higher but generally, we're managing it to the full year expectation.

Dave Marberger:

Yes. I mean we obviously got the biggest benefit was from the tomato pricing and we saw the expected benefits there. The elasticities were good and in line with what we expected. We also did have a benefit of mix in the quarter. So our price/mix which was a little over 4% for the quarter, we did get a benefit of mix which contributed as well. And so a lot of our businesses in Grocery & Snacks are progressing as we expected. And so that's driving a good mix for us. So that was part of the equation as well in the quarter.

Alexia Howard:

Okay. So can I ask to begin with just about the productivity improvements in the food service channels. It seemed as though they were particularly strong this quarter. Is that likely to continue going forward?

Alexia Howard:

Great. And then can I just hone in on private label in the frozen vegetable area. There seems to be some confusion out here about whether private label is becoming more of a problem just broadly or whether it's actually still fairly contained. Is there anything that you're seeing in terms of private label, either in frozen vegetables or more broadly that would suggest it's becoming more of an issue. Or is it really that the supply chain challenges have been overcome on the private label side but there doesn't seem to be any major red flags or anything on the horizon?

Operator:

The next question comes from Rob Dickerson with Jefferies.

Sean Connolly:

Yes. I think to not get too twisted up in the optics of the combined R&F segment -- if you look at -- I think it was Page 10 of our presentation today which was consumption in our consumer domains. That's really the key kind of evidence point of what we're seeing from our investments. So our investments have been heavily skewed towards frozen, as I mentioned, because that's a very strategic business for us. And that line -- that consumption line there in terms of volume change has moved from minus 7.8% in Q1 of fiscal '24 to minus 2.8% in Q3 '24 and in the most recent -- in the first month of the fourth quarter, that number is about a minus 1.2%. So that's when I referenced the nearly 7-point swing in consumption that we've seen over the last couple of quarters, that's precisely what I'm talking about. And that is a very, very meaningful move in terms of the category, I think you'll be hard-pressed to find a bigger move more broadly in food. What is creating the noise in the R&F segment data is the refrigerated which I don't have here for you broken out volumes dollars in the absolute which is a function of 2 things that I referenced. One is the rollback in prices because of the deflationary categories there and also the ramp that we had in one of our -- in our table spreads business. So that's really what's behind that. But the movement in the volume is the basis for the ROI comment that I made and you can see how that movement has come out, it's been very material.

Dave Marberger:

Rob. So I think you'd agree that if you look over the last 6 quarters, there's been a lot of volatility in our supply chain. And so when forecasting gross margin, we want to be -- we want to make sure that we're considering all scenarios around operations. The fact of the matter is, is that if you look at a year ago, we had a lot of -- we still had a lot of things going on in supply chain with some recalls and some other challenges that we had that did impact the profitability. So as Sean talked about, our core productivity programs are on track. We're focused on the projects. We're executing -- so we're really seeing that benefit. The inflation is still coming in, we're still investing and you see those as part of margin. And we still have a headwind from absorption. So because the volumes are down. And importantly, we're driving inventory down. So our production in our plants has been down and we're managing that. That's been a headwind. But we haven't had any other disruptions like we've had the last couple of years in supply chain, given the environment that now we're able to -- we're really encouraged that we're able to make -- fund the investments we want to fund and execute our productivity programs and drive the gross margins that we're looking for. So one quarter doesn't make a year but we're really encouraged by what we saw this quarter and we're going to build on it.

Operator:

This concludes our question-and-answer session. And that concludes the conference call. Thank you for attending today's presentation. You may now disconnect.

Operator:

Good morning, and welcome to the Conagra Brands Second Quarter Fiscal 2024 Earnings Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Bayle Ellis, Manager of Investor Relations. Please go ahead.

Sean Connolly:

Thanks, Bayle. Good morning, everyone, and Happy New Year. Thank you for joining our second quarter fiscal '24 earnings call. Let's start with the Q2 headlines, shown here on Slide 5. At a macro level, the industry-wide shifts in U.S. consumer behavior, that we discussed on last quarter's call, persisted into the second quarter. These behavior shifts continued to pressure volume and mix. However, while the consumer is still deploying some value-seeking tactics when they shop, we are seeing clear progress when it comes to volume recovery. In Q2, that progress was most notable in our Refrigerated and Frozen segment, in particular, our Frozen business. This inflection was helped by investments on key brands as we were seeking to understand consumer readiness to revert back to more typical purchase behaviors. We saw outstanding responsiveness that will inform our back-half actions. More on that in a moment. The net result was a clear improvement in volume trends, with domestic retail volume loss that was half of what we saw in Q1. We delivered solid margins and EPS, as well as excellent free cash flow conversion. Our productivity initiatives remain on track. Although, we also saw some absorption impact from our volume declines. As we look ahead to the second-half, we have a robust investment plan in-place, reflecting our increased confidence in consumer responsiveness to brand building levers. Our goal is to continue to build momentum with our consumers as we move through the back-half of the fiscal year, and then, enter fiscal '25 in a position of strength. I will share more on our multifaceted action plan in a few minutes. Finally, we are updating our guidance for fiscal '24, reflecting both the consumer environment and the additional brand investments in the second-half of the year. After tremendous initial resilience in the face of a record inflation super cycle, U.S. consumer behavior shifts did emerge last spring in our industry as the cumulative effect of inflation caused consumers to begin to stretch their budgets. This resulted in a reprioritization of food choices as shoppers adjusted purchase behavior towards more stretchable meals. This slide reprises some of those shifts we discussed last quarter. At that time, we told you that we expected these trends to be transitory. We still believe that to be the case. But the pace of the shift back to normal consumer behavior has been slower than we initially expected, and that pressured our volume, performance and mix in the second quarter. That said, the tide appears to be turning. When we discussed these behavior shifts last quarter, Frozen was one of our most impacted businesses, specifically, our frozen single-serve meals. After five years of consistent strength, we saw some consumers looking to alternatives such as multi-serve meals and scratch cooking to stretch their budgets. We didn't expect that trend to be lasting as the unshakable consumer demand for convenience, combined with Conagra driven product innovation, has generated strong Frozen demand for a long-time now. As I noted in my opening remarks, we believe it's important to understand consumer readiness to resume more typical shopping behaviors before more fully ramping-up investments to facilitate the process. We want to be confident that our investments will have the desired impact. With that in mind, during the second quarter, we did invest in certain key businesses to assess consumer response to increased brand building stimulus. Most noteworthy was our largest Frozen business, single-serve meals, where we deployed high-quality merchandising nationally. The results were very encouraging, with lifts up 60%. These lifts ultimately drove meaningful gains in our market share. As you can see on this slide, our Q2 share in this business approached 51%, eclipsing last year's gains and also setting a new record. The net of this is while the consumer is still stretched, they are responding to high-quality brand building stimulus. And when you look at volume trends, while not yet positive, you can see that progress is clearly underway. Slide 9 shows volume results in our key U.S. retail segments, both separately and combined. I'll draw your attention to the chart on the left, where you can really see the impact of our investment actions. As a result of these investments, Refrigerated and Frozen segment volume went from minus 10.5% in the first quarter to minus 3.3% in the second quarter, coming in-line with volumes in Grocery and Snacks. Overall, our targeted investments in Q2 helped cut the total domestic retail volume decline in half compared to the first quarter, not all the way back, but good progress. I'm also pleased to report that we continued to deliver momentum in our International and Foodservice businesses, which together account for approximately 18% of total Q2 revenue. International grew organic net sales by 5.6% in the quarter, while our two largest markets, Mexico and Canada, delivered organic net sales growth above 9%. This was a result of our International team's outstanding execution, including strong brand activation, improved point-of-sale performance, innovation that is resonating with our customers, and expanded distribution in Mexico. Our Mexican business has now delivered four consecutive quarters of volume growth. In Foodservice, we delivered organic net sales growth of 4.3% in the quarter, driven largely by favorable price mix as well as expanded distribution in our Frozen portfolio, which accounted for roughly half of our total Foodservice business. Slide 11 details our second quarter results, including organic net sales of approximately $3 billion, which is down 3.4% compared to last year. Adjusted gross margin of 26.9% was down 129 basis points from last year, reflecting our targeted investments and the absorption impact associated with the volume decline. Adjusted operating margin of 15.9% was down 108 basis points compared to last year and adjusted earnings per share of $0.71 was down approximately 12% versus last year. Importantly, we delivered strong free cash flow during the second quarter. Dave will cover this in more detail shortly. But as you can see on Slide 12, free cash flow in the first-half of fiscal '24 was almost six times what it was in the first-half of fiscal '23. We used some of that free cash flow to paydown debt, bringing our net leverage ratio to 3.55 times in the second quarter. As I mentioned earlier, we have a robust and multifaceted investment plan in-place for the second-half of the year, reflecting our confidence in consumer responsiveness to our brand building efforts. On Slide 13, you can see images from our new advertising investments, focused on our biggest brands, including Birds Eye, Healthy Choice and Slim Jim. You may have already seen some of the terrific work we've done this year with Slim Jim and the WWE, building on the heritage and built-in awareness of our long-term partnership with Wrestling Legend, Randy Macho Man Savage. Fiscal '24 is one of our biggest innovation slates yet. We are backing those launches with meaningful increases in slotting in-store and other sales support versus the prior year. Slide 14 highlights some of the exciting innovation we've recently launched. If we have any chili lovers on the call, I highly recommend our Wendy's Chili. You can get the true restaurant taste of this beloved Chili at home. Finally, Slide 15 highlights the investments we're making in high-quality merchandising. Our efforts are focused on reengaging consumers with our existing products to capture market share as well as introducing consumers to our new innovation. The targeted investments we made during the second quarter give us confidence that our multifaceted brand building investments in the second-half of the year will drive momentum going into 2025. We're updating our guidance for fiscal '24, reflecting both the consumer environment and the additional brand investments in the second-half of the year, our new guidance includes organic net sales decrease between 1% and 2% compared to fiscal '23, adjusted operating margin of approximately 15.6%, and adjusted EPS between $2.60 and $2.65. Overall, we remain confident in our brands, plans, people and agility, as we continue to navigate this shifting consumer environment. With that, I'll pass the call over to Dave to cover the financials in more detail.

Operator:

We will now begin the question-and-answer session. [Operator Instructions] And our first question will come from Andrew Lazar of Barclays. Please go ahead.

Sean Connolly:

Morning, Andrew.

Andrew Lazar:

Hi, Sean, I know that - I think, investor concern for the Group as a whole, right, has been sort of building that there would ultimately be a need for sort of greater price investment to deliver volume improvement, and that it could get to the point where it could start more negatively impact sort of margin profiles. So, I guess, my question is, how can we be comfortable that the investments being made are sort of ROI or value-enhancing rather than, let's say, money being spent to simply flatter volume at the expense of margins and sort of disrupt the broader competitive environment?

Andrew Lazar:

Thank you for that. And then, the assumption, I think, it was that consumer behavior by now - or the initial assumption anyway, was that consumer behavior by now would have started to improve, and as you talked about, it seems the timing of that has been pushed out a bit. I guess, what are you embedding in terms of consumer behavior into your sort of new guidance at this stage?

Andrew Lazar:

Got it. Thanks so much.

Peter Galbo:

Hi, guys, good morning. Thanks for taking the question.

Dave Marberger:

Morning.

Dave Marberger:

Yes. Let me try to give you some color, and kind of unwind the price mix. Let me start with Q2. So, our price mix for the quarter was minus 0.5%. There were several dynamics to that. So, if you start with our tailwinds. As I mentioned, we did take pricing. We thought we have high inflation in tomatoes. We took tomato pricing in our domestic retail and Foodservice business. We did have some other pricing in International. That was partially offset by some pass-through pricing we have basically in our oil-based businesses, which is our spreads business. So, when you net those together, pricing was actually a tailwind. So, it was positive in that price mix. The other component was investment in slotting. Slotting was pretty significant. This quarter, it was about 30 basis points year-on-year of investment to support our large slate of innovation, which we talked about in the prepared remarks. And other piece that was negative this quarter was mix. And this is simply selling a higher percentage of our lower sales dollar per unit item. So, for example, lower sales on a multi-serve meals like Bertolli relative to higher sales on the Banquet pot pie, that is just a negative sales mix. That's the timing thing, Peter. So, over the course of the year, that tends to work-out, but quarter-to-quarter it can flip a little positive or a little negative. So, that was negative in this quarter. And then, the remaining piece is the trade and merchandising investment. And that was less than the slotting investment for the second quarter. So, there is a lot in there that gets to that 0.5%. I did comment that in the second-half, we do expect price mix to be down. Those dynamics are pretty much the same. We would expect less negative impact from mix in the second-half and more increase in the, kind of, the trade and merchandising investment. So, the second-half price mix will be a little bit down a little bit more than we saw in Q2, but directionally in that in that area. So, that - hopefully, that gives you some color on price mix.

Dave Marberger:

Sure. So, we're always looking at all of our options. Obviously, we have our commercial paper. We have a lot of liquidity. As you saw in the first-half, our free cash flow was very strong. Usually, this Company, we don't deliver really strong free cash flow in the first-half. Our conversion is usually very low with all the free cash flow coming in the second-half. Well, given our focus on working capital and Ardent Mills cash distributions, we had a very strong first-half, and we expect the second-half free cash flow to be very strong as well. So, it puts us in a nice position, where come May, when the bond is due, we're going to have strong free cash flow. We have access to our commercial paper and then, obviously, we're always looking at the capital markets to see if there's an opportunity to refinance. Rates seem to be coming down. We watch them very closely. So, we look at all the options and we figure out what's the best combination. Maybe, we use our free cash flow to paydown some of it and refinance the other part. But we'll look at all our options as we go-forward. But - I like where we are, given our strong free cash flow.

Operator:

The next question comes from Robert Moskow of TD Cowen. Please go ahead.

Dave Marberger:

Yes, Rob. So, let me answer that a couple different ways. So, if you just look at the total year, our guide - our operating margin guide is approximately 15.6%, that's where we came in, in fiscal '23. And when you look at gross margin, you look at A&P and SG&A, we generally expect to be in-line with where we were prior year. So, to your question, if - we were 2.4% last year, if we come in again at 2.4% dollar-wise, that's a little bit lower than where we were, and we're still looking at that. There is opportunity to spend up if we want to. The way we look at it though is if you look at A&P first-half versus second-half, our A&P spending is going to be up around 20% in the second-half relative to the first-half. So, we're just looking at what's the run-rate on spend now and what is it going to be in the second-half to support the advertising that Sean talked about in our other kind of digital advertising that we've been doing. So, we feel good about the second-half and the trajectory of the A&P relative to the first-half.

Robert Moskow:

Got it. Second part is, it sounds like you're very happy with the lifts you've seen in the promotional activity behind Frozen. Sean, can you speak more broadly about whether the food industry and retailers overall are happy with the lifts that they're seeing on a more broad-based basis? I think I hear kind of some dissatisfaction from certain big retailers about the lifts, and that the rollbacks haven't gotten the response that they fully expected. Is it possible to speak more broadly about what you're seeing?

Robert Moskow:

Makes sense. Thank you.

Pamela Kaufman:

Hi, good morning. Happy New Year.

Sean Connolly:

Hi, Pam.

Pamela Kaufman:

Can you give some more color on the drivers behind your reduced top-line guidance for the year? How much of it is a change in your expectation for volumes versus greater price investment? And then, just - you mentioned that in the second-half, you'll see price declines. Can you frame the magnitude of the declines relative to the second-quarter?

Dave Marberger:

Yes. So, Pam, if you just take the midpoint of our guide for the year on organic net sales, that implies a second-half organic net sales of minus 1%. And that's going to be a combination, based on the way we forecasted it and incorporating the comments - the important comment Sean just made, is a combination of price mix - slightly negative price-mix and slightly negative volume. The combination of those two to get to the minus 1% organic, that's H2. And that's improvement on total sales and volumes as we've seen Q1 to Q2, and then H2, we expect that improvement to continue, so that as - we continue to track towards growth by the time we get to the end of fiscal '24.

Dave Marberger:

Yes. So, if you look at the second-half, gross margins - if you look at where we landed the first-half in gross margins, we were at 27.2%, I think, is our first-half gross margin. Our second-half should be generally in-line with that, maybe a little bit below that. So, the second-half, where you're going to see the reduction in operating margin is coming from the higher investment in A&P as a percentage of sales and the timing of SG&A being higher in H2 than it was in H1. So, that's really the second-half reduction in operating margin. So, when the dust settles and you look at the full-year, we've guided to 15.6% operating margin, that will be in-line with fiscal '23. And if you look at kind of where we land with margin A&P and SG&A, we'll be pretty close to where we were prior year.

Dave Marberger:

Thanks.

Alexia Howard:

Can I ask about innovation, in terms of - I guess during the pandemic and also during the period of supply chain disruption, I imagine that the pace of innovation was dramatically reduced. How quickly is it recovering? Can you give us any numbers on how quickly the pace of innovation is likely to pick-up over the course of the next few quarters?

Alexia Howard:

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

Operator:

The next question comes from Nik Modi of RBC Capital Markets. Please go ahead.

Sean Connolly:

All right. So Nik, the first one is easy. The answer is no, no impact there. And on the second one, that is a very keen observation because I mentioned how our volume outlook for the back half of the year does not assume anything heroic. Part of not assuming anything heroic, we're not assuming that some of the away-from-home dollars begin to shift into at home, and you're 100% correct. If that happens, that's a tailwind for us and probably for the group. What's very interesting is how sticky some of this away-from-home spending has been even though we've seen a challenged consumer who is making trade-offs to stretch their household balance sheet. The one place that they've been fairly resilient is in their away-from-home spending. Should consumers stress increase from here. That is historically the first place that you would see an additional behavior shift is, you would see a reduction in away-from-home spend and you would see an equal and opposite response in home eating. That has not happened yet. But as we think about calendar year 2024, certainly, that is a potential positive if the environment remains stressed and the consumer decides they need to make further shifts.

Sean Connolly:

The price gaps versus away-from-home tend to take care of themselves. When the consumer reaches a point and they say, look, my burrito and my coke to go have now gotten too expensive, they first make the switch to stop doing that. Second, they switch to buy in the grocery store. And third, hopefully, they're buying our products. But we do look at our categories and look at this volume malleability as if it is an open set, meaning it's not just what's on shelf and then what's to the left or right of it that's switching, but it could be other categories. So an example would be, I referenced in our prepared remarks today that we are going to be - one of the things we're going to be investing behind is advertising on our Birds Eye business. Well, that is in the marketplace right now. It is running, and it is directly comparative advertising to canned vegetables. And it is focused on delivering a superior relative value message because while it might be tempting to trade down to a canned vegetable in the current environment, the trade-off on quality is simply not worth that trade down, and you end up actually in a worse value proposition. So that's an example of where we're thinking about the competitive set more broadly than what's immediately to the left or right of our products in any given section, and we're thinking about where consumers might go elsewhere, and really getting after that in a very targeted hard-hitting way with a focus on quality and superior relative value.

Sean Connolly:

Thanks.

Max Gumport:

Hi. Thanks for the question. Turning back to gross margins, so a year ago, you were really the first packaged food company to begin to sunset the inflation super cycle and start to post sizable gross margin expansion. But with price mix turning negative now, partly due to the increased trade investment, it seems like productivity is now fighting against inflation, absorption and the negative price mix to hold up gross margin. Are these trends still in line with the mechanical nature of how these inflationary cycles typically have played out in the past? Or are there nuances starting to develop this time around? Thanks.

Dave Marberger:

Yes. So if you just look at the guidance and you kind of say, okay, where are we going to land? We guided to operating margin of 15.6%. In that is gross margin, and gross margin is going to come in pretty close to where it landed in fiscal 2023. So you look at that and you say, okay, we kept gross margin flat to prior year when we've wrapped on pricing, our sales are going to be down for the year based on our guidance, and we've had a pretty significant impact from negative absorption, right, because volumes were down all of last year and they're down first half of this year. So being in manufacturing when you start to get your volumes more stable and actually start inflecting them to be positive, that negative absorption headwind goes away. So the focus now is we keep gross margins flat this year, we're increasing our investment, which gets our total investment when we finish this year back to more normalized trade levels. So we're going to have a business where the margins are consistent with last year, our investments back to where it was, and we have a lot of negative absorption that's in our base. So in fiscal 2025, we can get back to growth. We have some opportunities to leverage our cost base. We have an investment base that's where it should be, and it sets us up well for fiscal 2025. So there's a lot of things bouncing around, but when you copter up and you just look at where we're going to finish the year, that's how I think about it.

Dave Marberger:

Yes I - really interesting question. Basically, what we're saying is that, yes, the consumer is still deploying some value-seeking tactics to stretch their balance sheet, and that has had some impact on how they prioritized categories. And not every category is equal there, Max, in terms of what we've seen in the category. So we've seen tactics like this from consumers before, and they tend to serve their purpose over a short horizon and then they tend to disappear. But interestingly, even in some of the categories that remain softer than usual, we are seeing volume malleability via investments that drive share. But over time, frankly, we will take what the field gives us in the moment, whether that's improved volumes through share gains or improved volumes through improving category momentum. I think we're going to see both going forward.

Operator:

The next question comes from Chris Carey of Wells Fargo. Please go ahead.

Sean Connolly:

Hi, good morning.

Sean Connolly:

Yes. Let me try to kind of re-hit what we touched on our prepared remarks for us, I'm not going to comment on Q3. We're in Q3, so we'll stick with Q2. We saw clear evidence in Q2 that where we deployed investment to kind of help the consumer with this process of kind of reengaging in the more typical purchase behaviors, we got the response we were looking for. And because that was real empirical evidence that, of course, inspired confidence that if we do more of that in the second half of the year, we will get a similar type of response. But from a planning posture standpoint, we are not banking on major improvement in the macro consumer environment or signing up for a huge consumer response. So one might interpret that as we've got the investment in there, but what we're banking on in return is conservative. Look, in this current environment, that's probably not a bad posture to be in because this volume recovery has been more elongated than people expect. But I think that's that is a fair characterization of kind of what we're looking at.

Dave Marberger:

Yes. We - really almost all of the delta and SG&A in the quarter was driven from incentive comp. So that really drove the delta in the quarter. We do expect SG&A as a percentage of net sales to be higher in the second half. So it will get our SG&A as a percentage of net sales, close to where it was a year ago. So, there's some timing elements to this, especially with incentive comp, because it can it really can be a timing item relative to where you were in the prior year in your forecast. But as it relates to Q2, it drove all the variance in SG&A.

Dave Marberger:

Yes, that's excluding adjusted SG&A, which we exclude A&P.

Operator:

This concludes our question-and-answer session. I would like to turn the conference back over to the company for any closing remarks.

Operator:

The conference has now concluded. Thank you for attending today's presentation and you may now disconnect.

Operator:

Good morning, and welcome to the Conagra Brands’ First Quarter Fiscal Year 2024 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, today's event is being recorded. I would now like to turn the conference over to Melissa Napier, Senior Vice President, Investor Relations. Please go ahead.

Sean Connolly:

Thanks, Melissa. Good morning, everyone, and thank you for joining our first quarter fiscal ‘24 earnings call. Let's start with what we want you to take away from our presentation shown here on Slide 5. At an industry-wide level, macro dynamics have clearly impacted consumer behavior across the board. I will cover this in more detail shortly, but ultimately, this behavior shift has elongated the volume recovery period across the industry, which is reflected in our Q1 top-line results. As we've navigated these macro dynamics, I'm proud of the team for delivering another quarter of strong margin improvement and EPS growth. We also continue to strengthen our balance sheet, improving our leverage ratio during the quarter while investing in our business and returning cash to shareholders. Our team's execution supported a strong supply chain recovery during the quarter, hitting pre-pandemic service levels as we exited Q1. Looking toward the remainder of the year, we will work to drive volumes and top-line growth through targeted and disciplined investments behind prudent merchandising and continued support for our strong innovation. Finally, we are reaffirming our guidance for fiscal ‘24, reflecting confidence in our plans, people, and agility as we navigate a shifting consumer environment. As I mentioned a moment ago, the timetable for volume recovery has been elongated across the industry due to near-term consumer behavior changes. After three years of unprecedented inflation, along with other macro dynamics, consumers have felt increased financial pressure and used a variety of strategies to stretch their balance sheets. This resulted in a near-term reprioritization of their typical purchase behaviors in order to make their budgets work. We've seen shifts like this before and expect these near-term changes in behavior to also be temporary. In fact, recent trends suggest this is already underway. Let me provide a bit more color on the kinds of behavioral shifts we've observed. As you've seen for some time now, with the notable exception of summer travel, discretionary purchases have been down almost across the board. Consumers have also been actively reducing remnant household inventory from the pandemic. Within food, convenience-oriented items, typically a top consumer priority, have lagged as shoppers have turned to more hands-on food prep to get additional bang for their buck. And as they've done this, not surprisingly, they have shifted from meals per one to meals per many, even if not everyone is home at the same time to eat together. And the last shift I will mention is a reduction in wasted food and an increase in the use of leftovers. Collectively, these short-term behavior shifts act as a sort of cheat code to help these consumers spend within their means. Slide 8 demonstrates the elongated volume recovery across the industry. As you can see, through the four-week period ending August 26, the entire peer group was showing volume performance within a very tight band with Conagra in the middle of the pack. As I mentioned a minute ago, more recent trends are showing the first signs of improved performance. With that backdrop, let's dive into our results shown on Slide 9. As you can see, in the quarter, we delivered organic net sales of approximately $2.9 billion, which is down slightly compared to last year as a result of the slower volume recovery we discussed. Adjusted gross margin of 27.6% was up 272 basis points from last year. Adjusted operating margin of 16.7% was up 297 basis points compared to last year. And adjusted earnings per share of $0.66 increased almost 16% versus last year. Diving further into our top-line performance by retail domain, you can see on Slide 10 that sales in our staples domain were flat compared to the prior year. As consumers shift toward more stretchable meals, our staples categories, such as canned chili and canned tomato are well positioned and have gained unit share compared to last year. Despite the macro headwinds, our snacks domain has continued to grow as shown on Slide 11. We're building unit share as consumers continue to respond positively to our microwave popcorn and ready to eat pudding and gel brands. Looking at Slide 12, you can see that our frozen domain has been the most significantly impacted by recent shifts in consumer behavior, particularly in areas like single-serve meals, given the headwinds we discussed a moment ago. As we look at the frozen domain, it's worth noting a few key points. First, despite the recent impact on volume, we continue to gain unit share in important frozen categories like single-serve meals. This dynamic demonstrates the relative strength and strong position of our brands. Second, the year-over-year performance figures do not properly represent the broader trend within frozen food. In fact, if you look over a four-year period, Conagra's frozen retail sales have increased 22%. Frozen meals has been one of the fastest growing categories in in-home consumption over the past 40 years. Its 4% CAGR is in the top tier of foods growing in at-home consumption. This expansion has been fueled by the long-term sustained consumer demand for convenience as well as the addition of innovation and quality ingredients. This 40-year trend demonstrates the critical role that frozen plays in providing convenient, high-quality foods for every occasion which consumers have come to increasingly rely on. This is central to why we believe the current softness is temporary. Turning to Slide 14, I'm pleased to share that we continue to advance our supply chain initiatives during the quarter, allowing us to return our service performance back to pre-pandemic levels. Our productivity initiatives remain on track, and we plan to maintain and capitalize on this strong recovery during the rest of fiscal ‘24. As a key piece of our action plan for the remainder of the year as outlined on Slide 15, in addition to our ongoing supply chain execution, we will continue to focus on executing our Conagra Way playbook as we make targeted and disciplined investments behind our brands. Help protect share and drive the top line, while focused on investing behind quality, high ROI merchandising and A&P to support our brand. We'll also continue to prioritize reducing our debt and improving our net leverage ratio. We are reaffirming our fiscal ‘24 guidance that we shared last quarter, including organic net sales growth of approximately 1% compared to fiscal ‘23, adjusted operating margin of 16% to 16.5%, and adjusted EPS between $2.70 to $2.75. Overall, we remain confident in our plans, people, and agility as we continue to navigate this shifting consumer environment. With that, I'll pass the call over to Dave to cover the financials in more detail.

Operator:

Thank you. We will now begin the question-and-answer session. [Operator Instructions] And today's first question comes from Andrew Lazar with Barclays. Please go ahead.

Sean Connolly:

Good morning, Andrew. Yes, I believe the answer is yes, we have. Like others, we're essentially now putting our emphasis on the back half where we expect to have the most impact. If you copter up and look at the back half between more favorable comps, increased investment, a very strong innovation slate and a move back toward a more typical consumer behavior, we do expect meaningful top line progress in H2. And with productivity strong and excellent margin progress over the past several quarters and a good start to the year at EPS, we feel good about the profit call for the year even with that added investment. I probably also will give a nod to our Foodservice and International teams for the excellent job they're doing, working their plans.

Sean Connolly:

Great question. As you point out with our supply chain now, clicking on all cylinders, we're once again in a position where we can selectively add promotional activity to drive sales. As I've said before, selectively means highly incremental, high ROI events at critical calendar windows like the holidays as an example. So frozen is certainly in the mix, but so are other categories. Just to give you some perspective, and I'll give you more on this in just a minute so you have the detail. In Q1, only 21% of our sales were on promotion, which was below the peer group and also below the pre-pandemic baseline. So if you look at Q1, the last couple of years, not this year, but the last couple of years, Conagra was around 18% of our volume was on promo and the pre-pandemic baseline, the number was 24%. So this year, in Q1, we were at 21%. So we're still below the baseline, and we've got some room to pick our spots and invest smartly to engage further with consumers. But let me be clear, we are not talking about deep discount, low ROI promotional activity like you might remember from Conagra 10, 15 years ago. That is not part of our playbook.

Operator:

Thank you. And our next question today comes from Ken Goldman at JPMorgan. Please go ahead.

Sean Connolly:

Yeah. Ken, it's a mix of all the above. The comps are clearly much more favorable. We're clearly going to have some stronger merch investment in the back half. And we've got A&P focused on our largest brands with good margins. So those are all well positioned to have an impact. But I think the key here is this consumer behavior shift. And I do think when you see all the competitors in such a tight bandwidth, which is frankly a tighter bandwidth than I'm even accustomed to seeing, you know it's a macro dynamic. And the way to think about what we saw in the first quarter with respect to the behavior over the summer was, it was this paradoxical combination of selective splurging and broad-based belt tightening. So as an example, consumers may have simply said, I'm taking that summer trip and it's not up for debate. And then at the same time, said, I'm going to change some things up to create an offset. And so in our line of work, it's what we call compensating behavior. But one of the other things we know about consumer habits and practices is that they are very hard to change long term. So these shifts tend to be temporary tactics that people use to get through a period of time when they've committed more of their cash to something else. And I think the summer travel example is illustrative of what I'm talking about there. And so this is a bit of a different animal than what we would call normal elasticity effects because normal elasticity effects are really brand level elasticity effects that are consumer judgments about the value of a particular brand versus another close-in alternative following a price increase. These macro behavior shifts are a bit of a different animal. Here, the consumer is not passing judgment on the value of a specific brand following a price increase, rather, they're temporarily reranking how they prioritize entire categories in order to live within their means for a period of time. So why does it matter to understand the difference between this versus normal elasticity? Well, in our experience, it's because behavioral shifts at a category level tend to be shorter in duration. And it's -- a simple way to think about it is consumers are creatures of habit. So it's very difficult for them to deprioritize things like convenience benefit. So this is one of the key reasons we expect these shifts to be temporary. They have been in the past, and that's what we expect again. And it's also why we're really loading up our resources in the back half where we think the market conditions will be much more favorable to driving the kind of impact we're seeking.

Operator:

Thank you. And our next question today comes from Pamela Kaufman with Morgan Stanley. Please go ahead.

Sean Connolly:

It's higher, Pam. It's obviously -- the consumer dynamic in the first quarter was tougher than we planned for. We do think the conditions -- the macro conditions will be more favorable in the back half and we're in a fortunate position where we got off to a strong start in the year on profitability. So we've got some room to invest back. So we're talking about a higher investment posture on Merch, in particular, in the back half of the year as now we've got the supply chain working.

Sean Connolly:

Yeah. I don't really see that, Pam. The volume impact we are seeing, and frankly, the peers in the space are really not a function of individual brand level prices and a consumer judgment that it's much more of this macro thing where they're reprioritizing entire categories and consumer domains in order to stretch their budget short term. There are -- there was very little interaction in our portfolio with private label. There are some categories in our portfolio, albeit very few, that are more pass-through in nature and are more prone to a rollback in price if the key ingredient cost deflates. So products like Reddi Wip, where you've got basically dairy in there, products like our sausage business or our hotdog business where it's pretty much a particular meat block that's in there, those products -- kinds of products tend to move with the commodity. But for most of our portfolio, a, we haven't seen that kind of singular judgment around the value of the product being too expensive, and we just haven't seen any cost basis for rolling back price in terms of deflation. We're still net-net in an inflationary position.

Operator:

And our next question today comes from David Palmer at Evercore. Please go ahead.

Sean Connolly:

Sure, Dave. Let me hit that. we're going to focus, as we always do, on our frozen and snacks businesses because those are the centerpiece of our strategy. But we also do have businesses within our portfolio now that are typically reliable contributors that are working really well in terms of meal creation, simple meals and things like that in our staples business, which tends to be a good mix. But I think between an improving consumer environment, more aggressive but smart and selective merchandising environment, a really good innovation slate and then A&P on some of our biggest businesses, not to mention, we've got very favorable comps on some of our big businesses in the back half of the year. I think all of that gives us a line of sight to delivering the kind of numbers that you just quoted. Dave, do you want to add anything to that?

Sean Connolly:

And one other point I'll make, too, Dave, because you brought up our frozen business. It's not an inconsequential point that one slide in our prepared remarks today that showed the 40-year trend on frozen. It is literally not counting commodity category like frozen fruit, it is in the top two, I think, of packaged goods in terms of long-term growth in the category, and it's been particularly strong in the last six or seven years as we've driven innovation. So we remain incredibly bullish on our frozen business. And by the way, our unit share in frozen has grown consistently over the last seven or so years. And that included Q1. I saw it, David, you pointed this morning and thought we were losing share in our frozen meals business. That is actually not the case. Even with the consumer environment the way it is right now, consumers making some of these trade-offs, we grew our unit share in our frozen meals business once again. And that is with some additional promotional activity from a larger competitor in the space during Q1. But frankly, that had no impact on us on a national basis. It impacted a different competitor in the space that happens to be a value-oriented play, but had no impact on Conagra where we again gained unit share in our frozen meals business.

Sean Connolly:

Thanks, David.

Max Gumport:

Hey, thanks for the question. Just wanted to come back to the commentary around the improved outlook for the second half, the low single-digit organic sales growth. I hear what you're saying, but a lot of the factors that you've called out feels like they would have been knowable a couple of months ago in terms of the easier comps and the innovation and the advertising and lapping the supply chain disruption. So I'm just curious what's changed over the last couple of months that's given you this increased confidence in the second half because before it sounded like we were going to see organic sales would be strongest in the first quarter and then work its way down. Thanks.

Dave Marberger:

Yeah. And just -- and our International and Foodservice businesses are off to a really strong start and they're really tracking ahead.

Dave Marberger:

Yeah. So yes, we're holding our inflation assumption at 3% at this point. We've had some categories, some items where there is more inflation than we expected, but we have some that have gone the other way. So we're still holding to the 3%. That's important that, that remain that way for us to hit the margin guidance that we gave. We were impacted in Q1. We were really pleased with our productivity in the first quarter. Embedded in the productivity numbers are actual headwinds from absorption. So the second half with volumes, us being confident that our volumes will be up, we'll have a benefit in absorption. So the incremental investment can drive incremental volume and help with absorption offsets, which benefits margin. But I would just remind you, we gave a range for margin for a reason because of that. We're not going to get precise with an absolute gross margin number. You're directionally correct, but that's why we gave a range on operating margin for our guide.

Operator:

Thank you. Our next question today comes from Robert Moskow with TD Cowen. Please go ahead.

Sean Connolly:

Sure. Happy to do that, Rob. If you look at the slide we shared today, notably, it's units, it's not dollars. And that's the metric that we are looking at, is units, not dollars because to us, that is going to be the marker of when we start to see this change. Frankly, if you look at the slide that I shared today, it's got 52 weeks, 13 weeks, four weeks. What the competitive set would expect to have seen is that as you move from 52 weeks to 13 weeks to four weeks, you see improvement in trend. And as you could see on that slide, it was fairly flat. So what we're looking for is bend in the trend in unit movement as a proxy for this consumer behavior shift beginning to move. So if you look at the more recent period, which is -- it just came out, I think, this week, which is the four-week period following what we shared today, you see the first noteworthy change in unit movement for Conagra and there may have been one or two other competitors that saw some movement there as well. That's important because that's the kind of movement that we thought we would see across the industry back at our Memorial Day or so, and it didn't materialize. And we've got our first data point now that's showing it's going in the right direction. That's the metric we need to move. If units move the way that we expect them to move, everything else will take care of itself at dollars. And so that's why we're focused on that.

Dave Marberger:

Rob, I would just go back to what we said last year. We didn't quantify everything exactly, so I wouldn't want to give you a number here. But if you go back and look at what we communicated last year second half, I think you'll get a pretty good feel for the magnitude, generally speaking. But we didn't give a precise number on that.

Sean Connolly:

Thanks.

Nik Modi:

Yeah, thank you. Good morning. Sean, it's clear your brands within frozen are doing well, and you see that in the share gains. But I'm just curious if you have made any observations regarding the perimeter, right, some of the things that we're seeing through our channel work is deflation happening in the perimeter is putting pressure on frozen the category. So when you think about the competitive landscape, are you kind of factoring that in? And do you think that could put more pressure on potential pricing and promotional spend over the next several quarters?

Nik Modi:

Yeah, just fresh vegetables, fruits, primarily, right, the gaps between frozen and some of the fresh areas of the store.

Nik Modi:

Great. And then maybe one for Dave real quick. Just wage inflation, obviously, has been a big issue as it relates to conversion costs in terms of finished goods that you may buy and you have all these union negotiations going on in other industries. And I'm just curious, like, what are you seeing right now in terms of conversion costs kind of coming upstream in terms of how your cost of goods is shaping up?

Nik Modi:

Excellent. I’ll pass it on. Thank you.

Jason English:

Hi, good morning folks. Thanks for slotting me in. And congrats on the momentum in International and Foodservice. Great to see. Sean, a lot of questions, obviously, today on your back half guidance, and I'm sure it's not lost on you, there's clearly some skepticism on your ability to get to the volume growth you're promising in the back half. If that doesn't come to fruition, what, if any offsets, are in your P&L to allow you to get to the bottom-line guidance?

Dave Marberger:

Yeah, sure. So, Jason, obviously, we're looking at our cost very closely. If you look at the quarter, our productivity performance was really strong. Our supply chain organization does a phenomenal job especially now that we're back to a kind of more accommodative operating environment to drive our productivity, and we're seeing that. So that's a big driver, obviously, for us. You look at SG&A, we're -- 9.1% is where we came in last year, we'll be around that again this year. We're very efficient, we're as efficient as any food company out there, but we're always looking for opportunities. And then we obviously have our Ardent Mills joint venture, which continues to do really well. We're holding to our guide for the year there, but there's still really strong momentum in Ardent Mills. And that generates cash for our business. And so there are places we're always looking, but we're always looking to just make sure we're finding opportunities to drive savings so that we can continue to invest in the business.

Dave Marberger:

That's what we're always looking for. So we're -- productivity coming and Ardent is off to a good start.

Jason English:

Yeah, I would definitely recognize and respect that. Thank you very much.

Operator:

And our next question today comes from Steve Powers with Deutsche Bank. Please go ahead.

Sean Connolly:

Yeah, Steve, I think the easy answer to your question is we manage this business for long-term value creation and long-term success with the consumer. When you get caught up in these short-term windows of consumer behavior shifts, people always ask the question, well, in this window, what's more important, sales or profit? And obviously, you always want both. But when you see short-term behavior shifts, sometimes you have to be smart and you've got to ride the way in a patient and pragmatic way. And that means not trying to force things before they're poised to pivot. Otherwise, you can end up with either metric working for you. And as I said, we will invest smartly. We'll pick our spots. We'll focus on quality merch, A&P and our biggest brands and awesome innovation and we'll keep a strong determination to drive brand health and value creation for the long term.

Sean Connolly:

No, I actually would say the opposite. We did see in one of our categories, a competitor try to do some promotional things to kind of force the issue and force and it didn't work, and it didn't have any impact on our business. And I can't imagine what their bottom line looks like with such an inefficient spend. But it's just -- that's what I mean by you have to be sometimes be smart, ride the wave in a patient a pragmatic way. If you get impatient and you try to do something irrational and force the consumer to do something they're not ready to do, you know what you're going to do, you're going to spend a lot of money without having a lot of impact. And so we want to put our dollars and our investment out there in the marketplace on the right levers at the right time when the consumer is going to be responsive to it. And that's why we've got the cadence of our spend laid out the way we've got across the full year.

Operator:

And our next question comes from Alexia Howard with Bernstein. Please go ahead.

Sean Connolly:

Good morning.

Sean Connolly:

Alexia, I view that one a little bit differently. If you think about it, we've got an entire department of demand scientists here who are every day studying changes in consumer behavior, particularly -- a particularly important one for our company has been the ever-evolving consumer definition of what constitutes healthy and how they want to eat in order to be responsive to health. Back in the '90s with Snack Wells, it was all about fat and calories. And if you just look in the last few years, we've gone from grain-free to cauliflower to keto. I mean it's constantly evolving. So what our demand science folks do is they're constantly studying the trends that consumers are chasing, figuring out which of those need to be designed into our products and then adapting our products through our innovation program relentlessly so that we're staying up with consumer trends. So if we end up seeing changes in consumer eating patterns, let's say they go to smaller portions, then we evolve the innovations, and we design smaller portions. If they switch to different types of nutrients, we evolve the innovation, we switch to different types of nutrients. If they change the kind of pack sizes they snack on, we'll change that. So this is the kind of stuff that will happen over five, 10, 15 years, not over the next six months. But I think the key to navigating these kinds of just constantly evolving consumer environment is you have to be externally focused, you've got to study these consumer trends and you've got to rapidly design in what the consumer is looking for into your products and that's what we do every year.

Sean Connolly:

Yeah. Let me say this first because I never want our investors to misunderstand this. We always follow kind of a balanced approach to capital allocation. But we've said now for some time, and I'll continue to say it, our top priority is de-levering. The importance of having a clean balance sheet in the current strained external macro environment is very important to our investors, our ratings agencies, and that is our top priority. When the time comes that we've got our balance sheet where we want it to be, M&A has always been part of it. We've always said there are two kinds of big picture M&A. There's big synergistic acquisitions that rarely come along once in a blue moon, and then there are bolt-on more growthy smaller acquisitions, they tend to happen more frequently. So we'll always, over the long term, keep an eye on both of those things. But right now, our focus is on continuing to pay down debt. And then when we get to the time when we can add something to the portfolio, odds are it would be in our key strategic domains of frozen and snacks.

Sean Connolly:

Thank you.

Melissa Napier:

Thank you, everyone, for joining us this morning. Investor Relations is available if anyone has any follow-up questions. Have a great day.

Operator:

Good morning and welcome to the Conagra Brands Fourth Quarter Fiscal Year 2023 Earnings Conference Call. [Operator Instructions] Please note that this event is being recorded today. I would now like to turn the conference over to Melissa Napier, Head of Investor Relations. Please go ahead.

Sean Connolly:

Thanks, Melissa. Good morning, everyone and thank you for joining our fourth quarter fiscal ‘23 earnings call. I will start with the business update on the quarter and fiscal year and then share how we are thinking about 2024 and beyond. Slide 6 outlines what we’d like you to take away from today’s call. In Q4, we delivered solid profit and margin growth despite the disruption from one of our frozen logistics partners, Americold, which impacted both our sales and costs during the quarter. For the full fiscal year, I am proud of the way our team navigated a dynamic operating environment to deliver strong results. These efforts to execute against our fiscal ‘23 strategic priorities and the continued implementation of our playbook have our brands well positioned following the volatility of the past few years. As you will see, our outlook for fiscal year 2024 reflects a transition toward a more normalized operating environment as well as a continued commitment to our long-term financial algorithm. With that overview, let’s dive into the results, starting on Slide 7. Organic net sales for the quarter grew over 2% compared to the fourth quarter of fiscal ‘22 and adjusted gross margin of 27% represents a 216 basis point increase over the fourth quarter last year. The full year results underscore the strength of our performance across all four metrics, including 6.6% organic net sales growth and 17.4% adjusted EPS growth compared to the prior year period as well as robust gross and operating margin improvement. Looking back at our priorities going into fiscal ‘23, we are pleased to say that we delivered on each of them. We continued our disciplined pricing execution in the face of ongoing inflation, which helped to drive margin recovery a top priority coming into fiscal ‘23. Our supply chain continued to improve as we made meaningful progress on our cost savings initiatives, which in turn led to a vast improvement in service levels. We remain committed to lowering our net leverage ratio, which was reduced from 4.0x to 3.6x by the end of the fiscal year. And we did all of this while investing to maintain the brand strength that we have built up for many years running. Let’s take a closer look at these priorities, starting with the impact of our inflation-justified pricing actions on Slide 9. As you can see, pricing peaked in Q3, but remains almost 17% above the prior year due to our actions to offset ongoing COGS inflation. During the fourth quarter, elasticities did soften a bit, but remain fairly consistent well below historical norms and in line or better than competitors. Our strong execution was instrumental in driving margin recovery, which is detailed on Slide 10. As we have previously discussed, there is an inherent lag between the time when inflation hits and when we are able to recover that cost through inflation-justified pricing. This lag effect results in temporarily compressed margins as we saw most notably throughout fiscal ‘22. We took great strides to recover our gross margin in fiscal ‘23 and Q4 was our third consecutive quarter of strong margin improvement, up 216 basis points in the fourth quarter compared to the prior year. Turning to Slide 11, we continue to advance our supply chain initiatives, investing to rebuild our own inventory which helped us to deliver service levels of 95% as we exited the fiscal year. While we are making strong progress in supply chain, it’s not yet back to normal as we experienced transitory disruptions in the quarter such as the cybersecurity event at Americold. That said, we are pleased with our progress so far and see more room for improvement in fiscal ‘24, including investing in technology and modernization as the operating environment continues to normalize. Slide 12 highlights one of the key ways in which we are investing to maintain brand strength, our persistent focus on modernizing brands through innovation. The innovations we have launched since fiscal 2018 generated nearly $1.8 billion in retail sales during the last fiscal year. And unlike many in our space, we continue to innovate during the pandemic with new product launches since fiscal ‘21, now representing more than half of that total. Importantly, our innovation has built some really strong and sustainable platforms, including Bowls, Slim Jim SAVAGE and Duncan Hines EPIC. Our strategic frozen and snacks domains have been the focus of our innovation engine. As Slide 13 highlights, their growing domains and we’ve helped architect that growth. Over the past 4 years, the frozen and snacks categories in which we compete have grown 9% and 8% respectively, outpacing total food growth. Within our portfolio, frozen and snacks together now represent almost 70% of our domestic retail dollar sales and we have consistently increased our share within these strong and growing domains. Looking more closely at frozen, Slide 14 shows the growth of this category over the past 9 years, which represents the timeframe in which we reinvented our approach to frozen food. Since fiscal 2014, the frozen categories in which Conagra competes have grown from $29 billion to $54 billion, representing a 7% CAGR. And Conagra has increased our share by nearly 500 basis points to become the leader in frozen. This growth is a testament to our continual effort to modernize and support our strong brands as part of the Conagra Way playbook. One example of that brand strength is how our unit sales stack up to our peers. As you can see on Slide 15, even during the year of significant pricing 7 of our top 10 frozen product segments held or grew unit share in fiscal ‘23. The same is true in our snacks portfolio. As you can see on Slide 16, our two largest snacking platforms meat snacks and microwave popcorn also gained unit share during fiscal ‘23. Now let’s turn to the year ahead. As we continue to emerge from unprecedented operating conditions, including both COVID and the inflation super cycle, we anticipate fiscal ‘24 to be a transition toward a more normalized operating environment. That transition will include a few tailwinds and headwinds that are outlined on Slide 19. Starting with the tailwinds. In fiscal ‘24, we will be wrapping the various discrete supply chain disruptions that persisted throughout the year. As the operating environment continues to normalize, we will also benefit from the ongoing advancement of our productivity initiatives and we expect our investments in innovation to continue to deliver strong results, building upon our track record of success. Now, let’s talk headwinds. First, shifting consumer behavior, as you can see in the weekly scanner data, food companies are starting to wrap pricing in the year ago period and dollar sales are coming down as expected, but the rate of improvement in volume recovery is lagging. That suggests new consumer behavior shifts beyond the initial elasticity effects that occurred when pricing actions were initially taken. We have seen this dynamic since just after Easter and it has been broad-based across many categories and competitors. And importantly, where we see it, it is usually not a trade down to lower priced alternatives within the category. Rather, it’s an overall category slowdown. The question is, why now, given the steadiness we have seen from the consumer for 2 years? There are several possibilities at the root of this. One behavior shift we have heard about from consumers is just buying fewer items overall, more of a hunkering down than a trading down. There are several potential reasons as to why, including this summer being more travel intensive than last year. Overall, we view this dynamic as likely temporary behavior shift for consumers to stretch their budgets, but we have captured it as a near-term headwind in our outlook. Moving to the second headwind, while very limited, we have seen a few single ingredient brands become deflationary and we will make appropriate price adjustments to reflect that. Finally, the reduction of pension income and decline in contribution from Ardent Mills compared to its strong fiscal ‘23 performance will impact our earnings performance compared to the prior year. To maximize our competitiveness this year, we will continue to execute our playbook and invest in our business. And Slide 20 highlights one of our most important investments, our biggest innovation slate to-date. Our fiscal ‘24 innovation lineup features a compelling mix of convenient, value-added meals, restaurant experiences and exciting licenses. We expect our most significant new innovation to be in distribution by the end of Q1 and build throughout the rest of the year. These innovations, coupled with our consumer and customer support, will help us effectively navigate the dynamic marketplace conditions. Slide 21 outlines our financial guidance for fiscal ‘24. We expect organic net sales growth of approximately 1% over fiscal ‘23, adjusted operating margin of 16% to 16.5% and adjusted EPS between $2.70 to $2.75. As Dave will unpack further, our EPS guidance reflects our expectation for growth from the underlying business operations, which is being muted by the previously mentioned impacts from lower contribution from Ardent Mills and pension income. Overall, Conagra continues to benefit from strong brands, strong processes and strong people, which are all working together to drive sustainable growth and margin expansion. With that, I will pass the call over to Dave to cover the financials in more detail.

Operator:

[Operator Instructions] Our first question will come from Andrew Lazar with Barclays. Please go ahead with your question.

Sean Connolly:

Yes, sure. Good morning, Andrew, let me start with the big picture here, and then I’ll flip it to Dave to give you some more color. First, you’re 100% right. It is a transition year back to a more normal macro, and that’s probably going to be true of everybody. Second, yes, there will be a settling effect that occurs as the year unfolds. Dollars will come down, obviously, as pricing gets wrapped and volume trends will improve. Third, as you can imagine, that settling effect is not likely to be exactly linear from month to month. And the simple reason for that is there are time specific factors at play. So you’ve got supply chain disruptions in the year ago period of particular months, we’ve got the shifting consumer behavior dynamic. So I’d say, given all of this, 1% growth in organic net sales dollars for us for the full year is what we expect. That feels prudent given everything we see. And while we don’t guide on volumes, from a shape of the trend standpoint, we do expect trends to improve as the year unfolds. And Dave, you can unpack that a little bit more.

Andrew Lazar:

Thanks so much. Appreciate it.

Ken Goldman:

Hi, thank you. I wanted to ask just quickly about where your customer inventory levels are today and if that you see any abnormalities there. And part of the reason I’m asking is it seems even if you add back the 110 basis point impact in the medical, that maybe your shipments in Refrigerated & Frozen were a little bit less than what we saw in terms of measured channel takeaway. So just trying to get a sense of how you see that looking ahead.

Ken Goldman:

Great. I will pass it on. Thank you.

Pamela Kaufman:

Good morning.

Pamela Kaufman:

Can you talk about the pricing outlook from here? You pointed to some additional inflation in fiscal ‘24, although it’s much more modest compared to the last few years. Do you anticipate taking more pricing in fiscal ‘24 to offset those increases? And then you mentioned lowering prices in a few key categories. do you expect having to lower list prices across other product categories as well?

Dave Marberger:

I would just add, just reiterate, Q1, we will see the pricing wrap from obviously pricing we took in fiscal ‘23. And then we have communicated to customers, and there will be pricing on our tomato-based products effective early Q2. We’re seeing significant tomato inflation in fiscal ‘24.

Pamela Kaufman:

Great, thank you. And just on your guidance for 40 to 90 basis points of operating margin expansion. Can you unpack that a bit? What’s embedded into that through gross margin expansion versus SG&A reinvestment?

Pamela Kaufman:

Thank you.

David Palmer:

Thanks. I wanted to ask you a question on frozen and snacks. I mean, obviously, those are key long-term growth categories for Conagra and you’ve shown some good innovation energy there. It looks like the pipeline is strong. But those categories are not doing that great lately. Those categories have slowed and you’re losing share in some of them. I’m wondering if you could speak to perhaps a few of these, just tell us what your outlook is and what’s going on to your best diagnosis frozen entrees, frozen vegetables, maybe popcorn and because obviously, these are going to be key growth categories for you? Thanks so much.

David Palmer:

Thank you.

Cody Ross:

Good morning. Thank you for taking our questions. I just want to follow-up real quick on the Americold disruption. Thank you for the color there. Do you expect to recover those sales in fiscal ‘24? If so, can you detail when? And I’ll start and pause for a second before my next one.

Sean Connolly:

Just regarding that, Cody, is that we probably were out of stock in some stores when we couldn’t ship for a while. So I’m sure if the consumer was looking to buy one of our products, they couldn’t and they needed to make some purchase that in that shopping trip, they grab something else. We’re probably not going to get that back. But at this point, that consumption loss is water under the bridge.

Dave Marberger:

We don’t guide by quarter, Cody, but we – as I mentioned, Q1, we still will have the big impact from price mix.

Dave Marberger:

Yes. We have a lot of visibility, and you can you can assume that we have been through the details with Ardent. We review the business with them very closely. The level of profit we are guiding to is pretty consistent with where the business came in, in fiscal ‘22, right, so at that similar level. The thing that I have really come to appreciate personally is it’s such a great business. It’s a young business. It’s only 10-years-old. They have made investments in the business and they continue to grow. So, their core business continues to do really well, and then they have a trading aspect of the business, too. So, it’s a business that’s growing. It has a lot of competitive advantage in it. And so we are really bullish on the business. It’s a really great business.

Operator:

Our next question will come from Max Gumport with BNP Paribas. Please go ahead with your question.

Sean Connolly:

Well, when we look at this, Max, we pull the data across the entire food space by category, just to see if as dollars roll off and individual categories wrap price, you see that in sync improvement in volume trends. And you are really not seeing it. Even if you look at the scanner data that just came out for the period ending 7/1 you see Conagra and our five nearing peers are basically in the exact same place in terms of unit performance change versus a year ago. And we are probably all better served by looking at the unit volume change versus 2 years ago to get the noise out of the base period last summer. And when you do that, it’s really kind of uncanny, everybody’s volume is at an extremely tight band of down just over 6% in the last several periods. And as I pointed out, what we don’t see is much of a difference in terms of that volume change versus a year ago between the 13-week data and the past 4-week data. And that’s where I think people would have modeled and us included a bit of an improvement in that trend from 13-week to 4-week because when you roll off a price and you wrap the initial volume elasticity effect, you should see an improvement there. And that is exactly what I was pointing to when I talked about the shifting consumer behavior. And in terms of what’s behind it exactly, I think everybody is trying to figure it out. A lot of the data, to answer that question, is on a lagging basis, whether it’s diary data or channel data or things like that. And so we are studying it carefully. Importantly, it’s not a trade down within individual categories to lower-priced alternatives. It looks optically more like a cutting back and what I call the hunkering down. And one thing I know for sure, people aren’t eating less. So, it’s – they are making choices to manage their budget. As I suggested, likely to cover other expenses, and it’s just hard to imagine how that continues for an extended period of time unless people start eating less, which I haven’t seen happen.

Operator:

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

Sean Connolly:

Yes. Let me give you just without kind of tipping our hand on what we want to do competitively. This is always a hot topic is what’s the promotional environment, how is it going to change. In the simplest sense, Jason, we are okay with category building promotions that have a positive ROI. And I expect you will see more of those now that supply chains are servicing above 95%. Again, as I have mentioned in the past, for Conagra, we like certain holiday promotions because there is an incremental opportunity to drive volume there. And we haven’t really been at full speed on some of those. So, the most recent example was in the length in season where we usually do some very high ROI fish promotion because you sell a lot of fish on promotion during the Lenten season. We didn’t do that last year because we had a fire on our fish line. So, that’s an example of the kind of thing we can do more of and even some holiday type things with Birds Eye where demand was – had been very constrained because the supply chain issues previously. So, you are going to see competitors do more on that. And frankly, that’s a good thing. And I think investors should think it’s a good thing because it’s going to help drive healthy quality category volume. Now conversely, what we are not big fans of is deep discount, low ROI promotions that train the shopper to buy on deal. Conagra kind of a period of its history, where it did plenty of that stuff. We drained the swamp on all of that over the last 8 years, and we kind of got off that. We are one of the least promoted categories or companies in this space. And the reason for that is simple. It’s not how you grow categories. You grow categories with great innovation and quality display. To David Palmer’s point on Frozen, just look at Frozen from what it did for years when that was the playbook, it didn’t do anything. And then when we change the playbook around innovation, and marketing support, we drove real high-quality category growth and dollar realization. So, we don’t like those kinds of promotions. But in the current environment with the consumer that is cutting back and making other choices we probably are more likely to see some players resort to harder deals to stimulate units. We have not seen a lot of that to-date. So, that’s a good sign. But this isn’t our first rodeo, we wouldn’t be surprised to see that again. So, we monitor that carefully. And really, the only competitive detail, I will say is we will do what’s best for our business.

Sean Connolly:

I think that, Jason, the simplest way I think you can think about the year and the cadence and flow that I intend it before is you got dollars and you got volumes. And this year, they ought to move in different directions, right, because we are wrapping the pricing. And so you are just going to see, yes, you are going to have stronger dollars early as pricing carryover is in there, and then that will soften. And then as you wrap that, volume trends should improve. And we are not going to guide by quarter for a variety of reasons, one is we don’t ever do that. The other is as I mentioned to Andrew, it’s not going to be linear in terms of month-to-month, quarter-to-quarter in terms of how this thing flows. I know everybody would like it to be that way, but it wasn’t a linear in the base period when a lot of these factors that we are going to wrap occurred. And we have just got – we have got to get through the settling effect and continue to drive this business for the long-term and that’s what we will do.

Operator:

Our next question will come from Peter Galbo with Bank of America. Please go ahead with your question.

Sean Connolly:

Good morning.

Peter Galbo:

Dave, I was just trying to do a little bit of back of the envelope math, just on the dividend increase and the leverage target. Just can you help us out with free cash flow for this year? I know you have a CapEx guide, but just – it would seem like you would land a little bit below that $1.2 billion, but I just wanted to confirm that? Thanks.

Peter Galbo:

Got it. Thanks very much.

Steve Powers:

Hey, thanks. Good morning. Just a couple of – you talked about some of these items already, but just a couple of elaboration on how to think about ‘24 from a couple of perspectives on the top line. Number one, as we think about the wraparound pricing, net of those pockets of deflationary correction. Is there a way to quantify what that kind of net wraparound pricing is on a full year basis, number one. Number two, as you catch up on sort of supply chain disruptions in the aggregate over the years. Is that the way to quantify kind of what you are assuming in terms of that benefit for ‘24? And then lastly, on the shift in consumer behavior, the hunkering down – you talked about that as transitory and temporary, and I think that’s clear. The question I have is, are you assuming that it’s temporary and transitory within the year. So, i.e., there is improvement as we go forward, or are you assuming that the hunkering down that we are seeing of late is with you for the duration of ‘24 and the improvement really comes in ‘25 and beyond? Thanks.

Dave Marberger:

Yes. Steve, I would just say I know there is just such a burning desire for everybody to get quarterly information, but we are just not going to do that. I think in my answer to Andrew’s question, I really tried to go through pretty methodically kind of color around the guidance and some of the cadence items with the disruptions and kind of wrapping on pricing and everything else. So, I feel like there is enough there to put together a pretty good estimate.

Dave Marberger:

Yes. And I want to get because then you get into then you figure out volumes. And we just don’t – given the dynamics that Sean talked through, we just don’t want to get into getting very precise with exact volume and kind of the net impact on pricing. So, I think you know the drivers. You know the outcome that we are guiding to. So, we will keep it.

Dave Marberger:

Thanks.

Bryan Spillane:

Good morning guys. Peter actually asked part of my working capital questions. That was helpful. I guess a follow-on to that is just thinking longer term about deleveraging and the 3x by the end of fiscal ‘26. That’s probably a year behind what we thought. Is there anything that you see now impacting free cash flow conversion or maybe how you will need to manage the maturity pay-down that sort of takes you a little bit longer to get to 3x?

Bryan Spillane:

And then is there anything on the working capital side from an inventory management perspective, I guess that’s the key source of the slight tailwind you mentioned? Is there anything we should be thinking about with pacing of working capital through the year, just as an extension on the working capital comment before?

Bryan Spillane:

Got it. Thanks Dave.

Operator:

And our last question today will come from Matt Smith with Stifel. Please go ahead with your question.

Sean Connolly:

No, I think you are looking at what you are calling elasticity is in far too simplistic a manner. You can’t calculate in elasticity by looking at total volume change, looking at total price change and saying that’s your elasticity because there are many factors that go into what happens with volumes. So, not to get too technical here, but elasticity analytics measure a consumer demand response to a change in pricing at a brand level and in a time period following that pricing action. And those analyses have consistently, including recently shown consumer response to brand level pricing actions has been benign compared to historical norms. That remains true for Conagra. It remains true for our peer set. As I mentioned in my prepared remarks, our elasticities, they softened a little in Q4, but they remain benign versus historical norms, and they are directionally ahead of the peer groups. The behavior shift I referenced, are a bit of a different animal. It’s not a consumer response to a particular brand’s pricing action rather it is a set of coping tactics more broadly to the overall higher cost environment. These tactics include things like just buying less for a period of time, the stuff I talked about there. So, you may look at that and say, well, the net of them both is that volumes are lower, that’s true. But if you really want to get into analytically what consumers are judging the value of a specific brand and product, you got to get into the more granular analytics whole science. And if you want to understand just the more macro consumer attitude and how they are coping with the cumulative effect of higher prices, that is you are going to get to different conclusions.

Operator:

This concludes our question-and-answer session. I would like to turn the conference back over to Melissa Napier for any closing remarks.

Operator:

The conference has now concluded. Thank you very much for attending today’s presentation. You may now disconnect your lines.

Operator:

Good day, and welcome to the Conagra Brands Third Quarter 2023 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] Please note today's event is being recorded. I would now like to turn the conference over to Melissa Napier, Head of Investor Relations. Please go ahead.

Sean Connolly:

Thanks, Melissa. Good morning, everyone, and thank you for joining our third quarter fiscal '23 earnings call. Slide 5 outlines what we'd like you to take away from today's call. Our top priority coming into fiscal year 2023 was margin recovery following the unprecedented environment of the last two years with COVID and the inflation super cycle. To facilitate that margin recovery, our focus has been on inflation-justified pricing, supply chain improvements and the pruning of low-margin volume, a strategy we have successfully deployed before and refer to as value over volume. And three of the way into the year, our plan is working. In Q3, we delivered our second consecutive quarter of strong gross margin recovery, our pricing execution continued to be excellent while elasticities remain muted and consistent. Our volume performance again led our near-end peers versus our pre-pandemic baseline and our supply chain continued to improve with service levels exceeding 90%. This improvement allowed us to rebuild inventories to appropriate levels and support most of the strong demand from our customers, but there were exceptions as we experienced temporary manufacturing disruptions in certain categories that prevented us from being in stock. Despite this, we had strong results in the quarter overall, and we are updating our guidance for the year, including increasing our expectations for adjusted EPS growth and tightening the ranges for net sales growth and operating margins. With that overview, let's dive into the results on Slide 6. We delivered organic net sales of approximately $3.1 billion representing a 6.1% increase over the prior year period. Our adjusted gross margin of 28.1% represents a 409 basis point increase over the third quarter of last year, and our adjusted operating margin of 16.9% represents a 321 basis point increase over that same period. Adjusted EPS rose 31% from last year to $0.76 per share. The year-to-date results underscore the strength of our performance with growth across all four metrics including 8.1% organic net sales growth compared to the prior year period and the robust margin improvements we set out to achieve at the beginning of the year. Slide 7 shows the sustained recovery of our gross profit margin for a second consecutive quarter. Again, this margin recovery was our top priority for the year. Why? Because our gross margins fund our innovation program, and that innovation has been the centerpiece of our playbook and our success in driving sustained category growth in our two strategic focus areas frozen and snacks. This recovery, therefore, means you should continue to expect a relentless stream of provocative innovation and brand-building support as we go forward. In fact, looking at Slide 8, you can see that Conagra is one of the only companies in our peer set whose gross margins are essentially on par with pre-pandemic levels. Importantly, our brand strength and innovation pipeline position us well to maintain solid growth and healthy gross margin going forward. As I mentioned at the beginning of the call, our sales growth was primarily driven by inflation justified price increases coupled with ongoing muted elasticities. Slide 9 shows the relationship between elasticities and price increases. As you can see, elasticities have remained remarkably consistent and benign over the last eight quarters, even as we increased the price per unit of our products to help offset ongoing COGS inflation. And Slide 10 shows our elasticities are among the best in the industry. The modest elasticities, which are well below historic norms and have remained consistent in the face of our inflation justified price increases are a testament to the strength of our brands, the execution of our pricing strategy and the limited impact of private label competition. Turning to Slide 11. As you can see, at the total Conagra level, retail sales grew by 5.5% compared to the third quarter of last year and by 24.7% compared to three years ago. To put some context around the 5.5% number, three points. First, there was a fair amount of noise in the year-over-year comps for the peer set in Q3. Some companies had a very weak year ago period due to supply chain challenges while we had pockets of real strength in the year ago period due to Omicron and strong customer support for products that had recently come off allocation. Second, we continue to prune low-margin volume, most notably resuming our opportunistic value over volume strategy on select brands. This included eliminating 10 for 10 promotions on both value tier vegetables and canned products such as Chef Boyardee and Hunt's Tomatoes. Third, we experienced manufacturing disruptions in certain categories that led to out of stocks in the quarter. Most notably impacted where our canned meals and sides businesses, specifically canned pasta, canned beans, canned chili and canned meat, all part of our grocery portfolio. In Frozen, we had one noteworthy disruption as our fish business was on allocation, which led to out of stocks during the peak Lenten season. This was due to a fire on our fish frying line as reported in our second quarter 10-Q. While these discrete issues suppressed our volume in Q3, the root causes have been largely resolved, and we expect volumes to rebound sequentially from here. Importantly, when you take the noise out of the short-term view and compare our growth versus the stable baseline of three years ago, you see our performance has been strong on both the top and bottom lines. Dampening the results versus this time period normalizes for the volatility across demand, inflation and supply chain throughout the pandemic and demonstrates that Conagra is a top performer among our peer set. Slide 12 details our top line performance on a three-year basis as measured over the prior 52 weeks and compared to our near-end peer group who are footnoted in alphabetical order at the bottom of the slide. Among this group, Conagra continued to rank second in dollar sales growth and first in unit sales performance just as we did in Q2. This remains true when you look at the same chart isolating the third quarter. And post-Q3, the syndicated scanner data has shown our unit sales trends improving. In fact, in the four-week period ending 3/25 are units ranked in the middle of our near-end peer group on a two-year CAGR basis. Our continued top-tier pricing execution and volume performance is made possible by the strength of our brands and the superior relative value that our products provide to the consumer. Let's take a look at our top line performance during the third quarter by retail domain, starting with Frozen on Slide 14. We maintained our momentum, delivering strong retail sales growth on both a one- and three-year basis, improving 4% and 23%, respectively. This growth was driven by a number of our key categories, including breakfast sausages and single-serve meals. It's worth noting that this performance comes on top of very strong performance for our frozen domain in the year ago period when the Omicron outbreak influenced consumers' in-home eating behavior. For example, single-serve deals grew 12% last year, creating a two-year stack of 18% in that category. Turning to Snacks on Slide 15. You can see a similar story. We drove a 7% increase in retail sales compared to the third quarter of fiscal '22 and a 39% increase over the third quarter of fiscal '20. The continued momentum in this domain is broad-based across a number of categories. Compared to last year, seeds was up over 22% and baking mixes and microwave popcorn both rose more than 10%. Meat snacks grew 6% year-over-year, building on top of the 22% growth in the year ago quarter, a period when meat snacks were coming off allocation and our customers were eager to fulfill demand for our leading products in this category. We also continued to drive growth in our highly relevant staples portfolio despite the discrete supply chain challenges in some of our canned meals and sides businesses that I noted earlier. Our staples portfolio increased retail sales 7% compared to the third quarter of last year and 20% compared to the same period three years ago. This growth was led by WIP toppings, which grew more than 18% on a year-over-year basis. Turning to Slide 17. While we experienced transitory supply chain friction, we also continue to make progress on our supply chain initiatives during the third quarter, which benefited from continued headway on our ongoing productivity initiatives, which remain on track to achieve the targets we outlined at our most recent Investor Day, and more moderate increases in COGS as anticipated. These improvements to our supply chain led to improvements in the service we provide our customers. While we're making good progress in supply chain, it's not back to normal and industry-wide challenges persist. However, we're recovering as expected, and we see more room for improvement as we advance our productivity initiatives, and the macro environment continues to normalize. Overall, we're confident we will deliver on our top line and margin guidance for the year, and we're raising our bottom line estimates. With that in mind, we are updating our guidance to reflect that we now expect organic net sales growth of 7% to 7.5%. We expect adjusted operating margin of 15.5% to 15.6%, and we're increasing our expectations for adjusted EPS growth to range from $2.70 to $2.75. Before I hand the call over to Dave, I want to reiterate our confidence in the path ahead. We have successfully executed pricing actions in response to inflation, that inflation is moderating, and elasticities remain remarkably consistent and benign. We're moving past discrete supply chain disruptions and continue to make progress on our margin expansion initiatives such as productivity and value over volume, all within an environment that is normalizing. And as we look at more recent scanner data, we are already seeing improvements in sales trends and we expect that momentum to accelerate through the end of the fiscal year. Overall, Conagra continues to benefit from strong brands, strong processes and strong people, which are all working together to drive sustainable growth and margin expansion. With that, I'll pass the call over to Dave to cover the financials from the quarter in more detail.

Operator:

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Today's first question comes from Andrew Lazar with Barclays. Please go ahead.

Sean Connolly:

As I've said on these calls many times before, navigating these inflation cycles is pretty mechanical. You get hit with inflation, you take price, you don't reflect it right away, and therefore, you experience a lag, which compresses margins, but then pricing catches up and margins recover as you saw us start to do really materially in Q2. Then when you wrap these actions, dollar growth comes down and unit performance improves, both because elasticities wane and because you wrap the unit impact. So that stuff is all mechanical, and it's all predictable. I think what you're getting at is the big question then becomes what comes next. And the goal is obviously sustained growth. And the debate that you're poking at here is, well, what will the tactic be? And to me, that answer is crystal clear, especially for us, simply by looking at how we have pursued growth since I have been with Conagra. The answer in a word is innovation. Just look at our frozen performance it was 100% about innovation, premiumization, but ironically, also value over volume philosophy around actually eliminating low-quality promotion. So the question then becomes, why would Conagra suddenly or anybody else for that matter, suddenly believe that the opposite approach is now a smart growth strategy? That doesn't make a lot of sense to me. As far as, as Q4 goes, first, listen, as I said in my opening remarks, I feel very good about where we sit and our plan is working. Our margin recovery is in place, our elasticities remain benign and consistent, supply chain is improving, innovation is hitting the market, top line trends are improving. So in terms of the implied Q4 guide, we think it's prudent. Supply chain is improving but it's not all the way back, and our position all year has been to plan conservatively in this regard. And as far as unit volume goes, I think we gave you a lot of color on that already. But for those that are more inclined to focus on short-term trends, our eight-year unit CAGR in the most recent four-week period scanner data, which is ending 3 25 was right smack in the middle of our peer set and at levels that are entirely predictable as our muted elasticities kind of show you. So to be above that, either elasticities would have to be nonexistent or you would have to be shipping ahead of consumption. And the former is unrealistic, and the latter is not part of our playbook.

Dave Marberger:

Yes, Andrew. As we said in CAGNY, we expected a 50 basis point impact on Q3, and that's exactly what it did. It impacted us 50 basis points on sales, lost sales. We also had additional impact of around $8 million in kind of fees and just cost to bring the product back. That actually hits net sales and gross margin. So it's really both of those pieces. That did hit in Q3. Just to finish that point, I did say that, that would fully recover in Q4. One thing that has changed is we're really ramping up the replenishment on the shelf. So, we're not going to see that full replenishment of the 50 basis points we lost in Q3 come back in Q4. That's going to drift into the beginning of fiscal '24.

Ken Goldman:

I just wanted to ask a little bit about the guidance for the top line, just trimmed at the top end very slightly, not a huge deal, but just trying to get a little bit deeper into the reasons behind that. Is it mainly just the manufacturing issues that you had? Or are there other factors that we should think about as we look at that?

Dave Marberger:

Yes. I mean, Sean hit it. Just to give you a little bit more specifics, as I just mentioned on the previous question, we do not expect now to see the bounce back from the Armour recall in Q4, that is going to drift into next year. That was 50 basis points that impacted Q3. And then category, Sean talked about, chilies, beans and then the impact of the frozen fish. These dynamics, we're working through that. It's improving, but we're still on allocation in some of those specific categories and actually SKUs. And so that is impacting Q4 as well on the top line. If you just think about it this way, if you look at the previous guidance, which was 7% to 8% for the full year, that implies a midpoint for Q4 of about 5.8% with the revised guidance for the year, that implies a midpoint of about 4.8%. So, that's about a 100 basis points of a decline in the Armour and then these other allocation issues with the brands I just mentioned are pretty much why.

Dave Marberger:

No, Ken. Just we're still on track with the commitments we made at our Investor Day on the $1 billion over three years. A lot of it is just normal timing. In this environment, we're still working through where things just take longer. If you're ordering certain materials and things that you need to execute these CapEx projects, they're just taking a little bit more time. So -- but it's not at all changing kind of the opportunities we see and the projects that we're going to target.

Pamela Kaufman:

So just a question on the Q4 guidance. So at the midpoint, your updated full year guidance for operating margins, implies Q4 operating margins decline year-over-year, but you've seen about 180 basis points of operating margin expansion year-to-date. So what's driving that more cautious Q4 margin outlook?

Pamela Kaufman:

Got it. And then just on gross margins, you've had very strong gross margin expansion year-to-date. How should we think about gross margins in Q4 and then into next year? Can gross margins continue to move above this 28% level? And how are you thinking about the contribution from your productivity investments?

Operator:

Thank you. And our next question today comes from David Palmer of Evercore ISI. Please go ahead.

Sean Connolly:

Well, David, we're not obviously going to get into next year's guidance today. But I'll come back to the mechanical point that I made at the beginning of the Q&A section here, we're going to go into this phase here where we start getting into Q1 and then Q2 and then Q3 next year where you really start to wrap on the pricing, and you're going to see dollars come down, but you'll see the unit declines that were tied to multiple waves of pricing tied to the elasticity start to rebound. So that's going to be a shift. That's going to be in everybody's next fiscal year, and it's going to be different for every company because every company started pricing -- so you're going to see that shift. And I think everybody's got to start to model for that and prepare for that because then when you get through that, you're going to be back to pretty much everybody's long-term algorithm. And for us is sales, that's low single digits. And so that's what we expect. And then we pursue that a variety of ways, the bulk of which is through innovation. Dave, anything else you'd add to that?

David Palmer:

I wanted to ask maybe one more, going to see, if you could comment a bit more on the inflation. You said you're expecting inflation for all of calendar '23. If that were up low single digits then you would be talking about a flat second half of calendar '23, meaning your first half of fiscal '24. So I'm wondering what type of inflation are you thinking about for -- as you enter into fiscal '24?

Operator:

Thank you. And our next question today comes from Nik Modi with RBC Capital Markets. Please go ahead.

Sean Connolly:

Sure, Nik. Let's talk SNAP first. So out of the 50 states, we've got 18 rolled off of these -- they've sunset these emergency allotments previously and then you got 32 that just rolled off recently. So what do we know so far? What we know is that what we saw in terms of impact to our portfolio from the '18 was no material impact. And we've been tracking that for some time. I've mentioned this on calls before and we just not have not seen any material impact there. And I will give you, as I did last quarter, one perspective on why I think that's the case for our portfolio is we already do have really great value offerings within the Conagra portfolio. So if you've got more limited SNAP allotments it would seem logical to me that you would use them on the things that are inherently harder to afford. And our products are inherently easier to afford and that may explain why we've seen such modest impact. But you've got 32 states that have just recently come off. It's just -- it's brand-new data. We're going to -- we monitor this over an 8-, 10-week period, so we can see if there's any movement there, and we will do just that. But based on what we've seen in the '18 thus far, I just don't have a good rationale for saying that, that would be any different of a result. With respect to digital, I would say you used the word promotion. I think what we do is digital marketing. I mean we do literally do some digital promotion with our customers, where they shop online, things like that. And we invest in search to make sure people find our products. But a lot of what we do to drive buzz on our brands is what I talked about at CAGNY, which is really finding real people who use our brands to tell their story of how our brands fit in their life in their own words very authentically. We call those people irrefutable advocates. They live on TikTok, in Insta, things like that, and they -- we build relationships with them, and they tell our story. And -- it's incredibly efficient, which is why you see our A&P line look lighter than you see in companies that use traditional tools because it's far more efficient than traditional in-line media, which is not only expensive, but it's heavily ineffective. So we've done that. I just saw some new stuff for my team yesterday that's coming on a couple of our brands that I'm very excited about. And we're just going to continue -- this is an evolution in terms of this digital marketing and the irrefutable advocates. We love it. We think it works for us, and we're going to continue to drive it hard.

Sean Connolly:

We're -- frankly, we're there on some categories right now. So we gave you the north of 90% number, but this is a pretty vast portfolio, as you know. And so the way you should interpret that is that, that 90-ish number at the portfolio level has embedded in it in some categories and brands that are already back to which is best-in-class where we've already been. Equally, we have had manufacturing disruptions that we talked about quite a bit today that we're still on allocation or we're still replenishing stock on the shelf, and we have to do that before it's even in a scan. So you put those all together and you get that low 90 service level, the transitory stuff with the manufacturing disruptions we've got it contained, we're ramping it up. And so that average that we quoted today should improve from here. Dave, do you want to...

Operator:

Thank you. And our next question comes from Peter Galbo with Bank of America. Please go ahead.

Sean Connolly:

Well, what I'm really getting at there is relative to Q3. I mean, we -- as I pointed out in my prepared remarks, we had -- there's a lot of noise in the year-on-year quarterly data in Q3, both for us and peers. And we had some of the supply chain things hit us in Q3. So as we wrap some -- get past some of the unusual comps. We had some strong comps on big businesses in Q3. We move into Q4. The profile of the comps change on some of our big businesses, plus you'll see we get back in stock on some of these canned categories where we've had canned fish, where we've had some limited ability supply and those conspire to show improving consumption trends. So I referenced the four-week Nielsen's ending 3 25. Today, our units and our dollars, you've seen improvements, and that's a four-week number, right? So the fact that the staggering four-week numbers that come out every two weeks improve, are kind of showing you embedded in that is weekly data that is improving week after week after week. And that's really what I was referring to.

Dave Marberger:

Yes, absolutely. All of the cash flow from operations impact that you're talking about is from us building back our inventory levels. So, you'll see on our cash flow statement the increase in working capital related to inventory. And that gets back to the point I just made, where we are back to healthy levels with our inventory, great safety stock levels. So, we feel really good going forward. So as we get into especially Q1 of fiscal '24, we should be in an opportunity where you can start to see inventory as more of a tailwind versus a headwind. And it's just been investment to build back our inventories to the safety stock levels that we want to be able to execute our plan.

Alexia Howard:

Can I, first of all, ask about the surge in the foodservice side of things. It's obviously been strong for a while. Are there particular channels in there that are doing very well? I'm just wondering about the overall recovery on that side of the business. And then I have a follow-up.

Alexia Howard:

Got it. And then as a follow-up, I'm just curious about the market share trends in Frozen. It looks as though things are down a bit in that part of the business. I'm wondering, if it's supply constraints? And how does that recover over time? Is that a faster pace of innovation as we roll into 2024 or marketing? Or would pricing actions be needed on or promotional activity be needed on that side of the business?

Operator:

Thank you. And our next question today comes from Jason English for Goldman Sachs. Please go ahead.

Dave Marberger:

Jason, it's a difficult question to answer. Ardent Mills is a great business. It's a newer business. It's been growing, and it really has two key components of its business. It's core milling and blending business where it creates great flours that it sells to customers and then it has more of a trading type business. And so that core business has continued to grow, the margins have expanded. They have great mix. They have great strategies to really drive the margins on that business and the sales. And they've also benefited from this environment and the volatility on their trading side of the business. And so the question comes down to what's that trading piece? I think that the center line of performance for Ardent Mills will continue to go up. It's just quarter-to-quarter, there can be more volatility just given the nature of the business.

Dave Marberger:

No, no, not at this point.

Sean Connolly:

Yes. Jason, I'll come back to kind of the things that I just shared with Alexia. If you're looking at year-on-year decel, you have to consider what was in the last year. So you got to look at it at a brand level, you got to pull out the Omicron stuff. It's probably even better to look at it on a two-year stack basis because you had Omicron strain in single-serve meals, you got weakness this year in fish. And then the bigger one is the right time to get off of the 10 for 10 promotions in Birds Eye is now because we're in a pricing cycle. And basically, the way to think about it is in an inflationary environment, you don't want to stick your promotion practices, especially these high-velocity promotions that are not very profitable. You don't want to stick to what where you were before an inflation super cycle. You have to move off that. And frankly, while these inflation cycles are painful for manufacturers to go through to a degree, sometimes they're actually quite good for you because they become a catalyst for getting your pricing right and getting off of legacy promotions that customers are very attached to that are low profitability. So just the timing is right for us to go further on that and on the business as I cited some of it in Frozen and some of it in our can business.

Robert Dickerson:

Just one question for me. Just to stick on the Refrigerated & Frozen line of questioning. So Sean, profitability margin in that segment was clearly the highest, I think, we've ever seen and clearly, a huge step up year-over-year, a huge step up relative to Q1 of this year. It sounds like maybe there's some need over time to kind of increasingly invest in that side of the business. But at the same time, you're almost sitting at 21% op margin. So as we think forward, whether it's Q4 or next year or five years forward, would you say now you've kind of reached kind of a point of profitability on that business that maybe you would have expected coming out of the Pinnacle acquisition? And is that level of profitability sustainable or at least within some rational range factor again the volatility of the supply chain, et cetera. That's it.

Robert Dickerson:

And just to clarify, obviously realized you're not guiding for next fiscal year, but all of us have to put something in our model. So I'm just curious, if I look at that percent margin operating in Q3, it doesn't sound -- what you're saying is there's anything necessarily in there that was one-off that could have inflated that in a given quarter, that's basically kind of what you were managing toward that hopefully would be somewhat sustainable.

Operator:

Thank you. And ladies and gentlemen, this concludes today's question-and-answer session. I'd like to turn the conference back over to Melissa Napier for any closing remarks.

Operator:

Thank you. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day.

Operator:

Good morning, everyone and welcome to the Conagra Brands Second Quarter and First Half Fiscal 2023 Earnings Conference Call. [Operator Instructions] Please also note today’s event is being recorded. At this time, I’d like to turn the floor over to Melissa Napier, Senior Vice President of Investor Relations. Ma’am, please go ahead.

Sean Connolly:

Thanks, Melissa. Good morning, everyone. I hope you all are off to a happy and healthy start to the New Year. Thank you for joining our second quarter fiscal ‘23 earnings call. I’d like to start by covering some key points for the quarter on Slide 5. Despite our most recent wave of inflation-justified pricing, consumer demand for our products in the second quarter was strong as elasticities remained muted and well below historical norms. The ongoing durability of demand is a testament to the strength of our portfolio and demonstrates how the Conagra Way playbook has positioned our brands to continue to resonate with consumers even in an inflationary environment. The successful execution of our playbook is clear in our second quarter results. We drove a significant increase in our top line. We continue to have solid share performance across the portfolio, especially in our key frozen and snacks domains and we made excellent progress recovering both gross and operating margin. Operationally, we made good headway on our supply chain and productivity initiatives. While we are pleased with what we’ve accomplished to-date, our supply chain is not yet fully normalized. That will improve. And overall, we see a long runway of opportunity ahead. We also continue to prioritize strengthening our balance sheet while making strategic investments in our business and returning capital to shareholders. In short, Conagra had a strong quarter across the board. Given our positive results during the first half of fiscal ‘23, we have increased our expectations for the year, raising our full year guidance across all metrics, including organic net sales growth, adjusted operating margin and adjusted earnings per share. With that overview, let’s dive into the results on Slide 6. As you can see, we delivered organic net sales of more than $3.3 billion, representing an 8.6% increase over the prior year period. Our adjusted gross margin of 28.2% represents a 310 basis point increase over the second quarter of last year. And our adjusted operating margin of 17% represents a 237 basis point increase over that same period. Adjusted EPS rose 26.6% from last year to $0.81 per share. Slide 7 goes into more detail on our sales results on a 1 and 3-year basis. Given the timing when the pandemic and inflation began to impact our industry, we believe that the 3-year comparison provides important context to highlight the underlying strength of our performance. At the total Conagra level, we grew retail sales more than 10% on a 1-year basis and more than 26% on a 3-year basis. We are pleased with our solid share performance, including how our strong brands allowed us to largely maintain total company market share while taking several inflation-justified pricing actions, particularly during the past year. Notably, we have continued to drive robust share gains in key frozen and snacks strategic domains on both a 1 and 3-year basis. I want to spend a minute putting our sales growth in context. Slide 8 shows our performance over the past 3 years compared to our near-in peer group, including Campbell’s, General Mills, Kellogg’s, Kraft Heinz and Smucker’s. We have a great deal of respect for our peers, all of which have been navigating the same macro demand and inflation dynamics over the past 3 years. Among this group, Conagra ranked second in dollar sales growth and first in unit sales performance. It’s important to keep in mind that all of these peers have taken pricing actions to help offset inflation and Conagra is in the middle of the peer set in terms of the price per unit increases in this time period. It’s clear that consumers continue to appreciate the quality, convenience and superior relative value that our strong brands have to offer, which has enabled Conagra to perform extremely well on both an absolute and relative basis. Let’s take a closer look at our top line performance during the second quarter by retail domain, starting with Frozen on Slide 9. We maintained our momentum, delivering strong retail sales growth on both a 1 and 3-year basis improving 9% and 26%, respectively. This growth was driven by a number of our key categories, including breakfast sausages and single-serve meals, which both experienced double-digit retail sales growth compared to last year. Turning to Snacks on Slide 10, you can see a similar story. We drove a 14% increase in retail sales compared to the second quarter of fiscal ‘22 and a 41% increase over the second quarter of fiscal ‘20. The continued momentum of our snacks business is broad-based across a number of categories. Compared to last year, microwave popcorn was up 21%, seeds was up 18%, and meat snacks and hot cocoa both rose more than 14%. We also accelerated growth in our highly relevant staples portfolio, increasing retail sales 10% this quarter compared to the second quarter of last year and 22% compared to the same period 3 years ago. This growth was led by pickles and whipped toppings which grew more than 11% and 10% respectively on a year-over-year basis. As I have mentioned, our strong top line performance was primarily driven by inflation-justified price increases, coupled with ongoing muted elasticities. Slide 12 details the relationship between pricing and volume over time. As you would expect, increased pricing does have an impact on volume, both for Conagra and the total industry. However, you can see how elasticities have remained steady even as we have continued to increase the price per unit of our products to help offset ongoing COGS inflation. And as we detailed a few minutes ago, Conagra’s 3-year CAGR on unit sales performance leads its near-in peer group. The relatively modest elasticities, both compared to historic norms and our peers are a testament to the strength of our brand. Now that we have unpacked the relationship between price and volume and the resulting net sales, I’d like to spend a few minutes on the relationship between net sales and COGS and the resulting impact on our margin performance on Slide 13. Generally speaking, when a business has strong brands, strong processes and strong people, as Conagra does, it is able to navigate inflationary cycles in discrete, predictable phases. As we have detailed for some time, when unprecedented inflation increased our cost of goods, we took strategic pricing actions to help offset the rising costs. However, there was an inherent lag between when we implemented pricing actions and when we realized the benefits of those actions in our top line results. This pricing lag resulted in temporary margin compression. Furthermore, continued inflation extended this period of margin compression as new inflation-justified pricing actions led to additional lag effects. That is the dynamic we have experienced over the last several quarters as we continue to play catch-up by increasing price incrementally to account for the extraordinary extended rise in inflation. At the end of the first quarter, we reached a significant inflection point in the relationship between net sales and COGS, marking the end of the temporary margin compression phase in the beginning of the margin recovery phase. As you can see in the chart, inflation has begun to moderate in certain areas enabling our inflation-justified pricing actions to catch up to the rising costs. Slide 14 shows the impact this inflection has had on our gross margin results as continuously rising inflation weighed on our COGS throughout fiscal ‘22 and into the first quarter of fiscal ‘23, our margins were compressed. Now predictably, as pricing has finally caught up to COGS inflation, you can see the recovery of our gross margin to be more in line with pre-pandemic levels. While our gross margin can vary quarter-to-quarter due to a range of internal and external factors, the strategic pricing actions we have successfully executed, combined with moderating inflation and our strong brands, position us well to recover and maintain a healthy gross margin going forward. Of course, inflation remains elevated in many areas and we continue to closely monitor our costs, just as we have in the past. We will continue to take appropriate inflation-justified pricing actions as needed. Another key driver of our margin recovery is our supply chain performance shown on Slide 15. This is due to a combination of macro factors as well as the strategic initiatives we are executing to improve our operations. We made good progress on our supply chain during the second quarter, which benefited from improvements in the service we provided to our customers, continued headway on our ongoing productivity initiatives, which remain on track to achieve the targets we outlined at our most recent Investor Day, more moderate increases in commodity prices and improved inventory levels due to an increase in the availability of materials. The takeaway here is that we are pleased with the progress we are making, but industry-wide challenges do persist. There is more room for improvement as we advance our productivity initiatives and the macro environment continues to normalize. As a result of our strong performance this quarter and the first half of fiscal year 2023, we are raising our full year guidance for all metrics detailed here on Slide 16. We now expect organic net sales to grow between 7% and 8% compared to fiscal ‘22; adjusted operating margin to be between 15.3% and 15.6%; and full year adjusted EPS growth of 10% to 14% or $2.60 to $2.70 per share. Dave will provide more detail on the underlying assumptions behind these expectations. Before I turn the mic over, I want to summarize what I have covered today. Our strong performance during the first half of fiscal ‘23 was primarily driven by a combination of inflation-justified pricing actions and muted elasticities, reflecting the strength of our brands. Consumers continue to recognize the value our brands provide despite the higher prices, allowing us to gain share in key domains such as frozen and snacks. Our top line growth was coupled with encouraging progress in a number of different areas of our supply chain that enabled us to operate more efficiently. Together, these factors as well as improvement in the inflationary environment helped us recover our margins to near pre-pandemic levels. As a result of our strong performance, we are raising our full year fiscal ‘23 guidance for organic net sales, adjusted operating margin and adjusted EPS. Finally, we are looking forward to seeing everyone who can make it to CAGNY this year. We plan to host our annual kickoff dinner on February 20 and are scheduled to present the following morning. We will follow-up with more details on the event as we get closer. With that, I will pass the call over to Dave to cover the financials from the quarter in more detail.

Operator:

[Operator Instructions] Our first question today comes from Andrew Lazar from Barclays. Please go ahead with your question.

Sean Connolly:

Sure, Andrew. Yes, everything we’re seeing is very consistent directionally with what we’ve expected precisely as things come in by month, by quarter, there is a little bit of variability there. But I’d say, overall, I know these inflation super cycles are a complicated thing for our investors to unpack, which is why we always try to be instructive as to the predictable and mechanical way these cycles tend to unfold, if you have three things in place

Andrew Lazar:

Really helpful. Thanks so much.

Cody Ross:

Good morning. Thank you for taking our question. Two questions here. First one, you put up a slide showing how your unit sales on a 3-year CAGR basis are performing much better than your peers. What do you attribute that to?

Cody Ross:

Great. Thank you. And then I just want to follow up on gross margin here. You revised your inflation outlook down to about 10% from low teens, implying approximately 8% inflation in the second half. What gives you the confidence to lower your inflation outlook? Where are you seeing the most easing? Thank you.

Cody Ross:

Great. Thank you. I will pass it on.

Ken Goldman:

Hi, thank you. Good morning. I wanted to dig in a little bit more toward the – or on the operating margin guidance. And thank you for the help in terms of how to think about the gross margin in the back half, Dave. It seems just back of the envelope math that to get to where your operating margin will be sort of that mid-15s for the year. And given that you’re talking roughly about a 300 basis point increase continually in the gross margin that you’re going to have to have a step up in SG&A as a percentage of sales. And I’m just – a, is my back of the envelope math correct there? And b, what would cause that step-up as we think about going into the back half of the year? I assume, Sean, you’re not going to advertise a lot more given your history. I’m just trying to get a sense of how to think about that?

Sean Connolly:

Yes, the only – yes, on that, I would say, we do spend A&P, Ken. So we don’t do a lot of in-line TV because we don’t think it’s particularly effective. But we do spend A&P, and it does vary quarter-to-quarter depending upon the programs that we’ve got. As you know, it’s a lot of influencer type spend, digital spend, things like that. And so as we’ve got new innovations unfolding, we do back them based on the windows where we’ve got products coming to market. So there – you will see movements quarter-to-quarter in our A&P line, which syncs up – usually syncs up with the activity we’ve got planned in the marketplace. And frankly, when we got business momentum like this, we want – and we’ve got really exciting new innovation coming out that we will share at CAGNY. We do want to make sure we get those new products off to a good start with good awareness and good trial.

Dave Marberger:

Year-on-year change, Ken.

Dave Marberger:

Yes.

Alexia Howard:

Great. Good morning, everyone.

Alexia Howard:

So two questions. The first one is a bit more of a take a step back. In my conversations with a lot of investors, people are commenting on the fact that you’re not getting – really getting a lot of valuation credit to your faster-growing Snacks business. And they also want you to get the leverage down, which I think you commented on in the prepared remarks. Surely one solution might be to dispose of some of your more mature categories. I’m just wondering how you’re thinking about some of those slower growth businesses, the non-snack areas and whether you might think of that being a way into addressing some of those concerns more quickly? And then I have a follow-up.

Alexia Howard:

Great. Thank you very much. And just a quick follow-up, promotional activity, are you seeing any shift in what retailers are expecting or is that all still very much business as usual at the moment, even though I think it’s a lot lower than it was before the pandemic?

Alexia Howard:

Great. Thank you very much. I will pass it on.

David Palmer:

Thanks. Thanks guys. Slide 12, the one where you showed the price lag phase being followed by the margin recovery phase. I am wondering, how you think about the shape and the length of this recovery phase. It was five quarters or six quarters long on the lag phase. Do you see it playing out like a similar lines for the recovery phase?

Dave Marberger:

Yes, just to build on that. And David, back to something I said earlier, for H2 gross margins, we expect that delta of approximately 300 basis points to hold. So, that – translated to that chart, that just means that, that relationship for the second half will continue, right, where the sales per unit and the price per unit is above the cost because we are – we have already incurred that inflation. Our 3-year inflation number, when you use the 10% estimate for this year, is 33%. So, we have significant inflation that’s in our base. We are now catching up to that. So, that drives that margin improvement for the second half.

Sean Connolly:

Yes. Let’s talk about it. First, no door slam, okay, so what we are seeing right now is very consistent with what we expect. And it was an excellent quarter. And things are unfolding the way we would expect. With respect to Grocery & Snacks volumes, Grocery & Snacks volumes came in right where they should have come in, given the magnitude of pricing we have taken in the first half of this year. Now, in terms of what you are observing, good eye, the shipment numbers look about 2 points worse than what you might expect given the elasticities that we have talked about. That does not reflect a Q2 phenomenon. That reflects strong shipments in this segment in Q2 a year ago. Why was that, because that’s precisely when we came off allocation on a handful of brands in G&S. And our customers, as you can imagine, these are good strong brands, we are quite eager to replenish their inventories. So, that’s – when I look at that number, I see about 2 points of what might look like an excess drop on in volumes. It’s entirely about the year ago period, nothing about right now. So net-net, what keeps us up at night, it’s the stuff that we can’t predict. It’s like a return of some kind of new COVID strain or more unexpected friction and supply chain because you can’t get materials from suppliers, things like that. As we have said, we are making good progress in supply chain, but it’s not perfect yet. We still have more junior people. Our labor situations got significantly better, but we have got newer employees who are still ramping up the learning curve. These are the things that drive the volatility. And it’s led us to have our year-to-go outlook stay in a range, I would describe as prudent given that we are making progress. But it’s not all the way back to right. Dave, you want to add to that?

Sean Connolly:

Yes. Before we go to the next question, I want to come back to volumes for a second, because this is a really important one for folks to get right as you think about assessing kind of where we are, is it a good guy or a bad guy. To accurately assess volume performance across a cohort of companies, you have to look at total scanned volume change over time for the whole peer set. And as you saw on Slide 8, Conagra ranks number one in our peer group in terms of volume and resiliency over the past 3 years, which is, obviously, a testament to our brand health. And as I have said in my prepared remarks, there is always some elasticity when you price as much as we have cumulatively, but those elasticities have in fact been relatively benign and remarkably consistent and they have been lower than our peers, lower. That’s the data. So – but in any given quarter and in any good segment, frankly, you may see more or less volume impact based on the recency of the pricing actions that you take. And as you know, we took a lot in Q1 and in Q2. But overall, we are in very good shape in the absolute and versus others. And don’t forget, over – as we have said many times, over time, these elasticities tend to wane as consumers adapt.

Operator:

Our next question comes from Max Gumport from BNP. Please go ahead with your question.

Sean Connolly:

So, Max, I think it’s pretty simple. The first big trade down is the trade down from away-from-home to at-home. If you are looking at consumers over $100,000 a year income, you are still seeing they are going out to eat. But below that threshold, it’s not where it was pre-pandemic. So, one of the reasons – a big one of the reasons why you see muted elasticities across the sector on average is because there has been – there was a trade down into at-home eating during COVID. And that has not fully reverted to away-from-home because the prices away-from-home have gone up so high that it’s a better value to continue to eat in home as people are trying to stretch their household balance sheet. And we are the beneficiary of that. And it shows up in muted elasticities. When you double-click down from there, within grocery, what you see is there is trade down taking effect. And if you look at private label by category, you can see that in certain categories, they are making progress. Those categories almost, always tend to be categories that are more highly commoditized. So, things like in food, like cooking oil. And outside of food, things like ibuprofen. When a consumer knows it’s a single ingredient product and one is a lot cheaper than the other, the switching costs are lower. It’s easier to make the trade down. So, that is happening. The good news for us is we don’t have a lot of those categories. We have had them. We exited them. And now our private label interaction is lower than average in the space. And on a strategically important stuff that’s really vital to our go-forward cash flow, things like frozen, our snacks categories, we have got very strong relative market shares, very little private label alternative, and that’s one of the reasons we continue to thrive.

Dave Marberger:

Yes. Max, that’s all timing. We are still prioritizing investing in capacity and automation in our supply chain, which we have talked about. So, that’s all just timing for the fiscal year.

Pamela Kaufman:

Hi. Good morning.

Pamela Kaufman:

Just had a follow-up to your last response, in general, it seems like the softer macro backdrop this year creates a favorable environment for your business and for food-at-home consumption. So, as consumers look for savings, can you just talk about how your categories and how frozen dinners have performed in prior recessions? And how are you leaning into this opportunity and highlighting the value to consumers?

Pamela Kaufman:

Great. And just on the supply chain, it sounds like it’s getting better, but there is still room for improvement. Can you talk about where you still see supply chain challenges, and where there is room for improvement, where are your service levels today versus targeted, and how much gross margin recovery can those drive on top of the improvement that you saw this quarter?

Dave Marberger:

Yes. I would just add to your question about margins. So, if you look at the Q2 bridge that we have in the deck, the operating margin bridge, you see the productivity and other cost of goods sold at plus 1.3% of margin points. And once we get to a more normalized supply chain operation, we would expect that to improve. We are not going to give specific numbers, but that’s where you would see it in the margins.

Operator:

And our next question comes from Robert Moskow from Credit Suisse. Please go ahead with your question.

Sean Connolly:

Alright. Let me try to hit each of those. And Dave, if I miss anything, jump in. With respect to dollar sales and the year-on-year growth, putting up 9%, whatever. That’s not just as a reminder. That’s not our long-term algorithm, right. That is a function of kind of where we are in this inflation super cycle. So, that’s not going to be the go-forward run rate on sales forever and that goes without saying. In terms of the pricing that we have taken, we took price in early Q1. We took – that’s pretty meaningful. We took price again in early Q2 that was pretty meaningful. And then we are taking price again, I would say, more surgically in January, call it, for Q3. That’s kind of what’s been negotiated with our customers. That’s what’s in place. There is nothing else beyond that to talk about right now, but pricing, again, isn’t window-based, it’s principal-based. So, if we continue to see waves of inflation, reemerge, then we will do what we have got to do. In terms of retailer reaction, let me give you just a couple of thoughts on this. Number one, with respect to the margins, our margins and the good quarter we just had on margins, I think it’s really important to remind everybody, we are talking about margin recovery following a period of pretty meaningful margin compression. So, that’s kind of point one. And point two is, we have been really clear with our retail partners that, a, all of the pricing we have taken is justified by COGS inflation. And b, margin recovery is as important to them as it is to us, because we need to recover our margins in order to sustain the innovation program that has driven category growth for these retailers in important aisles like frozen, as I mentioned just a minute ago. And then the third point I will make is, with respect to inflation from here, it’s still with us, right. So, we are calling 10% on the year. It’s not deflation. It’s sustained inflation. And that’s just an important reminder that we are not looking at a deflationary period. So, that’s got to factor into the retailer conversations as well. Dave, anything you want to add there?

Robert Moskow:

And given that you have revised down your inflation outlook, is there any discussion about also revising down some of the price increases?

Robert Moskow:

Got it. Thank you.

Operator:

And ladies and gentlemen, with that, we will conclude today’s conference call and presentation. We thank you for joining. You may now disconnect your lines.

Operator:

Good morning, and welcome to the Conagra Brands First Quarter Full Year 2023 Earnings Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. Please note that this event is being recorded. I would now like to turn the conference over to Melissa Napier. Please go ahead.

Sean Connolly:

Thanks, Melissa. Good morning, everyone, and thank you for joining our first quarter fiscal ‘23 earnings call. Let's jump right in with what we want you to take away from our presentation shown here on Slide 5. Overall, Conagra delivered strong first quarter results. We had robust net sales growth across our portfolio, mainly due to the impact of our inflation driven pricing actions coupled with ongoing limited elasticities. We continued to gain market share at the total portfolio level, particularly within our strategic frozen and snacks domains and drove solid profit improvement during the quarter. We also saw another strong performance from Ardent Mills, as effective management enabled the joint venture to continue capitalizing on volatility in the wheat markets. Our supply chain productivity continued to improve. However, we experienced some internal and external operational challenges during the quarter like many of our peers. These challenges led to both increased costs and inefficiencies, which more than offset the benefits from improved productivity and impacted our business in the quarter. I'll unpack this later in the presentation. We also continue to strengthen our balance sheet improving our leverage ratio during the quarter, while investing in our business and returning cash to shareholders. Finally, our solid start to the year reaffirms our confidence in the fiscal ‘23 guidance we announced last quarter. With that backdrop, let's dive into the results shown on Slide 6. As you can see, in the quarter, we delivered organic net sales of just over $2.9 billion, representing a 9.7% increase over the year ago period; adjusted operating margin of 13.7%, which is down slightly compared to last year as a result of the supply chain inefficiencies I mentioned a moment ago; and adjusted earnings per share of $0.57, 14% higher than what we generated last year. Slide 7 breaks down our strong sales performance during the quarter. At the total Conagra level, retail sales grew by almost 9% compared to the first quarter of last year and just over 24% compared to three years ago. Our momentum continued as we gain share in the marketplace demonstrating the valuable connection our brands have with consumers. These share gains are most pronounced in our frozen and snacks domains, which increased share 0.8 percentage points and 1.5 percentage points on a one and three year basis respectively. Diving further into our top line performance by retail domain, you can see on Slide 8 that frozen generated a significant acceleration of quarterly sales growth on a one and three year basis of 8% and 27% respectively. Clearly, our focus on catering to consumer preferences for convenience, quality and great taste continue to resonate. Similar to prior quarters, this growth was led by key categories such as plant-based protein and single serve meals which along with breakfast sausages increased sales by double-digits compared to the first quarter of fiscal '22 while gaining market share from our competitors. Our snacks domain also continued to deliver strong sales growth on a one and three year basis shown here on Slide 9. Compared to the first quarter last year, snacks retail sales increased 13%. And as you can see, we have delivered sustained growth versus the period three years ago, including 36% in the most recent quarter. In particular, we saw significant growth in sales of microwave popcorn, which increased more than 20% compared to the prior year. Our highly relevant staples domain also accelerated sales growth increasing 8% compared to the prior year and 15% versus three years ago. This was driven by strong performance in single serve dinners and entrees, with toppings, pickles and canned tomatoes. Slide 11 highlights the relationship between price and volume over time. As I mentioned on last quarter's earnings call, we continue to take strategic pricing actions during the first quarter to help offset ongoing COGS inflation. As you would expect, pricing has driven some volume elasticities both for Conagra and the overall industry. This tends to be most acute in the immediate aftermath of new pricing and wanes over time as consumers adjust. As you can see at the bottom of this slide, our net elasticities have remained nearly flat over the past few quarters. These relatively modest elasticities both compared to historic norms and our peers are a testament to the strength of our brands. As we monitor the impact of our pricing actions on volume, we also look at the relative impact between branded foods and private label. As you can see on Slide 12, private label has increased its dollar share of certain categories on average since 2019, including a jump in share gains at the beginning of this calendar year. However, it's worth noting that those share gains are much more modest in the categories in which we compete. We're confident that the continued investments in our brands as part of the Conagra Way will ensure they continue to resonate with consumers. These important efforts combined with our limited exposure to private label will help us retain the market share we've gained during the pandemic. Before I turn the call over to Dave, I want to talk about Conagra's supply chain and both the improvements and inefficiencies I referenced earlier. As I said, our supply chain continues to make progress. Pricing actions we implemented in the quarter and over the last year were largely able to offset continued inflation and our service metrics continued to improve in Q1. While we're pleased with what we've accomplished to date, our supply chain is not yet fully normalized. We've continued to see some discrete inefficiencies pop up that resulted in higher costs in Q1. I'll give you two examples to illustrate this. In our Foodservice business, we identified an off-spec finished good issue while producing product for a customer. We disposed of the product and lost manufacturing time during our diagnostic. This pulled sales and gross margin below where they should have been. My second example is in our canned chili and beans businesses, where late in Q1, we found cans that were off spec. No product was recalled. And while production is now backing -- back up and running properly, the lost inventory effect will linger into Q2 impacting volumes and margins. The point is, these types of challenges can result in downtime needed to determine and solve the root cause of the issue as well as proper testing to ramp production back up, that lost time can result in higher costs and less production. Looking ahead, we're not expecting these discrete supply chain interruptions to disappear overnight as the external environment remains dynamic. But despite these transitory disruptions, we are making good progress in the supply chain with core productivity continuing to improve. Accordingly, we remain committed to our operating margin target for the year and to the productivity targets we announced at our Investor Day in July. In summary, we're off to a strong start in fiscal ‘23, fueled by robust top line growth as a result of inflation driven pricing increases and muted elasticities. Operationally, we continue to make progress in our specific areas of focus. For the balance of the year, we're planning for the operating environment to remain dynamic. While we expect consumer response to our brands to stay strong, we are planning for this quarter's volumes to be impacted by the supply chain disruptions, I just outlined and from our most recent wave of inflation driven pricing introduced to the market in early Q2. However, as I covered earlier, we expect this elasticity to wane over time. And while inflation remains persistent, we are starting to see moderation in certain areas and anticipate relief for commodities as the year unfolds. Overall, we're off to a great start, but one quarter doesn't make a year and we remain focused on delivering for our customers and consumers. We continue to see a clear path to achieving the guidance we issued for fiscal ’23 behind the strength of our brands and ongoing productivity initiatives leading us to reaffirm those targets. With that, I'll pass it over to Dave.

Operator:

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Andrew Lazar from Barclays. Please go ahead.

Sean Connolly:

Hey, Andrew.

Andrew Lazar:

Hi. I've got two questions. I guess first off, have you seen any change in sort of volume trends elasticity or retailer reaction since the new pricing has come into play in 2Q or since announcing the more targeted pricing for 3Q? And again, are you just sort of being, I guess, more prudent in the way you're forecasting your sort of volume and elasticity going forward? Just trying to get a sense if anything has changed that you see that we don't see like let's say in the data yet?

Andrew Lazar:

Great. Very helpful color. And then, I guess, I want to go a little bit deeper on gross margin. It's improved sequentially, I think, for the past sort of five quarters. I think you had previously said that fiscal 1Q was really the quarter where Conagra would see the largest sort of mismatch, right, between pricing and cost of the year in ‘23. So I guess, could we see gross margins start to expand year-over-year starting in fiscal 2Q, as the Street still has lower gross margins year-over-year? And I guess if not, why would that be? I understand some of the operational issues, but you had some of those in 1Q, but margins still came in better than the Street was looking for. So any color on that I think would be helpful because again we're trying to get a read on for you and the industry sort of the timing around the potential for actual margin recovery as opposed to just covering the sort of the dollar cost, if you will?

Dave Marberger:

Yeah. Sure. So, Andrew, we don't give specific quarterly guidance, but we do expect sequential improvement in gross margin and operating margins moving forward based on the assumptions we have now. We expect the highest percentage of inflation for the fiscal year in the Q1 we just delivered. So we expect the percentage will moderate moving forward. We're seeing the full magnitude of pricing from fiscal ’22 in the quarter, but we also took pricing during Q1 and we've taken additional pricing at the beginning of Q2. So we will see the full impact of that starting in Q2. And we also expect to see some gradual improvement in our net productivity as the supply chain and service levels continue to normalize. So all those things give us confidence that we'll improve our margin sequentially moving forward.

Operator:

The next question comes from Ken Goldman from JPMorgan. Please go ahead.

Sean Connolly:

Ken, I'll make a brief comment and turn it over to Dave. We're seeing some green shoots obviously in some commodities and I think that does bode well. We are obviously much longer into an inflation cycle than anybody hoped we would be. This thing is persisted longer than ever. But I do see positive things shaping up. But as you can imagine, when you contract in some of these commodities, those contracts don't necessarily drop off. At the very minute, you start seeing positive news on the forward curve. So that negative sourcing factor is -- it's just a reality of being at the end of one of these cycles. And the good news is, I feel good about how our purchasing team has managed this because when you're coming to the end of an inflation cycle, you don't want to be overly long, right? And I think the team has done a very good job of that. Dave, do you want to add any more color?

Ken Goldman:

Thank you. And then a quick follow-up. One of the -- I'm sure you hear this all the time, the more bearish cases on the industry is that your customers, as their consumers start weakening and maybe as vendor gross margins start to improve, but some of those retailers will start to demand a bit more from you and your peers, whether in the form of higher promotions or in store advertising. So we really haven't seen an indication of this taking place and I think your tone today would suggest you're not either, but I'm just curious if you're seeing or hearing any talk in the industry or any talk in your categories about your competitors getting more aggressive on price and promotion or your customers kind of pushing back a little bit as these list prices continue to rise. It doesn't seem like we're seeing it in the data, but as Andrew said before, sometimes the data don't tell the whole story. Thank you.

Ken Goldman:

Thanks so much.

Operator:

The next question comes from Jason English from Goldman Sachs. Please go ahead.

Sean Connolly:

Good morning.

Sean Connolly:

Actually, Jason, service levels have improved pretty dramatically. It's quite positive. So moving in the right direction, getting north -- during the peak of COVID, you saw service levels in CPG even broader and food drop into some companies were down in 50s. And recently, you've seen companies back up over 90%. So that's -- it's category specific. So you can't kind of assume that, that's everywhere. We still have certain categories where our demand is just so strong. We'd like to be cranking out more volume and selling more like Slim Jim. But I'd say here's how to think about supply chain overall. There is clear progress happening in supply chain. It's at Conagra. It's across the industry, and it's improving. Service levels have materially improved, as I just said. Core productivity is tracking well. Clear progress. Is it flawless? No, it's not flawless, as you heard. Some things keep popping up, as we outlined. So the external environment remains dynamic, and that's why we think it's prudent. And you heard some of our comments on commentary on Q2, we just want to take a prudent stance forward looking to say, look, we are going to be taking some more pricing. That's broader on the portfolio. That'll have some even modest impact tied to it. And we've got -- we're going to assume that the supply chain dynamism continues for a bit longer. We just think that's the right way to handle it this close into the year. But overall, service levels, to your point, are making real progress.

Sean Connolly:

I think we're quite a ways from that. And to the degree it does, Jason, a couple of things to keep in mind about our company. If you look at our volume base, and you say what percentage of the total volume is promoted, it's one of the lowest levels of promotion in the industry. And as you know, that has been a deliberate part of our playbook, but we're not opposed to promotion. We do some promotion, and we do it on certain brands, and we do at certain times of the year because it drives incremental volume. A good example of that is the work we do around holidays and promotion because it's kind of binary. If you're not on promotion on holidays, you're going to miss some sales, and we'll take those sales because that's pure ROIC. So we're very -- we've become very focused on very selective pursuit of promotion and a high ROI focus on promotion and we're probably at record lows right now. At some point, that'll come up modestly, but I'm not anticipating any kind of material change.

Operator:

The next question comes from Bryan Spillane from Bank of America. Please go ahead.

Dave Marberger:

Yeah, Bryan. Why don't I take that? So if you see in our margin bridge that we had in the deck that the realized productivity in other COGS was plus 1.2%. So clearly, those two issues impacted that. I'm not going to give a specific amount, but our core productivity that's in that number -- as you know, we shoot for about 3% of cost of goods sold, which equates to, when you look at margin, about 2.2%. So 2.2% margin improvement would be what our core productivity is, and we came in at 1.2%. So that's about 1 percentage point of impact. Now that wasn't just the things Sean talked about. We also had some other things and absorption and different things that hit. But Sean just gave you a couple of examples that are in all of the things that gave us a headwind against that kind of core productivity number. So we're pleased about core productivity in the plants. We're making great progress. It's just some of these isolated things that we look at as transitory are kind of headwinds to that number.

Bryan Spillane:

Okay. And then just one other follow-up is just given the recent Hurricane Ian in Florida and the impact there, anything that we should be thinking about with regard to, I guess, this quarter, either pull forward of sales or any impact on operations? Just anything we should be thinking about there?

Dave Marberger:

Yeah. And just the last part of that, there was no material impact on our operations as a result of the hurricane.

Sean Connolly:

Thank you.

Operator:

The next question comes from Robert Moskow from Credit Suisse. Please go ahead.

Dave Marberger:

Why don't I start? Sean, you can jump in, add any color. On your first question, Rob, we continue to ship in line with consumption. So if you -- look, in Q1, we shipped a bit ahead of consumption, but when you look at the percentages, but if you look at Q1 a year ago, we shipped a little bit below. So when we look at our days of supply numbers with retailers and the retailer inventories, we are in line with where we've been in prior year and where we expect to be. So we don't see any significant kind of issue with retailer inventories right now. We're right where we want to be, and we're basically shipping to consumption. So there's no kind of loading or deloading dynamic right there. In terms of your second question, yeah, we -- as you saw in the first quarter results, we did have negative sourcing, right, because we come off favorable contracts. So that will continue to happen. That's all baked in our estimates that we give, right? So we estimate market inflation and kind of where we were locked in, when those contracts or hedges come off. So that's all part of the forecast that we gave. So I'm not going to give a very specific number that you asked. But generally, that's how we forecast and plan it for the full year.

Sean Connolly:

Yeah. Let me start that, Rob, and then I'll flip it over to Dave here. I think the intent behind the question is, are we -- do we have a good plan in place to support our brand-building activities? And the answer to that question is clearly, yes. Just look at our results with dollar sales over the past 52 weeks versus three years ago, I think we're up over 19%, while volumes over that same period are roughly flat despite quite a bit of pricing. So the brand support that we've got out there is strong. And for those of you who are listening who did not watch our Investor Day presentation, I would direct you to the presentation from Darren Serrao on how we think about brand building broadly because A&P is a piece of it, but it's only a piece of it. And I think that was very instructive. With respect to where we sit on the year on A&P, Dave, you want to kind of describe how it's unfolded in Q1 and how it unfold from here?

Robert Moskow:

Thank you.

Cody Ross:

Hey. Good morning. Thank you for taking our question. I just want to go back to your pricing actions that you noted to be effective in 3Q. Can you just describe how much is it, what parts of your portfolio it is in and then how much is locked in at this point?

Cody Ross:

Thank you for that. And then just one quick question on SG&A. SG&A ex-A&P was up 10% or so. It looks like incentive comp drove about 8% of that. Is that correct? I mean how should we think about SG&A and incentive comp for the remainder of the year? Thanks.

Cody Ross:

Great. Thanks. I’ll pass it on.

Operator:

The next question comes from Chris Growe from Stifel. Please go ahead.

Sean Connolly:

Good morning.

Dave Marberger:

Yeah. Let me take that. So, our -- we've been very clear that our principle around pricing is, it's inflation justified. So when we go and we put a price increase on the table, it's all grounded in the inflation that we're realizing and we've been very clear there's been a lag. So all these price increases, what we took in Q1, what we've taken at the beginning of Q2 and then the smaller more tactical increases that we've communicated for Q3 are all tied to that inflation. So yes, once -- at this point in time, given the inflation that we've recognized and estimate, we have offset that cumulatively. And the consumption numbers that I find really support that is, if you go back and look at volume and total dollar consumption for 52 weeks now versus three years ago, our dollar consumption is close to plus 20%, and our volumes are pretty much flat. So that shows you that, that's the kind of pricing that we're seeing in market and that ties to the cost inflation that we're seeing. So the consumption data supports that overall catch-up.

Sean Connolly:

Chris, it's Sean. I'll comment on the first piece, and I'll let Dave comment on kind of the impact of it. But this is one of these things where I think people in my seat are really -- they want to be careful not to jinx themselves because the thing about some of these whack-a-mole disruptions is that they're not foreseen in many cases, they pop up. So you go through these periods where the frequency appears to diminish, and it feels like, hey, this could be good, but then you'll have something pop up again. That's the nature of kind of this kind of friction that we see. So I being very deliberate in saying, I don't think these things are going to go away overnight. From a planning posture standpoint, our view is let's just assume that they'll continue to pop up. But yeah, you're absolutely correct, we watch very carefully to say, do we see these things kind of diminishing in frequency? And we don't want to jinx ourselves there and get out of our skis, but that's obviously what we're hoping for. Dave, do you want to add to that?

Chris Growe:

Okay. I should appreciate that. Thank you.

Nik Modi:

Yeah. Thanks. Good morning, everyone. So Sean, I was hoping you can -- I mean I appreciate the fact that you guys have been able to get the pricing through. But when I look at some of the household (ph) penetration metrics, even going back to pre-COVID, it looks like some of your bigger brands are actually below those levels. So I was hoping you could just give us some context on how you're thinking about that, in terms of rebuilding house of penetration, especially in this inflationary environment. And then do you worry that the price gaps have narrowed between, let's call it, some of the frozen prepared meals and QSR because we've seen inflation obviously go higher in the off-premise than the on-premise.

Nik Modi:

Great. Thanks for that perspective.

Pamela Kaufman:

Hi. Good morning.

Pamela Kaufman:

I just wanted to follow up on your pricing -- the additional pricing that you're taking in the coming quarters. Just to clarify if that was embedded in your initial guidance at the beginning of the year. And how has the composition of your outlook for org sales changed for this year relative to last quarter? So do you still expect low teens price mix or will it be higher now? And are you expecting softer volumes relative to your initial expectations?

Dave Marberger:

Yeah. Just to build on that. So the Q1 and Q2 was in our guidance and in our forecast Q3 no.

Sean Connolly:

Yeah, Pam. Clearly, Q1 was a strong quarter, and that's good news, but it's still early. The environment remains dynamic and we just prefer to get a bit further into the year before we make any new declarations about how we expect to finish the year.

Sean Connolly:

Thanks.

Carla Casella:

Hi. Thanks for taking the question. It looks like your leverage will still be kind of in the three -- high 3s range at year-end. I'm wondering if, on the M&A front, if you would look to wait until you get your leverage down to your target range or if the right acquisition comes up, if you would temporarily take your leverage higher and kind of how your thoughts are around M&A or if you have asset sales to offset something if you do find something that's appropriate.

Carla Casella:

Okay. Great. Thanks a lot. And have you said the time frame in terms of getting to your 3 times your target -- you give a target time frame for that?

Carla Casella:

Okay. Great. Thank you.

Operator:

There are no more questions in the queue. This concludes our question-and-answer session. I would like to turn the conference back over to Melissa Napier for any closing remarks.

Operator:

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

Operator:

Good morning, and welcome to the Conagra Brands Fourth Quarter and Fiscal 2020 Results Conference Call. All participants will be in a listen-only mode. [Operator Instructions] Please note that this event is being recorded. I would now like to turn the conference over to Melissa Napier, Head of Investor Relations for Conagra Brands. Please go ahead.

Sean Connolly:

Thanks, Melissa. It's great to be working with you again. Good morning, everyone, and thank you for joining our fourth quarter fiscal '22 earnings call. I'll start with what we would like you to take away from the call this morning. Throughout fiscal '22, our team took decisive actions to offset inflation and invest in our business. We faced heightened costs throughout the year, but inflationary pressures were especially high in the fourth quarter. As a result, we implemented additional inflation justified pricing actions to help offset the impact. We continued to make deliberate strategic investments in our business to better serve our customers and meet the strong consumer demand for our products. Physical availability is an important part of maintaining and building trust and loyalty. I'm pleased that our brands continue to resonate with consumers demonstrated by broad-based share gains within the portfolio, particularly within our most strategic domains of frozen and snacks. We are continuing to drive growth, gain share in attractive categories, and we remain disciplined in executing the Conagra Way to create lasting connections with consumers. As we've communicated throughout the year, the external factors I touched on a moment ago, as well as investments we made to maximize service and product availability in the face of supply constraints, all contributed to increased margin pressure. We continue to pull levers to manage these factors and we were pleased to see margin improvement materialize in the fourth quarter in Grocery & Snacks as well as Foodservice. This represents an important inflection point that we expect will extend to our Refrigerated & Frozen and our international businesses within fiscal '23. I also want to highlight the strong fourth quarter performance of our joint venture, Ardent Mills, which effectively managed through recent volatility in the wheat markets and continued to prove an effective hedge against inflation. Looking ahead to fiscal '23, we expect to see continued strength in our sales driven by strong innovation, the impact of pricing actions and progress in the supply chain to help offset continued inflation and elasticity. While we expect elasticity to increase incrementally from fiscal '22 levels as more inflation justified pricing comes to market, we believe they will remain below historical levels. These expectations are reflected in the fiscal '23 guidance we're providing today. With this expected macroeconomic backdrop, we are lowering our long-term leverage target which Dave will discuss later. As you know, maintaining a strong and flexible balance sheet and keeping our investment-grade credit rating remain important to us. With that overview, let's take a look at the results. While we had planned for high inflation, it was higher than we anticipated. Slide 7 shows our cost of goods increased 16% in fiscal '22, far higher than the 9% we anticipated at the time of our fiscal '21 fourth quarter call a year ago. Inflation was particularly acute during the fiscal '22 fourth quarter when our cost of goods sold were 17% higher than a year ago period and 24% higher on a two year basis. The elevated levels of inflation we experienced in fiscal '22, particularly in the fourth quarter, required decisive actions in response. A critical part of that response included the inflation justified pricing we implemented throughout fiscal '22. On Slide 8, you can see the change in on-shelf pricing by quarter. On-shelf prices for our brands rose across all three domestic retail domains compared to the same period a year ago and also increased in Q4 as we experienced additional inflationary pressures. We closely monitor the impact of these pricing actions on volumes. We've been pleased that price elasticity has remained below historical levels. Slide 9 demonstrates that unit sales have stayed largely consistent on a three year basis even as the on-shelf prices for our brands have increased. Even in Q4, as more significant inflation justified pricing took effect, the increase in elasticity was relatively modest and below historical norms. As we monitor the impact of our pricing actions on volume, we look at the relative impact between branded foods and private label. While private label is gaining some share more broadly in food, we have not seen notable migration toward private label in the heavily branded categories in which we compete. The superior relative value of our products continues to resonate with our customers and our consumers and the resiliency of our portfolio means we are well-positioned to take additional action in fiscal '23 if we continue to experience incremental inflation. As a result of our decisive actions, we're beginning to see the expected recovery in our margin performance. As I mentioned earlier, the fourth quarter represented an important inflection point as we saw margin improvements materialize in Grocery & Snacks and Foodservice, which helped drive fourth quarter operating margin improvement for the total company. As I already noted, we expect our Refrigerated & Frozen and International segments to deliver operating margin improvement as fiscal '23 progresses. As you can see on Slide 11, our team delivered solid Q4 results in the face of a highly dynamic and challenging operating environment. Compared to the fourth quarter of '21, organic net sales for the fourth quarter increased at just under 7%, with growth in all four segments. And importantly, adjusted operating margin increased approximately 100 basis points and adjusted EPS was up over 20%. I'd like to briefly detail our performance across our three retail domains, starting with our Frozen business on Slide 12. Frozen continues to be one of the strongest businesses in our portfolio and offers modern attributes, convenience and quality to make it the perfect fit for today's consumer. In Q4, we continued to deliver strong growth on both a one year and three year basis. And within this consumer domain, we've seen growth across key categories, highlighted by more than double-digit year-over-year growth in both plant-based protein and single-serve meals. Now let's talk about snacks. As shown on Slide 13, we've seen a meaningful acceleration in retail sales growth in our snacks business over the last three years. In the fourth quarter, our snacks business grew 11% year-over-year. That equates to 34% growth over the same period in 2019. In this domain, we've driven growth in key categories, including meat snacks, hot cocoa, microwave popcorn and salty snacks. Our retail sales of ingredients and enhancers and shelf-stable meals and sides have also been growing meaningfully over a three year period, and that trend continued in the fourth quarter. As you can see on Slide 14, this business grew 5% year-over-year and 10% on a three year basis. In particular, we saw a large increase in the retail sales for syrup, which was up nearly 20% in Q4 on a two year basis. As we execute our Conagra Way playbook, innovation has remained a key to our success across the portfolio. Slide 15 shows the impact of our disciplined approach to delivering new products and a modernized portfolio. During the fourth quarter, our innovation outperformed the strong results we delivered in the year ago period. And once again, our innovation rose to the top of the pack in several key categories, including with toppings, single-serve meals and plant-based protein. Looking at Slide 16, you can see that we continue to grow sales on both a one and three year basis. Total Conagra retail sales were up 15.8% on a three year basis for the year. We also continue to gain share in the important Frozen and Snacks categories with our category-weighted share growth up both on a one year and three year basis. With that context, for fiscal '22, let's turn to our outlook for fiscal '23. We expect our strong brands, on-trend innovation, effective pricing and strengthened supply chain to drive top line growth and margin improvement. Continued inflationary pressure in fiscal '23 is expected to result in incremental increases in elasticity, which overall, we anticipate will continue to remain below historical levels. Our outlook also reflects our expectation that we will have higher CapEx and interest expense in fiscal '23, lower pension income and that the elevated performance from Ardent Mills in fiscal '22 will moderate. We look forward to sharing more details about our expectations for the year at our upcoming Investor Day. In 2023, we expect organic net sales growth of 4% to 5%, adjusted operating margin of approximately 15%, adjusted EPS growth of 1% to 5%. Before I turn the call over to Dave, I'll remind you that my team and I are looking forward to hosting an Investor Day on July 27 to discuss our plans for the future. In response to feedback, we've decided to hold our event in a virtual-only format to best accommodate our investors and analysts. Registration, dial-in and Q&A details for the virtual event are available on our website. Dave, over to you.

Operator:

Thank you. And we will now begin the question-and-answer session. [Operator Instructions] And our first question today will come from Andrew Lazar with Barclays. Please go ahead. Andrew, please go ahead with your question.

Melissa Napier:

Yes, we can hear you now.

Sean Connolly :

Yeah, Andrew, it’s Sean. I will answer that. It’s pretty clear as we look at the data we are experiencing trading in that others referenced and the demand for our products remains quite strong. So as you saw in the slide brand health is in a very good place and I would say no to the question of are we experiencing something unique in elasticity? Based on what we are seeing right now the answer to that is inequitably no. Consumer demand has remained very strong. These elasticities, as you mentioned, have been meaningfully better than historical norm. But what I draw your attention to is supply chain constrains, while we are making progress in supply chain, the constraints are still with us. And they were still a factor in Q4 and we did see retailers burn through inventory faster than we could replenish it. And that clearly put an upper control limit on parts of our portfolio, including some of our fastest growing, strongest brands and including Refrigerated & Frozen. So we'll give you a full update on a tremendous amount of good work that's going on in supply chain. We are making progress there, and we've got a very exciting transformation plan ahead. We'll update you on that on our Investor Day in a couple of weeks. And we'll also, as we always do, preview some of the exciting new innovation that will come into the market -- that's currently coming into the market that will continue to drive strong sales. But I'd say for now, my key points are brands are performing very well, and the innovation is thriving. The pricing power we're seeing is quite strong. Despite that strong pricing power, the elasticities remain well below historical norms. Supply chain is making progress, but it's not fully back to normal yet. And looking forward, our outlook for '23, we believe is quite prudent.

Dave Marberger:

Sure, Andrew. So if you take it from the top, we guided to low teens inflation off of the 16% this year. So we float that. We think that's going to be higher actually in Q1. And as the year goes, the percentage will come down, but low teens is what we assume there. We're assuming that our supply chain productivity, which came in at 1.8% for Q4, we expect that as our supply chain continues to stabilize that, that will improve as the year goes on. We obviously have a big impact of pricing in ’23, the carry-in pricing, which will be significant. And then as I talked about in my comments, we have pricing that is actually in market now in Q1 and will actually be in market in the beginning of Q2 as well. And so a big impact from pricing. And we do expect that both our SG&A and A&P investment will grow at a greater rate than the sales guide. So we are investing in both of those areas. But given the pricing, given the ramp-up of productivity and given inflation at low teens off of what was a high base in fiscal '22, we feel comfortable with what that's going to do in terms of our EBIT growth for '23.

Dave Marberger:

Thank you.

Ken Goldman:

Hi, thank you. One of the other larger food companies recently said that as soon as it's November quarter, the dollar impact from higher pricing could equal the dollar impact from inflation, roughly with maybe pricing being a net benefit afterward just given the lag effect. So I'm just curious -- I know every company is different in the timing of hedges are different and so forth -- but is this kind of cadence something you could see as well? I really am asking, when might it be reasonable for us to kind of anticipate pricing in a dollar sense being at least as high as your inflation this year? And maybe it's too hard to be precise. I'm just curious for your rough thoughts.

Dave Marberger:

Yes. Just on the -- let me build on that and tie it into the guidance. So Ken, just kind of concise way to think about it is our organic net sales guide is 4% to 5%. We expect price/mix to be low teens. We expect inflation to be low teens. So if that is true, then the pricing dollars will exceed the inflation dollars next year.

Sean Connolly :

Yes. I won't put any numbers on it, Ken, but it's is category specific. We can see it very clearly. And where we -- probably most noteworthy, as I mentioned in my remarks a minute ago is Refrigerated & Frozen. That's -- as you all know, that is our -- Frozen business is our most strategic domain. We've just had persistent strength there. They're really -- in our Frozen Meals business isn't a trade-down alternative. So that is one of the key pieces of this portfolio and amongst our very strongest brands. We've driven virtually all the category growth there. I don't expect any change to that underlying strength at all. We've just got -- continue to get our suppliers back to full health and continue to get our ability to get service levels back to the traditional high 90% level. Dave, do you want to make any comments to that.

Ken Goldman:

Thanks. I look forward to the Investor Day.

Operator:

And our next question will come from David Palmer with Evercore ISI. Please go ahead.

Sean Connolly :

David, let me give you just kind of a quick way to think about it, and Dave, you can add anything. As we plan our '23 in terms of supply chain, we're not planning for a complete reversal of the supply chain friction that we've experienced over the last year. As you know, as we've said before, we prioritized doing what it took this past year to get as many units of our products out the door as we could. And that had a cost to it and it was less efficient than normal. We are assuming some progress because we are seeing some progress in some green shoots in supply chain. But from a planning posture standpoint, we're not assuming everything gets back to bright. There will still be some inefficiencies in there according to what we planned. When we see in a couple of weeks, we're going to take you through that in quite some detail. And in addition, some investments we are making to really transform and modernize supply chain so we can capture some good margin opportunities that we see going forward. So we'll take you through that in a couple of weeks. Dave, do you want to add anything to that?

David Palmer:

And then you mentioned in one slide or you showed how you have a relatively high contribution from innovation versus peers. And I wonder, going forward into '23, how you're thinking about the ability to get even more innovation impact given the ability for retailers to absorb that in the post-COVID era? And does that does that really -- how much of that is in the plan for '23 in addition to perhaps some higher expense in terms of promotions and other growth spending? Thanks.

David Palmer:

Thank you.

Alexia Howard:

Good morning, everyone.

Alexia Howard:

Can I, first of all ask about the gross margin trajectory from here? I realize you're not giving formal guidance. But given that the inflation seems to be higher than expected at the moment and the price -- the next round of pricing doesn't kick in until the second quarter. Does that mean that the near-term pressures on gross margin are likely to be fairly hefty? And will that -- is that expected to then improve through the rest of the year? And then I have a follow-up.

Alexia Howard:

Great. Thank you. And then just as a follow-up, you mentioned favorable mix across a lot of the segments this time around. Could you just give a qualitative description of what was going on and whether that's expected to continue, and I'll pass it on.

Alexia Howard:

And you'd expect that to continue presumably into '23?

Alexia Howard:

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

Chris Growe:

Hi, good morning. Thank you.

Chris Growe:

I had a question for you first and just a bit of a follow-up. So I think to Ken's earlier question. Last quarter, Dave, we talked about that gap between pricing and inflation and that $0.30 in EPS. And now there's been more inflation, and obviously, you've got more pricing coming through to catch up to that. Is there a -- would there be a point or embedded in your guidance some element of that $0.30 or whatever the new number is coming back in fiscal '23? So perhaps in the second half as it caught up on pricing and inflation.

Chris Growe:

Okay. Yes. That makes sense. And then just a question on A&P, which is to say that, I guess to be clear, you expect it to be up in fiscal '23 is the question. And then related to that, well, E&P was down this quarter and obviously a comparison issue, it could -- in terms of the total pressure against the brands, I can call it back because you've got promotional investments above the line going as well. Was your total sort of pressure against the brands down less or maybe even off or whatever the answer is in relation to that above the line spending that's going on as well.

Chris Growe:

Thank you.

Operator:

And our next question will come from Robert Moskow with Credit Suisse. Please go ahead.

Dave Marberger:

Yes. What I would say, Robert is that you have to remember that when we quote price, right, so this quarter, it was 13%. That's always going to be lower in terms of the margin impact, right, of that price. Same thing with inflation. Inflation was 17%, but the margin impact of that was 12%. So it's really the same thing. The price if we're low teens price next year, that's going to equate to a lower margin impact, but then the same thing on the low teens inflation, right? So we're quoting a percentage of either the sales or percentage of the cost of goods sold, but when you translate that into a margin impact, it's lower. So it's really that relationship.

Sean Connolly :

There's all factors at play Rob. We've got -- elasticities are happening, and they are happening well below historical norms, as I've said, and we're not able to ship to our customers at the same rate that they are burning through inventory. So they're both factors. And the one that's very topical right now is people want to know how is consumer demand holding up in the face of very strong pricing, and it's holding up extremely well relative to historical norms, but it's not zero. Dave, do you want to add some?

Rob Moskow:

Okay, thank you.

Bryan Spillane:

Thank you, operator. Good morning, Sean. Good morning, Dave. I just had Dave two questions for you related to, I guess, related to the balance sheet. The first one is just given the net interest expense this year being impacted by higher rates, is that a fixed number now? Or if rates were to move in one direction or another, is there a potential that net interest expense could move?

Bryan Spillane:

Okay. But given that it's really just tied to the piece that's like CP, there shouldn't be a material move one way or another.

Bryan Spillane:

And then just wanted, if you could expand a little bit on the comments you made earlier about leverage and leverage targets? And I guess they asked us in the context of kind of drifting up to four times in a market that today is -- equities are being more impacted by leverage today than they were a year ago or even on January 1, I would argue. So is there anything that you can do -- other than EBITDA growing, expected to grow in fiscal '23. Are there other levers you can pull, other actions you can take to maybe accelerate the deleveraging?

Bryan Spillane:

Okay. So it's -- that's -- I guess that was my question. You're not out of options, I guess, in terms of more than just organically deleveraging. There could be other options or other actions you could take to kind of help that along?

Bryan Spillane:

Okay, perfect. Thank you.

Melissa Napier:

Jason, you might be muted. We can’t hear you.

Sean Connolly :

Well, I think our planning posture across the board for this '23 plan, Jason, is to be prudent. We don't want to plan in a way that puts us in a -- we need to be in a heroic position in anything in terms of elasticities, supply chain rebound, et cetera. We want to -- it remains a volatile environment. We think the best guide for fiscal '23 is a prudent guide. And because as we've seen in the last year, things are going to happen that are different from what you assume at the beginning of the year, and you got to be able to navigate that. So that's the environment we're in right now, and that's the posture we've taken as we put together the plan.

Sean Connolly :

No, I wouldn't characterize it the way you're characterizing it, Jason. I mean when you go into these macroeconomic dislocations that we've experienced, the pain tends to come in waves. And manufacturers get hit with a lot of the pain early in the cycle, and that comes in the form of margin compression as you've seen we've gone through in the last year, a lot of that associated with the lag effect. And then the lag effect is a transitory effect that you do emerge from. So it's not as if what you're doing as you move through that cycle is you're recovering lost margin points as opposed to adding fresh new firepower at the profit line. That's not what's happening. This is about profit recovery. And that's an important thing. Manufacturers have to recover their margin, why? Because the top priority for our retail customers is growth. And our retail customers here at Conagra know that our innovation has been the absolute key to driving growth for their categories. They need and want that innovation to continue, but they know that, that innovation costs us money. We have to have healthy margins to be able to build out that innovation and get it to our customers in the market. And so they know we've got to take inflation justified pricing to recover our margins after we go through these windows where we experienced the compression that happens early in the inflation cycle. And that's exactly kind of how things are playing out.

Operator:

And our next question will come from Cody Ross with UBS. Please go ahead.

Sean Connolly :

Well, that's a good setup for our Investor Day in a couple of weeks because we've got -- I'd say there are areas of just continuous improvement and continued progress, like our innovation program, for example, just has been very strong for five plus years running now and it gets even stronger. There's other areas where we've got new things happening that are exciting and offer margin improvement opportunities going forward, particularly the work we've got going on in supply chain transformation and modernization, which we'll talk about in a couple of weeks. And then I'd say just from a team standpoint, culturally, our culture has remained incredibly strong throughout COVID. We've had our office open since June 15, 2020, and keeping our team together, because the work we do is very spontaneous and iterative and creative in nature. And so the importance of being together is critical to our ability to keep our innovation as agile as it is, and we'll just continue to get that stronger as we go forward.

Operator:

And this will conclude the question-and-answer session. I'd like to turn the conference back over to Melissa Napier for any closing remarks.

Operator:

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect your lines at this time.

Operator:

Good morning, and welcome to the Conagra Brands Third Quarter Fiscal Year 2022 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Bayle Ellis. Please go ahead.

Sean Connolly:

Thanks, Bayle. Good morning, everyone, and thank you for joining our third quarter fiscal 2022 earnings call. Today, Dave and I will detail our results for the quarter and our updated outlook for the remainder of the year. We'll then open the line to your questions. I'd like to start with the key messages we want to share with you this morning. As we navigate a dynamic external environment, our team delivered a solid Q3 that was largely in line with our expectations on the top line and adjusted EPS. We remain laser-focused on successfully executing the Conagra Way playbook by creating superior products and ensuring physical and mental availability to create lasting connections between consumers and our brands. This enabled us to deliver a robust plus 6% organic net sales growth for the third quarter, in line with what we expected. The strength of our top line can be measured both in the absolute and relative to peers as we gained share in key categories on a 1- and 2-year basis. And it's important to note that in response to inflation-driven pricing that has been executed in the market to date, elasticities have been favorable to historical patterns, even more so than what we expected. Unit demand remains strong as consumers continue to recognize the superior relative value that our portfolio provides. As worldwide events contributed to an already challenging environment, our teams remain agile and nimble to respond effectively and continue to serve our customers. Our third quarter results reflect strong contributions from our latest innovations, and we have another exciting innovations slate planned for fiscal 2023. But we also experienced higher-than-anticipated inflation as the third quarter unfolded. In the face of these heightened costs, we again made the deliberate decision to continue to invest to service orders and meet the strong consumer demand for our products, ensuring physical availability is an important part of maintaining and building trust and loyalty with consumers. While these strategic investments contributed to margin compression in Q3, we believe making them was the right decision as we position Conagra for the long term. Ultimately, we landed Q3 EPS a bit differently than we previously anticipated, but we did get there. Our adjusted Q3 EPS actualized in line with our expectations, above forecasted performance, and our Ardent Mills joint venture offset incremental Q3 inflation headwinds. As we look to the remainder of the fiscal year, the environment isn't getting much easier in the near term. We now expect an additional $100 million of market inflation in Q4. The updated Q4 inflation forecast equates to a 26% increase versus 2 years ago. As we'll detail further today, this higher-than-expected inflation is disproportionately impacting some of our strongest businesses, including meat snacks and frozen. Keep in mind that these businesses rely on inputs like protein and dairy, which are harder to offset in the short term and that frozen requires more specialized temperature control transportation. But as we started to see this latest wave of inflation coming, we took action on pricing just as we have throughout the year. These new pricing moves go into effect in Q1 of fiscal '23 and are highly targeted toward frozen and protein snacks. These businesses have been distinguished by innovation-driven sales growth, favorable elasticities, continued share gains and limited private label competition. So although we are experiencing pressure on our total company margins near term, we will see the benefits of the new pricing actions we've taken to offset this latest wave of inflation beginning in Q1 of fiscal '23. With this context, we're updating our outlook for the remainder of fiscal 2022. Our updated outlook reflects expectations for continued strong consumer demand for our product and lower-than-historical elasticities as well as the further increase in our gross inflation expectations for the year and the timing of the related pricing actions. Specifically, we now expect organic net sales for the year to be plus 4%, and we project adjusted diluted EPS to land at about $2.35, which translates to approximately $2.65 of earnings power when taking into account the impact of the lag between inflation and our end market pricing this fiscal year. And with that overview, let's dig into the quarter. As you can see on Slide 6, our team delivered solid Q3 results in the face of a highly dynamic and challenging operating environment. On a 2-year CAGR basis, organic net sales for the third quarter increased at just under 8%, and adjusted EPS grew by over 11%. Looking at Slide 7, you can see that we continue to grow sales on both a 1- and 2-year basis. Total Conagra domestic retail sales were up 18.5% on a 2-year basis in the quarter. We also continued to gain share in the quarter with our category weighted share growth up on both a 1- and 2-year basis. And on a relative basis, our share performance continued to compare favorably to the industry overall and to our largest peers. Slide 8 demonstrates that we gained category share at levels that outpaced our top 15 peers during the quarter. And if you take a look at the chart on the right, the share gains in our frozen and snacks domains were particularly notable. As you can see on Slide 9, our performance in frozen and snacks has driven our total Conagra share gains fiscal year-to-date and during the third quarter. Importantly, our categories are healthy, attractive and growing. As you can see from the chart on the left, our frozen and snacks domains have grown nearly 8% and 9% during the fiscal year-to-date and third quarter, respectively. So we're not just gaining share, we're gaining share in some of the most attractive parts of the store. These results are holding notwithstanding our need to put significant inflation-driven pricing into the market. On Slide 10, you can see the extent of our recent actions which increased in Q3 and have accelerated over the last 5 weeks. On-shelf prices for our brands rose across all 3 domestic retail domains compared to the same period a year ago, with inflation-driven price increases most concentrated in frozen and protein snacks. We implement these pricing actions. We're watching the impact on volumes closely, and we are pleased that the price elasticity has remained below historical levels. Slide 11 demonstrates that unit sales have remained consistently positive on a 2-year basis even as the on-shelf prices for our brands have increased. This dynamic is a testament to the fact that despite the broad-based inflationary environment we're operating in, the targeted nature of our inflation-driven pricing actions and the superior relative value of our products continue to resonate with our customers and consumers. A great example of this is our Banquet brand in our frozen business. As we've discussed before, the Banquet brand is a mainstay in American households and has undergone considerable modernization to ensure that the brand delivers on its promise of relevant flavors, hearty portions and a great value. Consumers see the relative quality and availability of our Banquet products and continue to choose Banquet despite inflation-driven price increases. Banquet's volume has remained consistent as prices went up in stark contrast to a key competitor. We see a similar story in our snacks domain with Slim Jim, another brand that has made lasting connections with its consumers through perpetual modernization, relevancy and availability. Despite the increased cost of protein and associated pricing actions, Slim Jim volumes have increased considerably, far outpacing a key competitor. In addition to strong relative performance compared with other branded products, we also continue to maintain share relative to private label products. Slide 14 shows private label dollar share across the edible industry at large, across the categories in which Conagra competes and across Conagra's frozen and snacking categories specifically. Two things stand out about this chart. First, we compete in parts of the store with less private label penetration than the edible space at large. And second, the share of private label sales has remained stable amid the highly inflationary environment over the past several years. We believe the data shows that consumers are finding comfort in the quality, reliability and familiarity that national brands provide, particularly modernized brands like those in our portfolio. And we have not backed off from our modernization focus in the current environment. Innovation has remained a key to our success. Slide 15 shows the impact of our disciplined approach to delivering new products and a modernized portfolio. During the third quarter, our innovation outperformed with the strong results we delivered in the year ago period. And once again, our innovation rose to the top of the pack in several key categories, including with toppings, frozen vegetables and frozen plant-based meat alternatives. And we have another exciting line-up of new innovations set to hit the shelves during fiscal 2023. The new products you see on Slide 16 are already being accepted by customers who have come to respect the innovation and marketing engine at Conagra and our ability to drive demand in key categories. Our ongoing investments in e-commerce also continued to yield strong results in the third quarter. We delivered compelling quarterly growth in our $1 billion e-commerce business as we outpaced the entire total edible category in terms of e-commerce retail sales growth in Q3, building on our momentum from fiscal 2021. Looking at the chart on the right, you can see that our e-commerce business has continued to grow as a percentage of our total retail sales as we continue to invest behind supporting our brands. I'd like to briefly detail our performance across our 3 retail domains, starting with our frozen business on Slide 18. Frozen continues to be one of the strongest businesses in our portfolio and offers convenience and quality that make it the perfect fit for today's consumer. In Q3, we continued to deliver strong growth on both a 1- and 2-year basis. And within this domain, meat substitutes, single-serve meals, desserts and multi-serve meals were the main drivers of our results. Driven by the appeal of our products to the consumer and the investments we've made in brand building and innovation, our leading frozen portfolio again grew share in Q3, both in the domain overall and within key categories. Now let's talk about snacks. Slide 20 highlights the meaningful acceleration in retail sales growth that we've experienced in our snacks business. In the third quarter, our snacks business grew 11% year-over-year that equates to more than 30% growth over the same period in 2020. Within snacks, we have seen growth across key categories, highlighted by more than 20% year-over-year growth in meat snacks. Similar to our frozen business, our snacks portfolio is gaining share in this large and growing domain. We delivered share gains in multiple snack categories, including several popcorn categories, meat snacks and hot cocoa. Our staples retail sales have also been growing over a 2-year period, and that trend continued in Q3. Specifically, we saw very large increases in retail sales for refrigerated whipped toppings and cooking spray, both of which were up over 25% in Q3 on a 2-year basis. Since the onset of COVID-19, many consumers have strength in healthy categories. We are driving growth, gaining share in attractive categories and remain disciplined in executing the Conagra Way to create lasting connections with consumers. The health of our business is what will enable us to deliver profitable growth for the long term. In the immediate, however, we face a volatile cost environment that continues to be very challenging. As the third quarter unfolded, our expectations for full year fiscal 2022 gross inflation increased from approximately 14% to approximately 16%. The biggest driver of this change is the market inflation that we now expect for Q4. At the time of our Q2 call, we expected Q4 gross inflation of about 11%. Today, we expect Q4 gross inflation of approximately 16%. On a 2-year basis, Q4 gross inflation is expected to be an unprecedented 26%. And as I noted earlier, these incremental costs are disproportionately impacting our strong frozen and snacks businesses. Both rely on inputs like protein and dairy, which are harder to offset in the short term, and in the case of frozen, require specialized temperature-controlled transportation. As noted on Slide 25, we're updating our guidance for the full year to reflect the trends I just covered. We now expect organic net sales growth of approximately 4%, adjusted operating margin to be approximately 14.5%, adjusted EPS to be approximately $2.35, and as I just mentioned, we're updating our gross inflation guidance to approximately 16%. We're also providing guidance for the fourth quarter to reflect the higher estimated inflation and the lag in the offsetting pricing actions. In Q4, we expect organic net sales growth of approximately 7%, adjusted operating margin of approximately 15.5%, adjusted EPS of approximately $0.64 and gross inflation of approximately 16%. While the environment remains challenging, our team continues to stay focused on executing our Conagra Way playbook and positioning our business for long-term growth and value creation. We delivered strong sales growth and continued to gain share, particularly in our healthy and growing frozen and snacks categories, both of which continue to resonate with consumers despite necessary price adjustments to help offset the impact of inflation. While accelerated inflation has put pressure on our near-term earnings, we're confident in our ability to offset the impact with additional inflation-driven pricing actions. And overall, due to the strength of our brands and consistent approach to creating lasting connections with consumers, we are confident in the underlying health of the business and the many value creation opportunities ahead. We hope to see you at our upcoming Investor Day on July 28 at the New York Stock Exchange, where the team and I will be sharing more on our plans for the future. We look forward to seeing many of you there in person. Now that I've highlighted our performance for the quarter. I'll turn it over to Dave to provide more detail on our financials.

Operator:

[Operator Instructions] And the first question will be from Andrew Lazar with Barclays.

Sean Connolly:

Well, Andrew, what I'll ask is let's Dave give you some comments on kind of how we're hedged for next year and then let me give you some of my thoughts on this lag dynamic.

Sean Connolly:

Yes. And I would just add that the bottom line is that, but for the lag effects, our business has performed remarkably well this year and is proving to be quite resilient. That said, lag effects come with the territory. And when manufacturers like us get hit with these waves of inflation, plural, you need 2 things to navigate. You need strong brands and perseverance, and we've got both. It's really not a matter of getting the pricing to line up better with when the inflation hits because mechanically, the way this works is pretty straightforward. First, we experienced a rise in our cost base. That triggers a price increase from us to our retail customers. And then at about the 90-day mark, we begin to see the benefit of that pricing in our P&L, and that's pretty standard. And if we experience multiple waves of inflation as we have this year, we repeat that process over again, and we start recovering the immediate profit squeeze in each wave after that 90-day lag passes. I think the most critical thing is as that process unfolds is watching what happens with volumes. And for us, that assessment has shown the tremendous strength of our brands because we're experiencing fairly modest elasticity demand across each of our 3 consumer domains of frozen snacks and staples. And that's due in large part to the success of the innovation we've got in the marketplace. So we're growing. We're gaining share. And in fact, 3 of our largest brands, Healthy Choice, Birds Eye Voila and Slim Jim, have posted double-digit growth for the past quarter in the scanner data with positive volumes despite price increases that are pretty meaningful. And I think that shows you that the consumers are concluding that these brands are, in fact, offering superior relative value versus things like other in-store alternatives or eating out.

Sean Connolly:

Yes. As I mentioned, Andrew, in my prepared remarks, we do scrutinize elasticities very carefully across all the domains. And what we continue to see in each of our 3 domains is very favorable patterns versus historical norms. And that's even after multiple waves of inflation and the follow-on pricing. Now if we were to experience additional waves of inflation, we absolutely would price again. But I would expect elasticities to remain favorable versus historical norms. And I think you got to think about the work that we've undertaken to modernize this portfolio over the last 7 years. It's a pretty massive transformation, a pretty incredible modernization. And it's working for consumers, and that's -- you see it in our share gains even as prices increases. And so that's kind of how we see things. Now the one other nuance that I will point out with respect to elasticities that I think gets overlooked a lot, and that is that elasticity effects in our portfolio anyway tend to wane as time goes on because consumers are adapting. So in light of the fact that we had waves of pricing, in any given window going forward, we might have older pricing where elasticities are waning, which can offset newer pricing that's been put in place where elasticities are first appearing. So there's a bit of an inherent hedge built in as time passes when you've got a broad portfolio and you've got multiple waves of pricing.

Ken Goldman:

Dave, again, with the understanding that the situation is fluid, you're not ready to really talk about fiscal '23 yet. I just want to get a sense, just to build on your commentary about where you are hedged best guess, as things stand today, where might we expect your cost inflation to be at its worst in terms of general time of the year? And when might you anticipate pricing being at its peak? I know we can't be overly precise here. I just really want to get an idea of rough timing for these factors if you have that general sense for us.

Sean Connolly:

Yes. Ken, I'll just add a couple of thoughts here. I just want to point out, we have not been and we will not be overly optimistic in terms of our inflation outlook. If you look back to what we were calling for at our last quarter in Q4, we called for 11% inflation, and that was on top of big inflation in Q4 last year. So specifically, we called for about a 20.5% 2-year stack on inflation in Q4 and that’s a big number. And had it come in, we would have landed full year EPS this year at $2.50. So that's kind of been our posture. There was no way we could have called the 26% 2-year stack and the 16% Q4 inflation versus 11%. But we obviously -- now we've experienced it, and it will cause us to continue to be balanced in our outlook. And understandably, we've spent a lot of time talking inflation today, but I think an equally important topic is, in fact, the broad-based strength we're seeing in the portfolio. It is undoubtedly the by-product of 7 years of heavy lifting to modernize this business, and it matters a lot because it's given us the ability to take meaningful inflation-driven pricing, and it enabled us to maintain consumer loyalty even after taking price as evidenced by the modest elasticities we've experienced. So yes, we've experienced a lot of inflation, but we've also been aggressive in taking the justified actions to offset it. And I just looked at the scanner data for the week ending March 27 for 10 companies, us and 9 competitors, and what it shows is that versus 2 years ago in the most recent 4-week period, Conagra's price per unit change versus prior year ranked #1; and for the most recent 13-week period, we ranked #3; and for the most recent 52-week period, we ranked #4. So the actions we've taken are clear in the data. The consumer has also seen it, but their conclusion based on their purchase patterns remains the same, and that is that our portfolio is giving them superior relative value even after raising prices.

Sean Connolly:

Yes. Ken, we're going to actually talk about that quite a bit at our Investor Day on July 28. Ale joined us after a long illustrious career at Unilever. He is off to a fantastic start. Modernization of the supply chain in the food industry, I think, is a real opportunity going forward. So we've got exciting plans there, and we'll be sharing kind of how we see things here when we see you all at the Stock Exchange on July 28.

Bryan Spillane:

Maybe just a follow-up to just Ken's question just now. Dave, I think it was in the slides. It was Slide 32, where you've got the operating margin bridge and there's productivity net of operational offsets. Can you just kind of drill into that a little bit? How much of that -- does that at all include the benefit from lapping some of the inefficiencies from last year that Ken mentioned or the COVID-related costs? Just trying to understand what the pieces are inside that.

Bryan Spillane:

So Dave, is the way to think about that because the prior year base would have had inefficiency -- I'm assuming, right, the prior year base had the -- I think you had called out last year, like inefficiencies related to COVID shutdowns. So like the gross to net here on productivity, as some of these things go away, will you actually capture more of the productivity intended or the gross productivity going forward without having to do anything else additionally?

Operator:

And the next question comes from David Palmer with Evercore ISI.

Dave Marberger :

Yes, David, that's -- it's tough right now for me to kind of get into that. I think -- we -- a lot of it comes down to what the additional inflation is going to be and what the additional pricing is going to be that we need. So as of now, we're taking significant pricing that will hit in Q1 from the inflation that we just saw. It's mostly in our frozen and snack business, and so that will be a significant benefit in Q1. If we get inflation rates that can get back to more moderate levels, then it's going to be able for us to expand our gross margin. And then as I mentioned previously, our productivity, how quickly can we bounce back to get more stabilized labor and get our productivity programs up to where they are historically. So there's just so many factors that we're still working through that I can't give you a precision right now on '23 margins.

Dave Marberger :

I think it would be another year of excessive inflation on top of this year, which is 16%. That would be one because, as Sean mentioned earlier, once we get above a certain level, we price and there's a lag there, right, which impacts gross margin. The productivity programs that we have, can we get stability in our operations so that we can get back to driving more cost savings and be more efficient, get rid of some of the absorption on favorability that we've had, but it really depends on the stability of labor. So I feel like I'm talking about the same things that are impacting this year. What we feel good about, David, is the pricing, the fact that the pricing we've taken this year, we're getting into market, the elasticities are favorable, and that's a really good sign. Like if you go back to the beginning of the year, you just look at our guidance to start the year, we had guided for organic net sales of flat, and we had said we think pricing -- we estimated pricing to be 3% to 4% and volume to be down 3% to 4% on that flat base. If you look at where we are now, with our guidance, we're looking at pricing for the year that's going to be about 7% and volume that's going to be down around 3%. So the volume estimate didn't change, and we've gotten twice the amount of pricing that we thought we were going to get. So that is obviously really important for this company as we move into '23 because we are able to price for inflation, and that's going to help us drive our margins. So it's all of those factors that I just mentioned are going to impact margins for next year.

Operator:

And the next question will be from Rob Dickerson from Jefferies.

Dave Marberger :

Yes, Rob, you'll see we had additional pricing that we took that does come into effect kind of midway through Q4. So that's going to help our gross margin versus prior year and versus prior quarter. As well as our SG&A and A&P combined, we're going to see some favorability there relative to prior year-end and Q3 as well.

Sean Connolly:

Yes. I'd say, Rob, over time, you've seen our portfolio has significantly increased in refrigerated and frozen and snacks relative to our staples business. That said, we've been very deliberate in being aggressive to reshape that staples business because there's a lot of good to get out of staples businesses overall. What we've done is we've identified the businesses within staples that are more commodity-like in nature, where we see more private label development and there's less pricing power, and we have divested those businesses. And what we're focused on in staples are think of staples as cooking ingredients and enhancers. And these can be incredibly high-margin businesses with very solid top line performance, if not growth potential. So we've got just gems in our staples business across that business like, PAM cooking spray and ROTEL and lots of other places where we've got extremely strong relative market share, extremely strong margins and a pretty nice top line. But we're just continuing to reshape that business because it does throw off a tremendous amount of cash that then becomes an engine for the growth and innovation that we've extracted out of frozen and refrigerated and out of snacks. So it plays an important role in the portfolio, not to mention to our customers, these are traffic builders, a lot of our staples products. So they're really important to our customers, and it helps us from a scale perspective, having some leverage when we're talking to these large retailers. So we'll continue to look at perpetually reshaping our portfolio for better growth and better margins. That's kind of what we do every day around here.

Chris Growe:

I just had a quick question for you and a question, I think, for Sean, just around where you see the consumer today? We talked a lot about favorable levels of elasticity, there's some indication that private label is starting to pick up, for example, and maybe some trade down in certain categories. I just want to get a sense without going through every category certainly but from a high level, what you're seeing across your business in some of your key categories?

Chris Growe:

And just to be clear then, are you building in -- do you build in like increasing levels of elasticity across your business going forward just to be conservative or based on historical experience?

Chris Growe:

I had just one other quick question for Dave. On that chart where you show like the pro forma EPS and the $0.30 of -- from the impact of the pricing lag, I'm just trying to understand that number. Because the market inflation you cite on there is a $0.21 drag at the operating profit level. What's the difference between those 2? Is that -- were you unfavorably hedged? Is that the way to say it? Or I want to make sure I understand the difference between that $0.30 and maybe like the market inflation or even the profit there of negative $0.18.

Operator:

Ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the conference back over to Bayle Ellis for any closing remarks.

Operator:

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

Operator:

Good day. And welcome to the Conagra Brands’ Second Quarter Fiscal Year 2022 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note today’s event is being recorded. I would now like to turn the conference over to Brian Kearney from Investor Relations. Please go ahead, sir.

Sean Connolly:

Thanks, Brian. Good morning, everyone, and thank you for joining our second quarter fiscal 2022 earnings call. Today, Dave and I will discuss our results for the quarter, our updated outlook for the remainder of the year and why we believe that Conagra continues to be well-positioned for the future. I like to start by giving you some context for the quarter. First, as you all know, the external environment has continued to be highly dynamic, but our team remained extremely agile in the quarter and executed the Conagra Way playbook. We navigated the ongoing complexity and delivered strong net sales growth anchored in elevated consumer demand that continued to exceed our ability to supply inflation-driven pricing actions and lower-than-expected elasticities. While our net sales exceeded our expectations, margin pressure in the second quarter was also higher than expected driven by three key factors. First, while we anticipated elevated inflation during the second quarter, it was higher than our forecast. Second, we experienced some additional transitory supply chain costs related to the current environment. And third, in the face of elevated consumer demand that continue to outpace our ability to supply, we elected to make investments to service orders and maximize product availability for our consumers. We expect margins to improve in the second half of the fiscal year as a result of the levers we pulled and continue to pull to manage the impact of inflation. We will always look to our cost savings programs to offset input cost inflation. However, given the magnitude of the cost increases, our actions also include additional inflation-driven pricing. We communicated pricing to customers again in December. For the year, we are once again reaffirming our adjusted EPS outlook, but our path to achieve that guidance has evolved. We are increasing our organic net sales guidance based on stronger-than-expected consumer demand and lower-than-anticipated elasticities. We are also updating our margin guidance given the increase in our gross inflation expectations for the year and the timing of the related pricing actions. Taken together, we continue to believe that elevated consumer demand, coupled with additional pricing and cost savings actions will enable us to deliver adjusted diluted EPS of about $2.50. So with that as the backdrop, let’s jump into the agenda for today’s call. We will start with an overview of the quarter before going into more detail on our outlook for the second half of the fiscal year. I will also share some of our thoughts on the structural changes we are seeing in consumer behavior, particularly with younger consumers. We believe these changes are further evidence in the long-term potential of Conagra Brands. Let’s dig into the quarter. As you can see on slide seven, our team delivered solid Q2 results. On a two-year CAGR basis, organic net sales for the second quarter increased by more than 5% and adjusted EPS grew by nearly 1%. As I noted earlier, we delivered these results in the face of a highly dynamic and challenging operating environment. Input cost inflation came in higher than expected in the quarter. In addition, we made some strategic decisions to service the heightened consumer demand we continue to experience. As the entire industry incurred transitory costs associated with labor shortages, supply issues on material and transportation costs and congestion challenges during our Q2, we chose to invest in our supply chain and service orders. This deliberate decision ensured we could deliver food to our customers and consumers, especially during the holiday season. Maintaining physical availability is an important part of building trust with customers and maintaining consumer loyalty. The bottomline is that amid the supply disruptions seen across the industry, we remain focused on building for the long-term. While the net result of these factors was a negative impact on our margins during the quarter, we are confident that our purposeful approach better positions our portfolio for the future. I want to take this opportunity to thank our tremendous supply chain team. They have been resilient in navigating this environment, allowing us to remain agile and deliver for our customers and consumers. I continue to be impressed by our team’s commitment and I am grateful for their ongoing dedication. Looking at slide 10, you can see that our strong performance in the second quarter was broad based. Total Conagra retail sales were up 14.8% on a two-year basis in the quarter, with double-digit growth in each of our domestic retail domains; frozen, snacks and staples. Household penetration was also up this quarter, building upon the significant number of new consumers we have acquired over the past two years. Total Conagra household penetration was up 59 basis points on a two-year basis and our category share increased 41 basis points. In addition to increasing household penetration and acquiring new consumers, we are retaining our existing consumers as demonstrated by our repeat rates. Shoppers continue to discover our incredible products and their tremendous value proposition. As the chart on the right of slide 11 shows, our consumers keep coming back for more. As we execute our Conagra Way playbook, innovation remains a key to our success across the portfolio in Q2. Slide 12 highlights the impact of our disciplined approach to delivering new products and modernizing our portfolio. During the second quarter, our innovation outperformed the strong results we delivered in the year ago period. We continue to invest in new product quality and in supporting our innovation launches with deeper, more meaningful consumer connections. Once again, our innovation rose to the top of the pack in several key categories, including snacks, sweet treats, sauces and marinades, and frozen vegetables. Slide 13 demonstrates how our ongoing investments in e-commerce continued to yield strong results. We again delivered strong quarterly growth in our $1 billion e-commerce business and e-commerce accounted for a larger percentage of our overall retail sales than our peers. We outpaced the entire total edible category in terms of e-commerce retail sales growth during the second quarter, just as we did in the first quarter of 2022 and throughout fiscal 2021. As we mentioned earlier, our strong net sales growth was driven by elevated consumer demand, favorable elasticities, and inflation-driven pricing actions. On slide 14, you can see the extent of our pricing actions in the first half of the fiscal year. During this period, our on-shelf prices rose across all three domestic retail domains, and as Dave will discuss shortly, the pricing flows through the P&L. As you can see on slide 15, price elasticity has been fairly low. It’s been favorable to our expectations. Consumers continue to see the tremendous value of our products relative to other food options, a concept I will elaborate on in a few minutes. Now let’s turn to the path ahead. You can see on slide 17, we currently expect gross inflation to be approximately 14% for fiscal 2022, compared to the approximately 11% we anticipated at the time of our first quarter call. This is a large increase and we are taking actions to offset the increase, while still investing in the long-term health of our business. Help manage our increasing inflation, we are taking incremental pricing actions, including list price increases and modified merchandising plans. Many of these actions have already been announced to our customers. As a reminder, there is a lag in timing between the impact of inflation and our ability to execute pricing adjustments based on that inflation. As a result, the incremental price increases will go into effect in the second half of the year, with the most significant impact during the fourth quarter. While it’s easy to get caught up in the quarter-to-quarter impact of inflation and pricing, it’s important to keep focused on the big picture. The long-term success of our business is driven by how consumers, particularly younger consumers respond to our products. And when you take a step back to evaluate the broader environment and how our portfolio delivers against the needs of the modern consumer, we believe that Conagra is uniquely positioned for the future. As we have detailed many times before, Conagra’s on-trend portfolio filled with modern food attributes is winning with younger consumers and our confidence is underpinned by the many changes we are seeing in consumer behavior that are proving to be structural, especially given that these changes are driven by younger consumers that represent the most significant opportunity for long-term value creation. Younger consumers represent a large and growing part of the U.S. population, and they want to optimize the value that they get for the money they spend on food. A large part of optimizing their food spending includes shifting more dollars from eating away from home, eating at-home. As they make that trade, they are choosing national brands and we believe Conagra is ideally positioned to experience an outsized benefit from these behaviors, given the relationship our brands are forming with younger consumers. Overall, Conagra is delivering superior relative value to consumers compared to both away from home options and store brands. Let’s take a closer look at these trends, starting with the population changes. Slide 20 highlights the demographic shift underway in the U.S. Millennial and Gen Z consumers are a large and growing cohort. These consumers are starting to settle down, buy homes and start families. As we presented in the past, when people enter the family formation phase, they increase the amount of food they eat at-home with an outsized increase in the consumption of frozen foods. And what we find particularly important about reaching millennial and Gen Z consumers is that we believe they will remain more value focused than their predecessors. First, let’s talk about the near-term. As you can see in the chart on the left, millennial and Gen Z consumers are earlier in their careers and earning less than the older generations of working age people. This is natural. But it bodes well for food at-home trends in the shorter term. We believe that even as food service bounces back, younger consumers will be value conscious in their food choices. Fewer younger consumers are expected to achieve the financial success of the generations before them. The data on the right suggests that millennials are more likely to earn less than their parents. We believe this means that these savvy consumers will look to stretch their food dollars further even as they age. The data also shows that younger consumers are already eating more at-home. Compared to the population as a whole, Gen Z and millennials have decreased restaurant visits more and sourced a larger percentage of their meals at-home. As these younger consumers have made the shift at-home eating, the data shows that they are finding comfort in the quality, reliability and familiarity that national brands provide. We believe this makes a lot of sense. National brands provide value, while replicating many of the on-trend flavors and modern food attributes that consumers are used to experiencing in away-from-home dining. When consumers make trades like away-from-home to in-home eating trust is paramount. In short, national brands, particularly modernized brands, like those in our portfolio, deliver on this trust imperative and that’s because they offer superior relative value versus other food options. As consumers seek to stretch their household balance sheets in the face of broad based inflation, one of the single largest levers available to them is the reduction in spending on food away-from-home, as food away-from-home prices are typically over 3.5 times more expensive than food at-home prices. This trade will likely become even more important for consumers as food away-from-home prices have already increased faster than at-home prices in calendar 2021 and they are expected to increase at nearly twice the rate as at-home prices in calendar year 2022. Our aggressive modernization of the Conagra portfolio over the past several years has put us in a strong position to capitalize on these structural shifts. Our portfolio has shown its competitive advantage, with excellent trial, depth of repeat and share gain performance. Overall, we believe Conagra is well-positioned to leverage these shifts to create meaningful value for shareholders. And slide 25 shows you the data to support our claim, Conagra is attracting more younger consumers than our peers and getting them to repeat at more attractive rates. By appealing to younger consumers now, we are building superior consumer lifetime value. Importantly, the data shows that these new younger buyers are stickier across our portfolio. We believe this comes back to the investments we have made and continue to make in our products and our brands. The Conagra Way has positioned us to win. As I discussed earlier, we are reaffirming our adjusted EPS guidance of approximately $2.50 for the full year, with a few updates on how we expect to get there. We are increasing our organic net sales guidance to be approximately plus 3%, up from approximately 1%. We are slightly adjusting our adjusted operating margin guidance to approximately 15.5%, down from approximately 16% and we are updating our gross inflation guidance to about 14%, up from approximately 11%. Now that I have highlighted our performance for the quarter and strong positioning for the future, I will turn it over to Dave to provide more detail on our financial performance.

Operator:

Thank you. [Operator Instructions] Today’s first question comes from Andrew Lazar with Barclays. Please go ahead.

Sean Connolly:

Good morning.

Andrew Lazar:

Hey. Two questions for me, if I could. First, maybe Sean, you mentioned several times that elasticities remain sort of below expectations than maybe what you have seen historically, and I realize there are a lot of dynamics at play that that lead to that. I am trying to get a sense of what you are building into sort of back half guidance along these lines in terms of elasticity, just given more pricing is obviously set to keep rolling in as you have talked about. And just some of your expectation taking into account the potential fading of some government stimulus and how does that play a role again and how you think about elasticity? And then I have just got a follow up for Dave.