Conagra Brands Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
October 5, 2023

There are 12 speakers on the call.

Operator

Good morning, and welcome to the Conagra Brands First Quarter Fiscal Year 20 24 Earnings Conference Call. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask questions. 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.

Operator

Please go ahead.

Speaker 1

Good morning, and thanks for joining us for the Conagra Brands First Quarter Fiscal 20 24 Earnings Call. Sean Connolly, our CEO and Dave Marburger, our CFO, will first discuss our business performance and then we'll open up the call for Q and A. On today's call, we will be making some forward looking statements. And while we are making these statements in good faith, We do not have any guarantee about the results we will achieve. Descriptions of our risk factors are included in the documents we filed with the SEC.

Speaker 1

We will also be discussing some non GAAP financial measures. These non GAAP and adjusted numbers Refer to measures that exclude items management believes impact the comparability for the period referenced. Please see the earnings release for additional information on our comparability items. The GAAP to non GAAP reconciliations can be found in the earnings press release And the slides that we'll be reviewing on today's call, both of which can be found in the Investor Relations section of our website. I'll now turn the call over to Sean.

Speaker 2

Thanks, Melissa. Good morning, everyone, and thank you for joining our Q1 fiscal 'twenty four 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.

Speaker 2

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 continued 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 2024, reflecting confidence in our plans, people and agility as we navigate a shifting consumer environment.

Speaker 2

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 3 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 sheet. 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.

Speaker 2

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 for 1 to meals for many, even if not everyone is home at the same time to eat And the last shift I will mention is a reduction in wasted food and an increase in the use of 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.

Speaker 2

As you can see, through the 4 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 $2,900,000,000 which is down slightly compared to last year as a result of the slower volume recovery we've discussed. Adjusted gross margin of 27.6 percent was up 272 basis points from last year.

Speaker 2

Adjusted operating margin of 16.7% was up 297 basis points compared to last year and adjusted earnings per share of 0 point 66 dollars increased almost 16% versus last year. Diving further into our top line performance by retail domain, you can see on Slide 10 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 chile 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.

Speaker 2

Looking at Slide 12, you can see that our frozen domain has been the most significantly impacted by recent shift 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. 1st, 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. 2nd, the year over year performance figures do not properly Present the broader trend within frozen food.

Speaker 2

In fact, if you look over a 4 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% Tagger 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.

Speaker 2

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 2024.

Speaker 3

That's a key piece of our

Speaker 2

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. To help protect share and drive the top line, we're focused on investing behind quality, High ROI merchandising and A and 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 2024 guidance that we shared last quarter, including organic net sales growth Approximately 1% compared to fiscal 2023.

Speaker 2

Adjusted operating margin of 16% to 16.5% And adjusted EPS between $2.70 to $2.75 Overall, we remain confident With that, I'll pass the call over to Dave to cover the financials in more detail.

Speaker 3

Thanks, Sean, and good morning, everyone. Slide 18 highlights our results from the quarter. Overall, we are pleased with our profit and cash flow delivery and remain confident in our ability to achieve our full year guidance targets. In Q1, net sales were $2,900,000,000 Reflecting a 0.3% decrease in organic net sales, driven primarily from the elongated recovery of volumes Due to the industry wide slowdown in consumption that Sean discussed earlier, gross margin recovery was a key priority for us in fiscal 2023 And we delivered another strong result in Q1. Adjusted gross profit increased by 10.9% in the quarter, Primarily from the pricing implemented in the prior year and strong productivity, which more than offset the negative impacts The cost of goods sold inflation and unfavorable operating leverage.

Speaker 3

Adjusted gross margin increased 272 basis points And adjusted EBITDA increased 12.1%, largely driven by the increase in adjusted gross profit. Slide 19 provides a breakdown of our net sales. The 0.3% decrease in organic net sales Was driven by a 6.6% decrease in volume, which was partially offset by a 6.3% improvement in price mix, a result of fiscal 2023's inflation driven pricing actions. A small benefit from the impact of foreign exchange Contributed to reported net sales coming in flat for the quarter. Slide 20 shows the top line performance for each segment in Q1.

Speaker 3

Our Grocery and Snacks segment achieved net sales growth of 1.2% in the quarter. We gained dollar share in snacking categories, As Sean discussed earlier, our refrigerated and frozen segment was the most impacted by recent consumer behavior shifts With net sales down 4.6% in the quarter. Our International and Foodservice segments combined are slightly below 20% of our net sales. Both are important to Conagra and contributed meaningfully to growth this quarter. Our international segment delivered year over year volume growth in addition to improved price mix, which helped support strong organic net sales growth Of 8.2% during the quarter, our 2 largest international regions, Mexico and Canada, delivered double digit organic net sales growth over prior year.

Speaker 3

We also saw low single digit volume growth in Mexico, which contributed to the segment's overall positive volumes. For the remainder of the year, we expect volume growth to continue in international. Our Foodservice segment delivered 5.2% net sales growth from strong price mix and we expect to see positive net sales growth in Foodservice for the fiscal year. Foodservice also delivered a strong gross margin in Q1 versus a year ago due to the reduction of supply chain disruption costs incurred in the prior year. This benefit is not expected to extend beyond Q1.

Speaker 3

Our Foodservice segment supplies a diverse set of clients beyond restaurants, including healthcare, travel and leisure and educational institutions, and we are well positioned to compete in these markets. Slide 21 highlights our adjusted operating margin bridge. We are pleased to have delivered a 4th consecutive quarter of strong gross margin improvement, up 2 72 basis points in Q1. We drove a 4 percentage point improvement from price mix during the quarter. We also realized a 1.8 percentage point benefit From continued progress on our supply chain productivity initiatives, along with the wrap of some supply chain disruptions in the prior year.

Speaker 3

These price and productivity benefits were slightly offset by cost of goods sold inflation, a margin headwind 3.1%. Those factors combined with small year over year favorability in A and P and SG and A Drove the 297 basis point improvement in operating margin for the quarter. Slide 22 details our margin performance by segment for Q1. Overall, continued progress on our productivity initiatives And positive price mix contributed to an increase in adjusted operating profit and adjusted operating margin across all 4 operating segments. It is worth noting that our refrigerated and frozen segment continued its very strong operating profit and margin recovery in the quarter, With adjusted operating margin improving 294 basis points versus a year ago.

Speaker 3

Our Q1 adjusted EPS increased to $0.66 representing a 15.8% increase over the prior year. Higher adjusted gross profit and slightly lower A and P and adjusted SG and A were the positive contributors to our adjusted EPS performance in the quarter. These positives were partially offset by lower pension and post retirement non service income, decreased equity method investment earnings And higher interest expense. Slide 24 includes our key balance sheet and cash flow metrics. At the end of the quarter, our net leverage ratio was 3.55 times, down from the end of fiscal 2023.

Speaker 3

We will continue to prioritize reducing our debt and lowering our net leverage ratio in fiscal 2024. Net cash flow from operations increased $180,000,000 in the quarter, primarily driven by reduced investment in inventory versus the prior year. While CapEx investment increased by approximately $20,000,000 Q1 free cash flow More than doubled from a year ago, coming in at $300,000,000 This strong free cash flow enabled us to pay down approximately $130,000,000 of net short term debt, while also funding $157,000,000 for the Q1 dividend, Highlighting our focus on balanced capital allocation. We did not repurchase any shares in the quarter as we continue to prioritize paying down debt. As mentioned, we are reaffirming our guidance for fiscal 2024 Given the strong Q1 profit and margin performance and the confidence in our investment plans a year to go as we continue to navigate a shifting consumer environment.

Speaker 3

Slide 25 outlines our current fiscal 'twenty four expectations for our 3 key metrics, including Organic net sales growth of approximately 1% over fiscal 'twenty three, adjusted operating margin between 16% 16.5 percent and adjusted EPS between $2.70 $2.75 Let's take a closer look at how we expect to achieve that guidance during Q2 and the back half of fiscal 'twenty four shown on Slide 26. During Q2, we expect to continue seeing low single digit organic net sales decline, but volume decline should improve versus Q1 as we wrap inflation driven pricing actions from fiscal 'twenty three. As Sean mentioned, we will redeploy some of our strong gross profit Into strategic investments behind quality, high ROI merchandising and increased A and P to support our brands. We also expect operating margins to be down from Q1 with adjusted EPS approximately flat to Q1. In the back half of the year, we expect volume trends to return to year over year growth, which will help drive low single digit organic net sales growth.

Speaker 3

We expect our trade and A and P investments to be higher than the first half with margins flat to Q2 and second half fiscal twenty twenty four adjusted EPS approximately flat to the same period in fiscal 'twenty three. That concludes our prepared remarks for today's call. Thank you for listening. I'll now pass it back to the operator to open the line for questions.

Operator

Thank you. We will now begin the question and answer session.

Speaker 4

Great. Thanks so much. Sean, I realized as you talked about a lot of near term sort of macro dynamics impacting sort of the industry volume recovery right Alan, it's logical that amping up the marketing investment in the second half now that service levels have returned to normal should logically Start to improve volume trends sequentially. And I assume you forecast as best you can, but I guess my question is, do you think you've given yourself enough latitude To sort of do what's needed, while also being able to reiterate the full year guidance on both the top line, which assumes a healthy positive inflection In the second half and on EPS given the year is now more back end weighted there as well?

Speaker 2

Good morning, Andrew. Yes, I believe the answer 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.

Speaker 2

I probably also will give a nod to our Foodservice and International teams For the excellent job they're doing working their plans.

Speaker 4

And then, I guess on the targeted and sort of disciplined spend, I assume much of this goes to the frozen arena. I guess what form will this take look more specifically and I guess how do you ensure it will be disciplined and I guess what are you seeing competitively? Great question. As you

Speaker 2

Great question. As you point out with our supply chain now clicking on all cylinders, we're once again where we can selectively add promotional activity to drive sales. As I've said before, selectively means highly incremental high ROI events 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.

Speaker 2

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 Percent. So this year in Q1, we were at 21%. 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.

Speaker 2

Thank

Operator

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

Speaker 5

Hi, thank you. Sean, to Andrew's question right there, one of the drivers you mentioned for the second half was, I think maybe a little bit of a directional return to more typical consumer behavior. I just wanted

Speaker 6

to know if we could hear a

Speaker 5

little bit more about which elements of this behavior Maybe you expect to improve, what will drive it? Or is the comment more just, look, we have more we have less pricing, we have more tray, we have more A and P, more new products. So That altogether will help our business. I just wanted to

Speaker 6

get a little bit more color there if I could.

Speaker 2

Yes. 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 and P focused on our largest brands with good margins. So those are all well positioned to have an impact.

Speaker 2

But I think the key here is this consumer behavior And I do think when you see all the competitors in such a tight bandwidth, which is frankly a tighter bandwidth that I'm even accustomed to seeing, You know it's a macro dynamic and the way to think about what we saw in the Q1 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 practice Is that they are very hard to change long term.

Speaker 2

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 re ranking how they prioritize in higher 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.

Speaker 2

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 de prioritize things like convenience Convenience benefits. 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.

Speaker 5

Thanks, Sean. I'll pass it on.

Operator

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

Speaker 7

Hi, good morning. You talked about your plans to step up A and P and Trade spend over the rest of the year, just wanted to get a sense for if this was kind of consistent, the amount was consistent with your initial Expectations heading into the year or if you are now planning for greater reinvestment compared to your initial plans given volume trends?

Speaker 2

It's higher, Pam. It's obviously the consumer dynamic in the Q1 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

Speaker 7

Okay, thanks. That's helpful. And then I guess do you feel like there are areas in the portfolio where you've taken Too much pricing and do you envision a scenario where pricing growth turns negative?

Speaker 2

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 got it's much more of this macro thing where they're reprioritizing entire categories and 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 Key ingredient cost deflates, so products like Ready Whip where you've got basically dairy in there, products like our sausage business or our hotdog business where it's pretty much 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.

Speaker 1

Thank you. That's helpful.

Operator

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

Speaker 2

It looks like you're assuming 2% to 3% organic sales growth in the second half as implied by the guidance. I guess, what gives you the most confidence that you can get there? What are the key improvement areas that we would see? I would imagine Frozen entrees will be 1, but perhaps you can give a sense of where we should be expecting the most energy and improvement going into the second half? Sure, Dave.

Speaker 2

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 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 and 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, you want to add anything to that?

Speaker 3

Yes. Just a little more color on The disruptions in the prior year, which were mostly second half last year, Dave, and we had a fire at our Jackson plant, which significantly impacted our frozen fish business. Obviously, Lent is the big time for that. So we'll be in much better position this year on that. We had canning issues in our beans and chili business And then as you remember, we had the Can Meet recall, which impacted Q3 and Q4.

Speaker 3

More specifically, we should see strong improvement on those categories.

Speaker 2

Hey, one other point I'll make too, David, because you brought up Our Frozen business, it's not an inconsequential point that one slide in our prepared remarks today that showed 40 year trend on frozen. It is literally not counting commodity category like frozen fruit. It is in the top 2, I think, of packaged goods in terms of long term growth in the category and it's been particularly strong in the last 6 or 7 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 7 or so years and that included Q1, I saw David you printed 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.

Speaker 2

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. Thanks for that. We're certainly seeing that promotional activity. I'll pass it on. Thanks.

Speaker 3

Thanks, Dave.

Operator

Thank you. And our next question today comes from Max Gunport with BNP Paribas. Please go ahead.

Speaker 8

Hey, thanks for the questions. 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 lacking The supply chain disruptions, 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 you were going See organic sales growth be strongest in the Q1 and then work its way down? Thanks.

Speaker 2

Sometimes when you're running businesses like this and you're servicing consumers, you take what the field gives you. And I think what we're saying is in Q1, The consumer environment is was more challenged. People were trying to create these offsets to cover expenditures that they were determined to make And we do believe that the consumer environment is going to be more favorable. There will be a bit of pent up demand here for Some of the things that people have traded out of as they've created these kind of short term hacks to make their household balance sheet work and Having the supply chain in the position it's in and getting off to a strong start on profit and having the ability to invest more, we think these are high ROI investments that are going to enable us to That are going to enable us to have the kind of consumer engagement impact that we want to have, but also Be profitable the way we want to be at the same time and that's kind of our outlook.

Speaker 3

Yes. And just in our international and foodservice businesses are off to a really strong start And they're really tracking ahead.

Speaker 8

Got it. And then one on gross margin, if I can. So you Talked about how you expect a step down in gross margin from the Q1 to the Q2 and then to remain at a similar level in the second half. I'm getting that might imply a gross margin of around 27% for the year or roughly in line with last year. A few months ago, it sounds like you were expecting Some improvement in fiscal 'twenty four given price mix and productivity, the lasting of supply chain disruptions, All outweighing negative overhead of the door percent and business investment.

Speaker 8

I didn't see an updated inflation number today, but assuming it stayed at around 3% I'm just curious what's changed. I'm assuming it's maybe a bit more business investment that has moved up. I'm just curious for any color there. Thanks. I'll leave it there.

Speaker 3

Yes. So, Mike, 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.

Speaker 3

We're really pleased with our productivity in the Q1. 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. So but I would just remind you, we gave a range for margin for a reason because of that.

Speaker 3

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.

Speaker 8

Got it. Thanks very much.

Operator

Thank you. And our next

Speaker 5

Sean, I think you said in your script that in the Nielsen tracking data, you had started to see signs of some sequential improvement. I didn't quite see it in the slide and I haven't seen it in our data yet. So I was wondering if you could give a little more color on that.

Speaker 2

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 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, 4 weeks.

Speaker 2

What the competitive set would expect to have seen is that as you move from 52% to 13% to 4%, you see improvement in trend and as you could see on that slide, it was fairly flat. So what we're looking for is And 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 4 week period following what we shared today. You see the first Noteworthy change in unit movement for Conagra and there may have been 1 or 2 other competitors We 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 around Memorial Day or so and it didn't materialize and it we've got our first data point now that's showing It's going in the right direction.

Speaker 2

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 And so that's why we're focused on that.

Speaker 5

Okay. And a quick follow-up for Dave. You mentioned a lot of little Supply chain issues that affected last year, Dave, like the frozen fish issue and then the beans and the chili. Is there any way to add it all up And help us understand like what kind of easy comp this provides either on sales, profits in the back half?

Speaker 3

Rob, I would just kind of 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.

Speaker 9

Okay. All right. Thanks. Thanks.

Operator

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

Speaker 9

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 those things that we're seeing through our channel work is Deflation happening in the perimeter is putting pressure on frozen the category.

Speaker 9

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?

Speaker 2

Nick, can you say more about the specific things in the perimeter that you're seeing that are growing that you think might be impacting frozen?

Speaker 9

Yes, just fresh vegetables, fruits, primarily, right, the gaps between Frozen and some of the fresh areas of the store? Okay.

Speaker 2

Well, I'm not sure we're having a lot of interaction there. Even our Birds Eye business is Behaving similarly with the balance of our frozen business, but what you're seeing in frozen Most of the frozen items we sell are frozen convenience items. And what you've seen over the last quarter are more of this Consumer pivot to what we'll call meals for many instead of meals for 1. It's more of a speed scratch type of thing where you can stretch Your buck and feed more mouths, but that's a laborious effort and it's also not exactly the food that people are habitually accustomed to eating. When I look back over the last 50, 60 years and you look at consumer trends, by far the most unshakable trend in the consumer packaged goods space is the trend toward Convenience.

Speaker 2

And so we know and you saw it in the long term frozen data that I put up that consumers don't have the time to To make stuff from scratch, they don't have the culinary skills and they don't want the waste associated with it. Does that mean they won't do it from time to time and buy a bag of rice and a can of beans and some ground beef. No, they will do that. Those are the kind of the short term cheat codes that I referenced. But they tend not to be very lasting behaviors because as I pointed out consumer habits Practices are highly entrenched.

Speaker 2

So, really, we're focused on that. We know, that this is a short term dynamic and we We certainly within Frozen have the brands that drive the growth and drive the share with the innovation we've delivered. I think our categories Over the last 5 years have accounted for about 70% of the growth in all of frozen, and we expect that kind of highly competitive performance to continue.

Speaker 9

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?

Speaker 3

Yes. And our inflation assumption for 3%, we had assumptions on conversion costs, which Kind of in that mid to upper single digit area. So that hasn't changed. We're very we spent a lot of time on our compensation benefits, Working hard to be competitive, is part of our overall strategy for all of our employees. So, we feel like we've captured it in our estimates for inflation.

Speaker 9

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

Operator

And our next question today comes from Jason English with Goldman Sachs. Please go ahead.

Speaker 6

Hey, good morning folks.

Speaker 10

Thanks for slotting me in and congrats on the momentum in International Foodservice. Great to see.

Speaker 4

Sean, a lot of questions obviously today on

Speaker 10

your back half guidance and I'm sure it's not lost to you. There's clearly some skepticism on the ability to get to the You're promising in the back half. If that doesn't come to fruition, what if any offsets are in your P and L to allow you to get to the bottom line guidance?

Speaker 2

Well, look, it is a quarter of the year is behind us. And as I've said many Other years, a quarter doesn't make a year. So, we are on or ahead of pace on most of our goals after 1 quarter And the challenge has been this consumer behavior shift, which as I mentioned, we view as a temporary dynamic. Between that, our favorable comps, The increased investment, we do expect meaningful top line progress in the second half. And That's our playbook.

Speaker 2

We feel good about it. We are investing more to drive the business. We are trying to Do a couple of things here, which is deliver a strong 2024, but also set our business up to have excellent momentum as we go out of 2024 into 2025, which we're confident will be A very different environment. Dave, you want to add anything to that?

Speaker 3

Yes, sure. So, Jason, obviously, We're looking at our costs 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.

Speaker 3

You look at SG and 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 We're 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 Saving so that we can continue to invest in the business.

Speaker 10

So Dave, I'm going to put words in your mouth to see if I'm understanding this right, I appreciate what your guidance is predicated on, that's top line acceleration. But I think I heard if that doesn't come to fruition, There could be some more opportunities than cost and there could be some upside opportunity in Ardent Mills. Did I hear that correct?

Speaker 6

That's what we're always looking for.

Speaker 2

So we're

Speaker 3

productivity coming and an ardent is off to a good start. Yes.

Speaker 2

Part of it, Jason, is culturally the way Yes, operator, we are wired to be a very lean, very adaptable, very agile team. We don't have a lot of orthodoxies around here of things that We're not willing to do to get to where we got to go. So we'll we've got a great team. They're going to get us Do what we need to do throughout the balance of the year and we'll be super agile as we always are in an environment that's highly dynamic.

Speaker 10

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

Speaker 9

much. Thanks.

Operator

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

Speaker 6

Hey, thanks. Good morning. So I kind of wanted to build on what Jason just asked about because it sounds I guess the question I'm left with is if the consumer behavior shift that you're expecting doesn't play out as we go through the balance of the fiscal year, Are you committed because of looking forward to 'twenty five and beyond, are you committed to the investment spend that you've articulated in 2Q and And 2H or does that itself become a lever to pull to preserve bottom line dynamics? It sounds like in the Q1, given what the environment gave you, you delayed some of the spending. Maybe that's the wrong read, but it feels like you delayed some of the investment spending because the demand was weaker.

Speaker 6

Now you're planning it later in the year as you expect demand to pick up. I guess the question is if that consumer behavior shift doesn't happen, do you keep spending?

Speaker 2

Yes, 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 shift, 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 wave Patient and pragmatic way and that means not trying to force things before they're poised to pivot.

Speaker 2

Otherwise, you can end up with neither metric work And as I said, we will invest smartly, we will pick our spots, we will focus on quality merch, A and P and our biggest brands and awesome innovation and we will Keep a strong determination to drive brand health and value creation for the long term.

Speaker 6

Okay. That makes sense. Is there any I mean, I guess the is there any validity to the thought that Because there was less spending in the Q1, it exacerbated some of the weaker demand trends No,

Speaker 2

I actually would say the opposite. We did see in one of our categories A competitor tried 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 and 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?

Speaker 2

You're going to spend a lot of money without having a lot 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 And that's why we've got the cadence of our spend laid out the way we've got across the full year.

Speaker 6

Okay. That's very helpful. Thank you.

Operator

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

Speaker 11

Good morning, everyone.

Speaker 3

Good morning.

Speaker 11

So it seems as though the industry this year has been caught Fairly flat footed with the surprising lack of recovery in volumes as price growth has slowed. Now it's obviously still too way too early to tell Where the impact of the GLP-one drugs is going to go, what the uptake is going to be over the next 5, 10, 15 years. But in a similar vein, how can you start thinking about different scenarios for how that could play out, which parts of your portfolio might be most Affected either positively or negatively. And how do you start getting data to decide Which of those paths you might want to pursue? I mean, how do you plan for another potentially big consumer behavior shift That might be coming down the pike over the next few years.

Speaker 2

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 healthy. Back in the 90s with SnackWells, it was all about And if you just look in the last few years, we've gone from grain free to cauliflower to keto. 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 that we're staying up with consumer trends.

Speaker 2

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 It will happen over 5, 10, 15 years, not over the next 6 months. But I think the key to navigating these kinds of just A constantly evolving consumer environment is you have to be externally focused.

Speaker 2

You've got to study these consumer trends and you've got to rapidly design in what the consumer Looking forward into your products and that's what we do every year.

Speaker 11

Great. Thank you very much. That's very helpful. And just as a quick follow-up, your leverage is obviously coming down. It's It's expected to come down further.

Speaker 11

Appetite for additional M and A and what parts of the portfolio you might be focused on for that? And I'll pass it on.

Speaker 2

Yes. 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 delevering. 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 and A has always been part of it.

Speaker 2

We've always said there are 2 kinds of big There's big synergistic acquisitions that rarely come along once in a blue moon and then there are bolt on more Growth in 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 where we can add something to the portfolio, odds are It would be in our key strategic domains of frozen and snacks.

Speaker 11

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

Speaker 5

Thank you.

Operator

Thank you. This concludes our question and answer session. I'd like to turn the conference back over to Melissa Napier for closing remarks.

Speaker 1

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

Operator

Thank you. Ladies and gentlemen, this concludes today's conference call. You may now disconnect your lines and have a wonderful day.

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Earnings Conference Call
Conagra Brands Q1 2024
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