Q1 2021 Conagra Brands Inc Earnings Call
Good morning, everyone and welcome to the Conagra brands. The school 21 first quarter earnings Conference call.
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At this time I'd like to turn the conference call over to Brian Carney Investor Relations. Sir. Please go ahead.
Good morning, everyone. Thanks for joining us.
I'll remind you that we will be making some forward looking statements today, well, we were making those statements in good faith, but do not have any guarantee about the results. We will achieve descriptions of the risk factors included in the documents we filed with the FCC.
Also we will be discussing some non-GAAP financial measures references to adjusted items, including organic net sales refer to measures that exclude.
Exclude items management believes impact the comparability for the period referenced please see the earnings release.
Additional information on our comparability items.
The GAAP to non-GAAP reconciliations can be found in either the earnings press release or the earnings slides both of which can be found in the Investor Relations section of our website Conagra brands Dot com.
Finally, please note that we expect to report our second quarter earnings in early January this fiscal year, we will.
We will issue a press release with the specific details later this calendar year with that I'll turn it over to Sean.
Thanks, Brian Good morning, everyone and thank you for joining our first quarter fiscal 2021 earnings call I Hope that you and your families are continuing to stay safe and healthy.
Today, I'm going to unpack the quarter for you and then share our perspective on how the evolving consumer environment is shaping longer term demand for our products. So let's get started.
Building upon our impressive momentum at the end of last year, we're off to a strong start in Q1 <unk>.
We exceeded our expectations and saw broad based strength across the portfolio.
We will detail today, we believe our business is well positioned to continue to deliver strong results both in the near and long term.
Formation, we've undertaken over the past five years by following our Conagra way playbook to perpetually to shape, our portfolio and capabilities for growth and better margins has proven critical in enabling us to respond to the changing dynamics in the current environment.
Modernize portfolio commitment to innovate and agile culture have allowed us to respond to the increased consumer demand.
And your preference is today.
In addition, us to deliver meaningful growth into the future.
Our robust performance has also helped us to get ahead of our expected de leveraging cadence.
As Dave will detail later.
Back to reach our net leverage ratio target of 3.5 times to 3.6 times by this.
By the third quarter of fiscal 2021.
Down debt, that's been a capital allocation priority in recent quarters, but you also know we're committed long term to a balanced capital allocation approach.
Given our progress on de leveraging and because we remain confident in the long term outlook for our business our base.
Our board has increased our quarterly dividend by 29% to $1.10 on an annualized basis.
And as I'll discuss more we also continue to invest in the business.
Our performance reflects the great work our team has accomplished during these challenging times.
In particular I want to recognize the thousands of hardworking Conagra team members on the front lines your extraordinary effort and simultaneously keeping employees safe and maximizing our supply have made it possible for us to continue to meet the needs of our communities customers and consumers.
Couldn't be prouder of them.
Let's get into the business update.
The table on slide seven shows our execution in the quarter enabled us to exceed our expectations across the board.
We delivered organic net sales growth of 15% adjusted operating margins of 20.2%.
Yes, 70 cents.
We ended the quarter with a net leverage ratio of 3.7 times compared to 4.0 times at the end of Q4.
During the first quarter, we continued to drive significant growth in each of our three retail segment.
Total conagra retail sales grew 12.9% year over year, driven by double digit growth in snacks frozen and staples.
Importantly, our higher margin non promoted volume contributed significantly to this growth.
Not only did we grow at a great rate, we expanded our presence with consumers and gained share we increased council.
Increased household penetration by 100 basis points and category share by 30 basis points.
Slide nine demonstrates how our investments in E commerce over the last several years continue to yield results in the quarter.
Lengthening our E commerce capabilities has been an area of focus for us and we're seeing the fruits of our labor are.
Our E commerce retail sales have recently demonstrated impressive growth and over.
Over the past five quarters have consistently outpaced total industry E commerce growth.
First quarter also saw continued strong innovation momentum.
Steadfast commitment to the Conagra way playbook has enabled us to consistently exceed our goal of having 15% of total retail sales each year come from products launched within the past three years and.
And of course as our.
As our overall sales continue to increase at this point.
This percentage of sales represents a larger absolute dollar amount.
Even during these challenging times, we remain committed to delivering innovation to our customers and consumers are grow.
Our growth is rooted in innovation and we're driving category performance.
Slide 11 highlights two examples in big growth areas frozen and snacks.
Let's take a look at the frozen single serve meals category.
As compared to our fiscal 17 this category experienced a $575 million increase in retail sales. During the 52 week period ended August Thirtyth Arena.
Our innovation in frozen single serve meals over the past three years is unmistakable we've.
We've generated almost 100% of that categorys growth over the same period.
We've applied this proven strategy to our snacks portfolio and are seeing similar category driving growth let me.
Glenn Jim has consistently Gainshare has the composition in dollar sales for meat snacks innovation.
To top it all off our new Slim Jim Savage Dick has the number one velocity all meat snacks.
Given this track record our innovation success has earned tremendous credibility with our customers.
And our most recent slate of innovation is enabling us to further enhance that credibility slide 12 shows some of the highlights offerings packed with modern food attributes and bolt on trend flavors.
These began launching in Q4 and were pleased with their early in market performance. We will continue to roll these out throughout the year.
We're also excited about the innovation shown here on slide 13.
We are using our broad portfolio to extend high growth brands beyond their legacy forms.
Leveraging our existing capabilities, we're extending gardien and healthy choice into attractive categories with large profit pools, soups jerky and salad dressing.
These two success stories are even going one step further co branding single serve frozen meals.
Slide 14 shows some examples of what else we have on deck for the balance of fiscal 21, clearly, we're not slowing down on our innovation agenda.
I'd now like to take a moment to touch on recent performance in our three domestic retail domains starting with prison.
Slide 15 shows our impressive performance in total frozen during the quarter. This bill.
This business is over $5 billion in annual retail sales and it grew 13.5% in the quarter with double digit growth in single serve meals multi serve meals and plant based meat alternatives.
With respect to frozen vegetables call that last quarter, we were supply constrained and birds eye.
That was in excess of our available capacity exacerbated by a brief plant shutdown to keep our employees safe and healthy I'm pleased to report that during the first quarter, our birds eye plants.
Well capacity and as the quarter progressed, we qualified external manufacturers to supplement our capabilities.
While our consumption in frozen vegetables grew 0.7% in the quarter our shipments grew at a much faster rate as retailers started rebuilding inventories did.
Sitting here today birds eye, which holds the number one position in the category and has over twice the category share compared to the closest branded competitor is very well positioned as we enter the important holiday season.
Turning to snacks.
Snacks business delivered another impressive quarter of growth, 14.6% versus the previous year and 22.7% on a two year basis.
In meat snacks, we are working to maintain our growth and capabilities.
Investing and expanded capacity at our Troy, Ohio plant to be clear. This investment is not a reaction to the near term environment, but a decision made pre coated and rooted in our longer term outlook for the business.
Our meaningful staples results as shown on slide 17 demonstrate that this domain remains extremely relevant.
Our staples business grew retail sales, 11.6% year over year with strong performance across our portfolio of iconic brands.
I'd now like to turn to our perspective on the evolving environment and what we see going forward.
While we hope and expect that the most acute in severe impact of cobot 19 is behind us.
We believe that recent shifts in consumer behavior, coupled with macroeconomic trends suggest that at home eating will remain elevated for some time.
We also believe that we are very well positioned to capitalize on this opportunity.
On pack these points in a bit more we see consumers experiencing and making lifestyle changes driven by cobot 19 that suggest the arrival of a sustained shift in eating habits.
We also know from prior recessions that an economic downturn typically leads to a permanent increase in at home eating even when economic growth returns.
These consumer trends affect everyone in our industry, but we believe that conagra is uniquely positioned to benefit substantially from this environment.
Our portfolio is well developed in the eating occasions that have seen the most significant and sustained shipped two at home eating and our portfolio delivers against the cooking behaviors that consumers are adopting.
We're attracting more new buyers than our peers and consumers are choosing to stick with conagra and come back for more.
Our proven track record of innovation, we believe we will continue to attract new consumers and delay.
And deliver food that meets their evolving needs.
Lets drill down on some of the proof points that underpin these expectations.
Starting with why we believe at home eating will remain elevated.
As you know the vast majority of our sales are sourced from the United States and a four.
And unfortunately, the US economy has been greatly affected by the pandemic unemployment in the U.S. remains high the pace of new job growth is decelerating and many U.S. households have limited savings.
You understand how this recession may impact Americans eating habits going forward, we look back at how behavior changed in the wake of the last recession.
Slide 20 shows the percentage per cent of eating occasions that have been sourced at home in the U.S. since 2007.
You can see the Oh wait recession, what the catalyst for a 200 basis point increase in at home eating occasions from 80% to 82% over the course of four years.
Importantly that rate held steady long after the recession ended even when the economy returned to growth and employment hit record levels.
With the Cobot 19 disruption we've already seen another 200 basis point increased 84%.
The four months from March to June 2020.
History is a guide.
The increased percentage at home eating occasions should persist even with economic growth returns.
And slide 21 shows as consumers are saving money in their food budgets there.
Our using their dollars and time differently.
They are preparing to be at home for an extended period of time tumor.
Tumors are investing in their houses their home gyms their entertainment systems and their kitchens.
The chart on the right you can see that consumers are also spending more time cooking data.
Data is showing that consumers are tackling more complex media in other words, they're upgrading their culinary skills.
We don't expect these upgrades to homes at home entertainment kitchens, and cooking skills to go away anytime soon.
This all leads to one conclusion more time at home and as a result more consumption of food at home.
The pivot to remote work is also a meaningful development.
Significant workplace disruption we've experienced over the past several months has given way to a new normal remote workforce.
Chart on the left of slide 22 shows how even baseline projections see office vacancies remaining elevated over the coming years. Furthermore, on the right. We can see how remote workforce adoption has significantly increased.
We're working from home means more lunches eaten at home and real opportunity for portfolio like ours.
And while we're well past the initial spike of stocks up behavior. When cobot first emerged in the U.S. in March at home eating occasions have remained elevated even increasing over the most recent two weeks of data.
As the chart on Slide 23 shows we're continuing to see a double digit percentage increase in total industry sales at retail versus the prior year.
During our first quarter food and beverage industry sales rose an impressive 14%.
Well, we don't know exactly how these growth rates will trend going forward. We do know that we're entering the cold and flu season and that winter weather could limit the appeal of outdoor restaurant dining in many parts of the country.
All of these factors give us reason to believe that the elevated level of at home eating should persist. We also believe the conagra is uniquely positioned to benefit.
Let's start with slide 24.
Total at home yields have increased almost 6% in the three months ending July 2020 that almost 7 billion meals.
When you take a closer look at this growth by Daypart the increases in meals and dollars are skewing toward lunch and dinner and as you know Conagra is well developed in both of these day parts.
And on the right shows that in fact, our portfolio over indexes dinner and is almost at parity for lunch compared to the overall mix.
And whether a consumer wants to cook from scratch to put those newly developed culinary skills to the test or.
Or heat and eat conagra's diverse.
Conagra's diverse portfolio can deliver a solution for every need in every day part so.
So we are very well positioned for when and how people are eating more at home.
On slide 25, you can see the benefits over 80% of our categories have been growing in line or faster than the industry.
And as I mentioned earlier, we've been gaining share within those categories.
This is further demonstrated by slide 26, which shows we're attracting new buyers at a faster rate than any of our peers.
Slide 27 shows that the buyers were attracting over index to the coveted millennial Gen X generation.
As you might expect we're seeing substantial millennial expansion in frozen, but just as importantly, we're seeking their expansion in snacks and staples as well.
Because of this we are creating the groundwork for future growth above the category and above our peers, we're attracting younger generation and building superior consumer lifetime value.
And not and not only are more consumers trying our products. They are liking them coming back for more take a look at the chart on slide 28.
New Trier repeat rates for our consumers, whose first trial was in March or April have remained steady at above 50%.
Thats sticking as can be seen further in the chart on slide 29.
Not only are repeat rates sustaining but depth of repeat is improving.
For consumers are choosing to repurchase a conagra product two or more times compared to where we were a year ago.
When you compare us to our peers, we are at the front of the pack slide 30 shows that we rank above nearly all of our peers in the total percentage of repeat purchasers demonstrating improved stickiness of our brand loyalty.
So in summary X.
Executing our disciplined conagra way playbook over the last five years has grown our portfolio growing our capabilities and positioned us to meet the evolving needs of our consumers, while earning the confidence of our customers we buy.
We believe that at home eating will remain elevated for some time as consumers seek affordable and convenient meals that meet the needs of their new normal.
And we are confident that conagra is well positioned to see sustained benefit.
With that I'll turn it over to Dave.
Thanks, Sean and good morning, everyone.
I'll walk through our first quarter financial performance and outlook before opening the line for questions.
Let's look at the piano highlights for the quarter, which are captured on slide 33.
As Sean discussed we started fiscal 21 on a strong note elevate.
Elevated demand across our retail segments, coupled with effective execution enabled us to exceed expectations for net sales profitability free cash flow and deleveraging.
Compared to the same period, a year ago net sales and organic net sales for the first quarter were up 12.1, and 15% respectively adjust.
Adjusted gross margin increased 244 basis points to 30.7% adjusts.
Adjusted operating margin increased 450 basis points versus the same period, a year ago, reaching 20.2% for the quarter.
Adjusted EBITDA increased 34.5% to $647 million ended.
And adjusted EPS increased 62.8% to 70 cents exceeding our first quarter guidance.
Slide 34 outlines the drivers of our first quarter net sales versus the same period a year ago as you can.
As you can see the 15% increase in organic net sales was driven by a double digit increase in volume as well as favorable impacts from price mix.
Favorable pricing and sales mix, both contributed to the growth in the quarter.
Price mix also been included a benefit of approximately 70 basis points from a favorable change in estimate associated with a prior period trade expense accrual.
The organic net sales increased more than offset headwinds from divestitures and foreign exchange as we.
As we pointed out in the past the impact from divestitures continues to diminish sequentially as we anniversary the divestiture closing dates.
Including the impact of the recently announced divestiture of HK Anderson, the full year impact of divestitures is expected to approximate 100 basis points.
Turning to slide 35, you'll find a summary of net sales by segment for the first quarter.
We saw continued strong growth in each of the companies three retail segments on both a reported and organic basis.
The net sales increase was primarily driven by consumers increasing their at home food consumption. As a result of the cobot 19, pandemic, which benefited our three retail segments, but negatively impacted the foodservice segment.
In the quarter, our grocery and snack segment reported organic net sales growth of 20.7%.
This segment benefited as consumers continue to purchase convenient shelf stable products to enhance their at home eating experience.
Segment growth in shipments this quarter exceeded growth in consumption as retailers began rebuilding inventories on brands, such as Hans Pam Duncan Hines and classic.
The refrigerated and frozen segment also experienced strong growth in the quarter that.
The 19% increase in organic net sales is a testament to our innovation in modernization efforts and the role our portfolio plays and meeting the needs of today's consumers.
This segment also experienced shipment growth greater than consumption growth in the quarter, primarily as a result of birds eye.
As Sean mentioned, we increased capacity in frozen vegetables during the quarter, enabling retailers to start replenishing their inventories.
The International segment, 13.1% organic net sales growth came in stronger than we forecasted with each of the segments regions posting growth higher than projected primarily from kobin related demand are.
Our foodservice segment reported a 20.3% organic net sales decline.
Primarily driven by a volume decrease of 24.2% due to lower restaurant traffic.
This marks an improvement from last quarter as some restaurant traffic began to rebound.
Slide 36 outlines the drivers of the 450 basis points of adjusted operating margin expansion in the first quarter.
Our margin levers such as realized productivity.
Nice mix operating leverage and synergies drove a 610 basis point increase in the quarter.
The specific drivers of this increase our supply chain realize productivity of 290 basis points.
Price mix up 250 basis points.
Cost of goods sold synergies up 90 basis points.
And operating leverage of 60 basis points.
Also the net impact of divestitures FX and other items negatively impacted operating margin by 80 basis points.
Cost of goods sold inflation was approximately 3.1% in the quarter, which negatively impacted gross margin by 220 basis points.
We incurred approximately $34 million and cost of goods sold directly related to our cobot 19 response, which now.
Which negatively impacted gross margin by 150 basis points are.
Our a and P. rate was favorable by 20 basis points in the quarter due to the favorable sales leverage as on a dollar basis. We spent approximately the same amount as last years first quarter.
Finally, our SGN a rate was favorable by 190 basis points.
Approximately 160 basis points was related to the combination of fixed cost leverage on higher net sales and reduced spending related to cobot 19 as employees worked from home and did not travel.
The remaining 30 basis point improvement was driven by synergies part.
Partially offset by normal SGN, a inflation and increases in stock based compensation expense.
We have certainly seen a margin benefit driven by the current environment, but.
But it's also clear to say that we have made great progress improving the underlying operating margin of the business.
Slide 37 shows our adjusted operating profit and margin summary by segment in the first quarter.
Our total company adjusted operating profit increased 44.2% to $541 million in the quarter.
Importantly, all four of our segments reported margin expansion in the quarter.
These results demonstrate the tremendous operating margin improvement in our domestic retail and international segments.
While the foodservice segment saw a decline in operating profit dollars. The segment reported a 28 basis point increase in adjusted operating margin.
This was aided by lower inventory write offs and less trade spending in the quarter.
Slide 38 highlights that our adjusted EPS increased 62.8% to 70 cents in the quarter.
Primarily driven by the increase in adjusted operating profit associated with the net sales increased and margin expansion.
Turning to slide 39, you will see a summary of our synergy capture since the close of the Pinnacle foods acquisition in fiscal 19.
After exceeding our fiscal 20 goal of 180 million. We have continued our strong synergy progress in the beginning of fiscal 2000.
In Q1, we can.
We captured an incremental $35 million in savings, bringing total cumulative synergies through the end of the first quarter to 219 million.
To date, the majority of our synergies have been in ESG today and we.
And we expect the majority of the remaining synergies to be roughly in cost of goods sold.
We're very pleased with our progress and are confident that we will continue deliver to deliver on our commitment.
Slide 40 shows the strong progress we've made to improve our balance sheet and cash flow.
From the close of the Pinnacle acquisition in the second quarter of fiscal 19 through the end of the first quarter fiscal 21, we have.
We have reduced total gross debt by more than 1.9 billion.
Resulting in total net debt of 9.2 billion.
As of the end of the first quarter, our net leverage ratio was 3.7 times down from four times at the end of the fourth quarter of fiscal 2000.
Given our we are caught.
We are confident in our ability to achieve our targeted leverage ratio of 3.5 to 3.6 times by the third quarter of fiscal 2001 and.
In addition, we remain committed to solid investment grade credit ratings.
Also our cash flow remains very strong in.
In the first quarter, our cash flow from operating activities increased $78 million or 37% compared to the prior year at the same.
At the same time, we increased our investment in the business by increasing capex by $39 million or 36%.
Supply chain investments and cost savings and capacity projects made up most of our year over year spend as we continue to optimize our network and drive brand growth.
This has led to our free cash flow increasing $39 million 38%.
Last year's first quarter.
As a result of our strong cash flows and progress reducing debt, we have greater financial flexibility to both invest in the business and return cash to shareholders.
This coupled with consistent successful execution of our strategic priorities and our ongoing confidence in the long term strength of the business.
At our board to approve a 29% increase in the quarterly dividend to 27, and a half cents per share were one dollar and 10 cents per share on an annualized basis.
This action is consistent with our commitment to maintaining a balanced approach to capital allocation.
As we return cash to shareholders. We are also increasing our investments in the business as evidenced by the 36% increase in Q1, Capex I just mentioned.
Turning to slide 42, you will find a summary of our outlook as you've heard both joining me share. This morning. We believe there is much to look forward to in the quarters ahead. However.
However, the dynamics surrounding cobot 19 continue to make forecasting with specificity challenge.
What we can share is that we anticipate a continuation of elevated retail demand throughout the second quarter.
We are therefore, providing second quarter guidance as noted in the release and on this slide.
We expect organic net sales growth of plus six to plus 8% in the second quarter.
We expect adjusted operating margin in the second quarter to be in the range of 18% to 18.5%.
Relative to Q1 operating margin.
We expect less operating leverage benefit and we expect to increase our marketing support both above the line and below the line.
We believe there are opportunities to increase brand building investments where capacity permits.
Given these operating margin factors, along with expected improvement in below the line items, we expect to deliver second quarter adjusted diluted EPS from continuing operations in the range of 70 to 74 cents.
We expect to reach our leverage target of 3.5 to 3.6 times by the third quarter of this fiscal year.
Of course, our ability to achieve these targets assumes continued performance end to end by our supply chain.
Finally, we are reaffirming all of our fiscal 22 targets. This morning.
Note that the impact of the HK Anderson divestiture as small enough that we will not be adjusting our fiscal 2002 EPS targets for the divestiture.
Thanks for listening everyone that concludes my remarks, I'll now pass to the operator to open it up for questions.
Ladies and gentlemen at this time, we will begin the question and answer session to ask a question you May Press Star and then one using a touchtone telephone if you wish to withdraw. Your question you May Press Star and two if you are using a speakerphone. We do ask you. Please pick up the handset before pressing the keys to.
Enjoy the best sound quality.
Once again that is star and then one to ask a question.
Our first question today comes from Andrew Elazar from Barclays. Please go ahead with your question.
Good morning, everybody.
Good morning.
Andrew Yes, hi, there I guess first off.
Just so I get some clarity on this you talked about obviously in some of your key.
Segments shipments exceeding what we would have expected around around takeaway or around takeaway given some rebuilding of retailer inventory can you tell us about how much that might have benefited overall organic sales growth in the quarter and I assume that's really just retailers getting back to more normalized levels as opposed to volume that.
No need to sort of come out in future quarters.
Yeah, Andrew Let me, let me take that as Dave.
As we came out of Q4.
The retailer inventory levels were below historic levels, we've talked about that specifically for July but we also saw it in several of our grocery brands as well so the shipments above consumption in the first quarter.
We're clearly just getting that the inventory levels back to the days of supply that they're looking for as we.
As we sit here as we ended Q1 and we sit here today retailer days of supply are still below historic levels. So.
When you look out shipping about consumption.
Right now we're sitting here with heavy retailer inventories were still below historic averages. So it was a catch up from where inventory levels were at the end of Q4.
And just as part of that would you expect the 6% to 8% organic sales growth in fiscal twoq to be.
All in more in keeping with what consumption trends are or above what you anticipate consumption will be because of some continued retailer inventory built and then I've just got a quick follow up.
Yes, right now we're forecasting that shipments will pretty much be in line with consumption for Q2.
And then you mentioned.
Just recently stepping up marketing spend both above and below the line, where you have the capacity to do so to sustain some some of these new consumers I guess, how do we think about that maybe the magnitude of that step up as it relates to how much of the fiscal one Q sort of earnings upside could could well flow through to the full year.
I guess I'm asking how much the companies willing to or it feels makes sense to commit to really stepping up marketing because it would seem a small price to pay in the end. If you can hold on to some of these consumers longer term.
Yes, let me.
Give you some big picture perspective on how we think about this and that and then we can talk a little bit about the go period, because I think it's important that.
You all understand what we intend to do what we do not intend to do and why.
First off before we ever contemplate an increase in our brand building investments two simple things have to be in place one the capacity to supply new demand generation and to evidence of a strong ROI now on this latter ROI point. There are two types of investments where the evidence is quite strong regarding our.
ROI.
Investments to increase consumer awareness around our new innovations and investments.
And investments to further build out our ecommerce business. So on new innovation awareness I think of it. This way it's the precursor to trial, we rate at trial, but you got and repeat but you've got to get that awareness in place. So as you saw in the data. We are repeat performance has been on E com.
Commerce.
We've learned that what we get out of it is directly a function of what we put into it. We've also learned though that speed in supporting the business is very important because it enables you to build a beachhead in the detailing universe that helps us fuel you for purchases. So if we were to see this opportunity someone else would build that.
But overall I'd say, we believe the supporting innovation and ecommerce undoubtedly maximize long term value because it maximizes consumer penetration, which then converts to loyalty, but let's keep things in perspective about the level of support we're talking about as you know our NPS very hard working but it's also very very efficient.
And the rate has hovered around 2%.
Over the last year or so working synergistically with our retailer investments. So that's been our playbook. It works and we will continue to do it and this coming quarter. The spend is likely to be a bit higher than Q1, because we have more capacity and because it's usually higher in Q2 than Q1 because of the holiday season and as the store.
Lets get crowded around holidays, we want to win at the point of purchase and we know that if we create awareness the rest will take care of itself, which sets up a good back half and a good fiscal 2002.
In terms of flow through to the year as you know, we're not guiding to the year and the reason for that today is the same as the reason a year ago, which is.
We're trying to manage this unpredictable environment quarter to quarter, we don't what the back half will give us so.
So.
The key thing for US right now is keeping people healthy and keeping our plants running because if we can't do that obviously it puts it puts a little bit on on our ability to drive revenue, which then converts to profit so.
We're just navigating this quarter by quarter right now.
Thanks very much.
Thank you.
Our next question comes from Ken Goldman from JP Morgan. Please go ahead with your question.
Hi, good morning.
I know it's difficult to be precise but is there a way to think about what your operating margin might have been if not for the trade load and the accounting catch up for Fourq use promo expenses.
Dave I. Appreciate you mentioned that operating leverage added only 60 basis points to the margin this quarter, it's a bit less than I might have expected.
But maybe your mix was also helped by the load or maybe you're just using so many co packers that the benefit to the margin from higher volume just wasn't that big I'm, just trying to get a sense for what the sort of.
Underlying operating margin was excluding some of those maybe nonrecurring benefits.
Yes, Ken let me to your P.
To your point, we're not going to get precise with that I am on my remarks, I tried to unpack it and a lot of details. So you can understand all the different components and drivers and so you should be able to say okay. This is more of a coveted related type item.
For example, we specifically quantified our Colgate related expenses. So you can look at that.
What I will say is that.
Our realized productivity programs and supply chain are tracking very well, our synergy capture which is a big part of our margin improvement is on track and continues to be on track more confident that will continue.
So when you when you look at those items and you compare to inflation and you strip it out at a high level.
We're seeing improvement in core operating margin performance.
As we expected to pre Covance so.
Im going to give you an exact number but generally I feel like we're on track and the pinnacle synergies was an important part of that improvement intended Sean let me just recharacterize to the shipment.
The shipment perspective from Q1, because I think I want you to think that we'll differently than some of the language you used I would characterize it as a partial replenishment, we exited Q4 with retailer inventories high fully depleted way below kind of normalized levels in terms of stock on hand that.
Began to rebuild in the quarter, which obviously will lead to shipments being ahead of consumption with the net take away in terms of absolute status of inventories and trade right. Now is it still your than it has historically in terms of days on hand, Thats, both because not every single category is flushed.
With capacity on the supply side, but also because the take away is higher so the pull through is more your days on hand dropped. So that's that's how I want you guys to think about the retail inventories dynamic.
Okay makes sense. Thank you and then a quick follow up.
Can you update us Sean on how the birds eye brand in particular is doing you're doing so well with so many of your categories and brands I don't mean to pick on this one it just at least what we're seeing in Nielsen data seems like this one's a little more sluggish maybe private labels, taking a little more share than what I might have thought.
So I'm just curious if you can give us a status update on that brand in particular, yes happy to.
You did talk about birds eye for sure on birds eye as you heard in the prepared remarks. His job is running flat out right now we've got thankfully plants are.
Are running well and and we are growing but what you're seeing in consumption.
It does it does it can confuse because the natural level of demand is actually higher than that but what you see going on right. Now is we are approaching the all important holiday season for vegetables, and it is very very important to retailers to have vegetable inventory during the holidays. So the supply constraint.
That you are seeing on birds eye or not just those that we've had in terms of our ability to manufacture, but it's also some retailers prioritizing preserving holiday inventory above call. It late summer inventory because as you can imagine when consumers go to buy their Thanksgiving dinner and vegetables, and they can't get what they want.
Got that becomes a very emotional there.
Very negative emotional event, and we don't want that nor nor do our retailers.
Thank you very much.
Our next question comes from Jason English from Goldman Sachs. Please go ahead with your question.
Hey, good morning folks congratulations on a strong start to the fiscal year.
I know, we're so early in this year, but my attention I think a lot of People's attention is on your goals for next year fiscal 22 targets, which.
Which increasingly look like they're more achievable than I think many of stop it would be a few quarters ago on the same.
On the sales side of that you are 1% to 2% CAGR.
Five flatline the back half of the year I'm going to take 2022 organic sales down 9% or so to get that multiyear cagar down to one to two and obviously that sort of reset and 22 contrast, with the narrative you guys built with a lot of really interesting data by the way on why some of this consumption or may remain.
Elevated so how do I put those two or should I, just sit back and say listen you put the target out a while ago, you're not going to move at this point of time, there may be some conservatism on the sales side.
Yes, I think.
We're not going to try to speculate on Bob what will.
What would we be looking like without co bid, but what we are dealing with is kind of what we've got so the environment. We've got we believe.
Sets us up well as we laid out in the prepared remarks today and it puts us in a position to reaffirm kind of where we are with 22 with our long term algorithm and that's that's really.
That's all the all the commentary I think we've got on 22.
Okay. Okay, you were coffee you'd get there without it and obviously, you're expecting koby to be a boost.
So there at least the sales side looks like it's more from a grasp on the cost side I. Appreciate the detail you ran through on the incremental corporate expense. You also mentioned there is theres Cobra related savings are those sort of net neutral or when the dust settles here will you have benefits of incremental costs falling away sort of netted against the.
The the headwinds of internal cost cutting back in or could actually be net favorable net headwind all in.
Yes, so we laid out the.
The 34 million and cover to related costs in our in our margin bridge.
SGN eight includes savings just.
Just because people are working from home there is just not as much travel and expense and so but that's that's less thats, probably a third of the.
$34 million in terms of the favorability, but I think long term out one of the key points, we're making today is art.
Are the work Weve done for five years then.
Intersecting with co bid.
Leads to a very positive long.
Long term NPV big.
Because we are getting these new consumers into our brands. They are discovering all the innovations that we've launched really over the last four or five years, including the new stop they are liking it and they are converting to repeaters and productive repeat is strong and that's we're going to be at 22 before we know it and it will be think of what comes beyond 22 and so.
Certainly all we're trying to maximize that outlook, Jason could I just had one more just so the $34 million in cost of goods sold which affects gross margin the.
Call. It 9 million 10 million of favorability as an ESP today.
Understood really helpful. Thank you guys.
Our next question comes from David Palmer from Evercore Evercore ISI. Please go ahead with your question.
Thanks, Good morning, just a follow up on the topic of gross spending.
Mention that you have the opportunity to reinvest and you mentioned that working media will continue to be in that 2% of sales level and you also mentioned investments in ecommerce I'm wondering if you could talk about how much you are reinvesting away from the working media, whether it's E commerce or other capabilities on the expense line and how.
Meaningful that reinvestment is or has been accelerating during this period and as a follow up.
Keep in mind, the S&P that we've got these days is is.
Almost all working a lot of the inefficiency that we found in a MP was in nonworking dollars survey data market research commercial production.
Things like that that have has been really cleaned up and what remains is very hard working but keep in mind bolster the vast majority of it is in digital I think it can be used at over 80% of it with digital spend so that spans everything from E commerce investments to digital social advertising.
Working.
Direct to consumer messaging all of that stuff and so we have hovered historically over the last number of quarters about 2%. This last quarter, we were below that because we were supply constrained and didn't make sense to pour more GMP on on top of a supply constraint, but now we're we're getting some flexibility there and you'll see a more.
Normalized.
Level for what a Q2, usually is Dave yes, yes, let me just add to that David just maybe help a little bit. So if you. If you look at the Q2 guide for operating margin versus where we came in at Q1 at 20.2%. Let me give you a kind of a few pieces here that will will help you also on the marketing investment so.
First that the trade change in estimate that's about 40 basis points. So if you if you take that out because that's a benefit to the first quarter, that's just going to stay for the year.
The difference between Q1 and sort of the mid point of the Twoq Guide is about 150 basis points lower.
That difference between Q1, and Q2 is roughly split among investments in a in pay.
In above the line investments in merchandising and slotting and then growth focused cost of goods sold investments to support our innovation and capital investments. So so thats, a 150 basis points to kind of split it into those buckets. So.
Q2 way MP level will be up versus Q1, it will be more consistent with the level that we saw in Q2, a year ago Brian.
And just a quick follow up I know, there's always limitations to how much you can comment on M&A.
Right.
There have been companies out there successfully selling stuff that they own too to help their future growth and getting surprisingly good prices I'm thinking of Hain celestial here. Just for example, you have.
You have the tax asset.
Things seem to be going slowly there on the divestiture front do you look at this as an opportunity rich environment for you to perhaps reduce exposure to lower growing categories.
Make hamper your growth after cobot. Thanks.
Well I guess, David the answer is it depends and as you look back over the last several years, we've been fairly active both on inbound and outbound stuff and we also are keenly aware, we have this tax asset and it does expire at some point, but we've said pretty consistently from the beginning it's not necessarily strategic to use.
Tax asset for the sake of using the tax asset its strategic if we use that to to create value and as we think about candidates that could be outbound. It always comes down to can we I can we get a value for it that is above what we see is the intrinsic value. So we've made very good progress on our de leveraging getting ahead of our.
Our expectations there its not as if we feel pressure.
Such that we would ever liquidated assets below its intrinsic value, we don't feel that pressure, but.
If a good valuation came along we as you've seen from our practices in the past that would be something we would look at as well.
Thank you.
Our next question comes from Chris growing from Stifel. Please go ahead with your question.
Hi, good morning.
Good morning.
I just wanted to follow on a couple of earlier questions just to get a sense of what you think the inventory rebuild added to the first quarter and then also to understand the perspective around Twoq you and.
Why inventories are not rebuilding back to normal levels I want understand is your production ability is it sounds like it has caught up in can you keep pace with demand right now is that any sort of limitation to you building inventory into Q.
Well the.
The inventories have started to rebuild Chris but demand remains elevated its really a category by category dynamic in terms of five pull through takeaway versus capacity at the plant. So as I pointed out between manufacturing capacity overall and retailer inventories being light.
Still we are still in catch up mode, but some categories are in good shape and those are the ones, where we have the ability to really maximize demand, but it's not by any stretch normalized yet because the lift that the demand remains very strong and now of course, we're going into a season, where all the outdoor dining is gone.
Go away in a lot of parts of the country and a cold flu season is upon us. So it's plausible that demand I can even lift from here you saw that in that one chart I showed on occasions, even the most recent weeks beginning to tick back up.
And then what did you say what inventory as of the first quarter.
Yeah, we shipped about retailer inventory.
Yes, how much your shipments were above consumption like what that added to your sales growth in the first quarter.
Our shipments were.
I think it was 600 basis point difference between shipment and consumption.
Okay.
Okay, and then just said.
Right got it okay.
And then just one other quick question on new product contribution is quite high.
There are a lot of companies have had to put off some new product launches.
And I think now sort of get back to a phase one understand it was I think about the next couple of quarters do you have a normal rate of new product activity. That's occurring and are you seeing that come to late at all because of the environment that we're in and just the robust growth occurring at retail.
Yes, I would tell you Chris back when this all hit in March April.
I would have thought more customers would have wanted to delay some of the new innovations, but given our track record and given.
Especially on frozen it's snacks the way, our innovation driven category growth and the way Weve really accounted for almost all of the share in some of our key categories in terms of growth that demand from customers for our new innovation remained extremely strong. So a lot of our products have been going out the door. We've got more yet to go out the door and the performance of those.
Products in marketplace have been strong so we've been doing a combination to maximize supply SKU rationalization, where it makes sense to do so.
Sounds like chef Boyardee, we maximize volume, we're putting out there but at the same time weve been very strong on innovation and it has been working so that's strictly a function of how well our innovation does in terms of velocities in the marketplace. We've got if you look at some velocities just new stuff that we've got out there.
Duncan Hines as brand, we don't always talk about we've got these new Quito friendly Cups, and if this is brand new and it's already got the number one dollar velocity skew.
In that segment are slim Jim prop.
Products the velocities just crushing it are slim Jim Savages initiative as the number one velocity in all meat snacks and it's been the number two velocity in all snacks overall in the last 13 weeks. So these new products are not only going out the door. They are really performing.
Thank you.
Our next question comes from Nik Modi from RBC. Please go ahead with your question.
Yes. Thanks, good morning, everyone. So I just wanted to touch on costs, you just give us an update on kind of how you see things playing out in terms of some of the key commodity costs, but more importantly, just wanted to get a sense on your thoughts around manufacturing and Lee.
And labor costs and kind of how you think about Bob as you forward over the next several quarters.
Hi, good we're hearing a lot from the industry just people.
People not showing up for work and obviously.
Consumption remained elevated so coped usage is going up and transportation costs have gone up so just wanted to get your thoughts on just the whole bucket.
If you could thanks.
Yes, let me start and then Sean you can jump in so for for Q1, our overall inflation was 3.1% for the quarter as we.
As we look going forward.
We estimate that that overall inflation rate is going to come down more to kind of the low to mid 2%. If you look going forward as you mentioned there have been increases and spot rates for freight.
If rates about 10% of our overall cost cost of goods sold but it's a very small piece of.
Our business because we contract for for our freight so.
Clearly going to be an impact but on an overall weighted basis, we think it's manageable and we have other favorability that we can offset that in turn.
In terms of supply chain remember.
Remember, it's the end to end supply chain. So it's not just our manufacturing it's our co mans, but it's also our suppliers so to the extent that certain regions get hit with Covidien and there's impacts on labor.
It impacts the entire supply chain and so we're on that every day every hour of every day.
Making sure we understand kind of where we are with demand and then where we are with supply were.
We're manufacturing fallout at all our manufacturing locations and we're really working closely with our suppliers to make sure we understand where they are with their lead times on ingredients and packaging and all the things that are critical for.
For us to be able to make a finished product so sean anything I think you covered it.
Great. Thanks, guys.
Our next question comes from Steve Powers from Deutsche. Please go ahead with your question.
Yes, hey, thanks.
So not not to belabor topic, you've already addressed in part, but can you just maybe take a step back and give us a bit more perspective as to how you landed at that 2% of sales and tier working media level, just being the right one.
I think everyone would agree it's working well now.
But I think a lot of investors washing your story from the outside and watching other CPG companies lean into today's demand with more elevated amping investment.
Carry some concerns about about your topline, having having more headwinds when the when the music stops on on at home demand so to speak.
I appreciate everything you said about demand staying elevated for longer potentially but I guess it is important to from from what I hear to address our concerns head on because it's a question for would be investors, who like what you're doing on the innovation on the trial and near term repeat fronts, but are more concerned about your brand equities being strong enough.
Going forward to submit long term loyalty.
Yes, Steve happy to talk about that I feel like I talked about this every quarter I my concern.
Consistent encouragement to investors is to think about.
Our brand building work Holistically it starts with the design of the product and the packages and then it includes all the investments we make to create a connection between our consumer and the brands some of that connection happens in the grocery store some of that a lot of it happens on their phone or on their computer or digitally all of it works together.
But a big piece of our first investment in how we get sustained growth is in designing the right products and the right packages. If you look at the single serve frozen meals slide that I shared today, we're now multiple years into re innovating that category and it started with major.
Investments in the food quality and the packaging and then on top of that we layered investments in MP and investment with our retailers and we've got to year one of our success. There. The question we got is.
How are you going to wrap this what's happened in year, two and your competition sees this and they emulate you and you've got difficult comps.
We've done it year after year after year, and we retained just about a 100% of the category growth in that space, which suggests that all the investments we make holistically in brand building from product to package to retailer investments to aim Pete on works very hard and is and is driving sustained performance.
What sometimes trips people up as they get accustomed to seeing thinking that all brand building resides on the ATP line and that a good rate of MP, which is kind of an artifact of the industry from the past is a 4% rate or something like that if you dig deep within most of the companies that have had those kinds of rates what you find.
Extraordinary amount of non working dollars and then working dollars that are still used against traditional tools like inline TV media and things like that we.
We are far beyond those days and Weve purged out that inefficient spend and we converted the old analog spend to heavily digital and what we find is when we put that profile together and we do it with with the work we do with retailers in store, which by the way as you know is not just deep discounting that's not really.
Conagra playbook anymore. It has been very successful for us.
With respect to taking.
Taking that investment up in any given co bid window it kind of depends upon what brand we're talking about because the last thing that would make sense would be to be spending a bunch of and piano brand that we're short on supply and we're not doing that well what we've said in the call earlier today is if we have available capacity and if we have evidence of good ROI will absolute increases.
Spend so you look at the average it it doesn't tell you much on some brands that rate is much higher than that and those are brands, usually where we get tremendous responsiveness and we we have available capacity.
Yes, I think I think thats, a comprehensive overview I guess.
Overview I guess, the only thing that I guess the follow up I have is is is that.
In this environment. Other companies are are making incremental investments that they might not have been making in the.
In a more normal environment I guess are you just saying that those incremental investments generally are not going to have a good ROI for their not happening in your competitive set or just how do we how do we square that circle. Thanks.
I guess from saying is give us credit for the incremental investments that we already had in our baseline. If you look at the slides today that show the sheer breadth and depth of the innovation, we put out there is unmatched so those.
So those are investments and those are investments that have already been in place and are already underway and then on top of that we layer investments to drive awareness of those new innovation. So the investment profile is holistic and.
It includes building out one of the leading if not the leading innovation portfolio in all the industry and all the cost associated with doing that.
Very good thank you very much.
And our next question comes from Bryan Spillane from Bank of America.
So just a quick ones from me first on the dividend.
We've got to step up today, which.
Kind of makes up for the time that the dividend has been frozen so.
This level at this payout ratio should we think about this now is kind of a normalized ratio and assuming there theres growth going forward, we're at a level, where we can grow the dividend.
Consistently and then the second one is just in terms of the outlook or the lack of outlook for for this fiscal year and the.
And the the kind of the question around visibility is the lack of visibility more around cost relative to the.
Revenues, because it seems like you've got a pretty reasonable amount of confidence in the environment and your ability to drive revenue in this environment. So just curious if the the inability to guidance is more driven by cost versus first the revenue. Thanks.
Good Brian Let me, let me hit the dividends, so Sean I communicated in our remarks, our our cash flow our deleveraging cadence or ahead of expectations and we're confident we're going as a targeted three three and a half to 3.6 times leverage ratio in the third quarter were also confident in the long term strength of the business.
As we reaffirmed fiscal 2002, so based on this progress and the board's confidence in a structurally higher earnings power for the company.
Board approved a dividend from 85 cents to $1.10 annualized and this increase moves.
Moves us towards the longer term historic payout ratio of 40.
A 45% to 50% so that's.
That's that's what I'll tell you related to the dividend.
And I think for the second part on the long term.
Hello.
I work related to fiscal 21, I'm, just trying to understand not having guidance for the full year is the lack of visibility more a function of visibility on the topline or is that a function of cost.
No I I think one of the things you got to keep in mind is we're at.
We obviously are in the middle of a pandemic so to some degree the upper control limit on revenue is.
How much can we get out of the plants and the function how much we get out of the plant is a function of how healthy we can keep.
So this is a very contagious disease were trying our best we are doing a great job, but every day when we commend we start date eight o'clock in the morning going through a review of how healthy our people aren't every single one of our facilities and every day brings us new information and teams doing a great job of managing that but it's it's a variable and its a variable that makes it very hard to.
Predict how how these quarters unfold, which is why we're taking this at this point in time quarter by quarter. So.
Thats very helpful. Thank you.
And ladies and gentlemen, with that we'll conclude today's question and answer session. At this time I'd like to turn the conference call back over to Brian Carney for any closing remarks, great. Thank you. So as a reminder, this call has been recorded and will be archived on the web as detailed in our press release. The IR team is available for any follow up.
Discussions that anyone may have thank you for your interest in Conagra brands.
And ladies and gentlemen, with that we will conclude today's conference call. We do thank you for attending you may now disconnect your lines.