Q3 2021 Conagra Brands Inc Earnings Call

Good day and welcome to the ConAgra Brands third quarter of fiscal year 2021 earnings conference call. All participants will be unable to know me both should you need assistance? Please take me off the specialist by pressing the star key followed by zero.

After today's presentation, there will be an opportunity to ask questions to ask a question. You might have started in one on a touch-tone phone which are you a question, please press * then two please Note 5 Days event is being recorded. I would not like to turn the conference over to Brian. Kearney was investor relations, please go ahead. Good morning everyone. Thanks for joining us off making some forward-looking statements today while we were making those statements in good faith. We do not have any guarantee about the results. We will achieve descriptions of the risk factors are included in the documents. We've filed with them. Also, we will be discussing some non-gaap Financial measures references to adjusted items including organic sales refer to measures that exclude items may have been an impact the comparability for the. Referenced.

Please see the earnings release for additional information on our comparability items the gaap to non-gaap reconciliation can be found in either the earnings press release or the earnings slides off both of which can be found in the investor relations section of our website ConAgra brands, with that. I'll turn it over to Sean. Thanks Brian. Good morning everyone and thank you for joining our third quarter of 2021 earnings call today Dave and I will discuss our strong third-quarter results our perspective on how ConAgra is succeeding in the current environment and how we are well-positioned wage future growth from behavioral Tailwinds. So let's get started our business continued to perform well both in the absolute and relative to competition during the third quarter our ability to deliver for stakeholders during this pandemic is not only a testament to our team's ability to adapt to the current environment but a reflection of the work we've done to transform our business over the place.

Five plus years are ongoing execution of the ConAgra way Playbook perpetually reshaping our portfolio and capabilities for better growth and better margins as in a us to rise to the occasion during the COVID-19 pandemic and has positioned the business to excel in the future during the third quarter. We continue to build on our moment and invested across the company to further strengthen the business this included ongoing investments in physical availability to ensure our products are accessible online stores and mental availability to ensure we're making the right connections with our consumers.

as I've said

COVID-19 pandemic has presented an incredible consumer trialling opportunity our Innovation and marketing approach has enabled us to secure not only strong and market share games based on the evidence. We are seen which I will summarize today. We expect to emerge from the pandemic which structurally higher volumes and share driven by the stickiness of the COVID-19 driven demand, but to be clear we are not relying on these benefits to achieve our fiscal 2022 organic net sales guidance.

In the longer-term value creation opportunities of our business. We opportunistically repurchased approximately 300 million of shares in the quarter. We remain committed to a balanced approach to Capital allocation, which includes investing in our business maintaining solid investment-grade credit ratings, executing smart m&a and returning Capital to shareholders via share repurchases and paying and attractive dividend our decision to repurchase shares demonstrates our willingness to capitalize on occasions when we took undervalued as we navigate the current environment. We're seeing input cost inflation accelerate in many of our categories and across the industry. Dave will detail multiple levels. We have managed this inflation.

Finally, we are again reaffirming our fiscal guidance.

Alan Papp these items a bit further in a moment, but I want to start by acknowledging our front-line team our supply chain is a vital component of our success and I want to commend our team once again for their extraordinary execution amid, the COVID-19 pandemic. I'm extremely proud of the thousands of hard-working ConAgra team members whose dedication has enabled our industry-leading mornings. We remain focused on keeping employees safe while meeting the needs of our communities customers and consumers and I'd like to thank everyone at ConAgra for making this possible.

Let's get into the business update is the table on slide eight shows are organic net sales growth of 9.7% Exceeded our expectations in the quarter off despite the winter storm in February causing a small temporary disruption in the supply chain. We also delivered adjusted operating margin of 16% and adjusted EPS of $0.59 both in line with our quarterly guidance.

A strong performance was driven by our continued execution of the the foundation of everything. We do is building Superior Products with modern attributes Great Taste temporary packaging our third quarter results demonstrate the continued strong performance of our new innovation, which is being accepted by customers and sought after by consumers.

Once we have the product.

Right. We need to make sure that consumers and customers have access to it across all channels as we will detail today. This is exemplified by our investments and transportation to ensure a vehicle availability amid elevated demand. And finally we support the mental availability of our products to ensure we connect with consumers in the right place at the right time and with the right page in the third quarter. We supported Our Brands with continued investments in e-commerce and digital marketing our Playbook is not just a slogan. It's the framework we use to run the business office and it continues to deliver great results.

With each of our domains and snacks outpacing the industry as a result. We grew up in each of our domains.

Are strong broad-based growth and share gains were fueled by both are superior penetration and repeat purchase traits in the quarter slide eleven shows that are household penetration rate off during the third quarter was on average double that of our top fifteen peers and we outpaced those same peers in terms of repeat purchase rate.

As I mentioned a minute ago that ConAgra way Playbook starts with building Superior Products, when we began this journey over five years ago. We recognized that we had a lot of latent potential in the portfolio, but it had to be modernized. So we set out to aggressively do just that and you'll recall that we established a goal of having 15% of our annual retail sales come from products launched in the preceding three years, as you can see on slide 12 our Innovation performance has consistently exceeded our 15% goal over the last two fiscal years and through the last fifty two weeks off.

And our fiscal 21 Innovation is performing even better than prior-year Innovation compared to last year's launches the products. We introduced through the third quarter of this fiscal 21 may have achieved 66% more sales per UPC and 53% more distribution points per UBC than during the comparable time. Last year off and as you can see on slide 13 many of our new Innovations are leading their categories.

Looking ahead to see strong customer acceptance our fiscal 22 Innovation customers trust our Innovation track record and rely on our new products to drive consumer trial and overall category growth slide fourteen shows just a few of our exciting innovations that will begin shipping in fiscal 2022.

Critical to our ability to sustain our growing relevancy with consumers is the physical availability of our products, whether through brick-and-mortar or online and slide fifteen demonstrates our investment and Ecommerce have continued to yield results ConAgra has outpaced total edible retail sales in e-commerce growth each order throughout the pandemic and we've grown so many Commerce across 76% of Our Brands over the past year.

as we've discussed before

We believe that e-commerce investment is a high Roi opportunity to deliver our message to Consumers slide sixteen details some of the specific benefits to expanding our e-commerce platform e-commerce Shoppers over index two younger Millennial consumers, when consumers start to shop online, they're likely to continue the behavior and become heavy users of a brand new and online Shoppers in general have higher brand loyalty than those shopping and store all of this demonstrates the opportunity for Superior lifetime value that's being generated by our eCommerce investment and growth. Now, let's turn briefly to each of our retail domains and start with Frozen on slide 17 total ConAgra Frozen retail sales rep impressive 12% on both the one and two-year basis in the quarter, which is an acceleration from the second quarter and a slide eighteen demonstrates our growth and Frozen accelerated off.

sequential basis across many of our leading Brands and categories

snacks business also continued to deliver strong growth throughout the court third quarter as you can see on slide. Nineteen, we generated double-digit retail sales growth on a year-over-year wage year basis and snacking led by impressive increases in Cross popcorn sweet treats and meet snacks.

And as consumers continued snacking at elevated rates, we capitalize with strong Q3 velocity growth across our leading brands.

Are Staples portfolio also delivered solid results in Q3 including 15% retail sales growth led by double-digit quarterly growth across key Staples category wage and it's like twenty two shows the broad-based growth. We delivered in third-quarter exceeded the already strong growth. We delivered in the second quarter people are returning to their kitchens during a MC and new younger consumers are discovering the joy of cooking as we discussed before the current environment has resulted in consumers trying or re-engaging with our Staples product coming back again, and again overall. I'm very pleased with our in market performance across the portfolio this quarter and it's even more impressive given the fact that we delivered these jobs despite continued Supply constraints resulting from sustained elevated demand outpacing our ability to supply

Not takes us to what we see looking ahead as we try to understand where consumer Trends are going. It's always helpful to look back at lessons from recent history month during the consumers shipped from primarily consuming meals away from home two meals stores in home while this shift is not surprising during the whole be a recession. It's important to recognize that the change in Behavior, although event-driven lasted well past the recovery and we believe that a good portion of that change in Behavior was driven by the formation of new habits.

psychology experts

Sure that it takes on average 66 days for a new Behavior to become habitual as you all know. We are nearly four hundred days into the COVID-19 Panthers consumers have adapted to at home eating and formed new habits that we expect to sustain well beyond the current conditions.

Supports our hypothesis. If you take a sampling of data from states that have been the most open based on the mobility of their residents throughout the pandemic off. What you'll find is the 2-year growth rates in retail sales are materially higher than pre pandemic and fairly consistent estate reopen and stay open. So while people are starting to leave their homes more frequently, they are still choosing to eat at home consumers are largely maintaining the habits. They've acquired over the past four hundred days just took like psychology predict and while we're poised to benefit from sustained elevated at home eating. We are not resting on our Laurels or taking our consumers for granted.

We're continuing to invest behind Our Brands to create connections with consumers slide shows just one example of our Innovative approach to brand-building. Please listen to our communities and identify the trends that resonate with them as an example. The slim-jim community online was built on memes.

Even that fact were a natural fit for our brand since joining the online conversation about the do good everyday sentiment of Dogecoin. We've tapped into off another another Channel 4 slim jim to engage with its its Community. We've seen a market uptick in audience interaction including direct engagement and advocacy off from the person that created Dogecoin as you can see on this slide.

Not only is this community hungry for our product and new innovation. But they've also been quick to Rally behind the brand playing a large part in slim jim being crowned the Champions add weeks, March Madness bracket of the top 64 brand on its way to the title slim jim defeated Doritos Pepsi Amazon Wendy's Eminem and Oreo in head-to-head matchups. We're excited about this and you should be on the lookout for additional crypto themed activations in the future.

We've gained the equivalent of more than four years worth of incremental buyers COVID-19 has effectively supercharged new trial and a level rarely seen in our industry importantly we're winning with younger consumers nearly half of our new buyers are millennials and gen Z the steady Trends shown on slide twenty-nine demonstrate that these new buyers are even more likely to repeat purchases across many of our key Brands. They are discovering are modernized portfolio and developing new habits and include our products that you can see on slide Thirty. We're outpacing our peers in terms of repeat rates as consumers are flocking to our brand more than to those of our top competitors across all of our domains.

We continue to believe.

That we are very well positioned to capture the benefits of consumer behavior post-pandemic. Let's start with Frozen the adoption of remote work provides a structural increase in the demand for frozen food compared to pre COVID-19 levels importantly some aspects of the remote Workforce adoption are expected to be permanent and this shift to remote work as long as the biggest impact on lunch and dinner occasions the meals with the largest exposure to Frozen Foods our portfolio of Brands and products uniquely meet these consumers needs to be frozen portfolio over indexes in these occasions by offering hyper convenient meals and sides perfect for a quick lunch or family dinner.

In addition to enjoying more food cooked together at home and including Frozen as a key part of those meals consumers are making what we believe is a significant and Lasting shift to home entertainment people increase their time spent watching digital video by over 40% and twenty twenty recent studies and our understanding of habit formation. Tell us that this shift towards at home entertainment is likely to continue post-pandemic when consumers particularly the younger Generations move their entertainment to the home. They increase the number of homes snacking occasions and during those occasions consumers are choosing Our Brands time and time again,

And as I've already touched on younger groups are engaging more and more with our staple segment as they learn how to cook at home as the chart on the left demonstrates young adults are increasingly moving from urban areas to smaller cities and suburbs where there are fewer options for eating away from home. And as the chart on the right demonstrates these young consumers Thursday and Millennials are increasingly engaging with ConAgra Staples portfolio as they discover their kitchens.

Today we are reaffirming as I said earlier were not incorporating expectations about the stickiness of COVID-19 driven demand in our reaffirmation of the organic net sales guidance. However, as we've detailed today, we are increasingly confident that we will benefit from the stickiness of the pandemic driven demand a name is Abel discuss while the current inflationary environment provides us more of a challenge on margin than we were originally expecting. We will be pulling on all of our margin levers off manage through the current environment and remain focused on delivering our profitability targets.

So to summarize we continued to deliver solid execution during the third quarter and our business remains strong in the absolute and relative to peers while inflation is accelerating. We have multiple levers to manage inflation and drive margin Improvement and we're continuing our execution of the ConAgra way Playbook which includes Investments to capitalize on significant behavioral Tailwinds with that. I'll turn it over to Dave.

Thanks Shawn.

Good morning, everyone. I'll start my remarks by calling out a few third-quarter performance highlights, which are captured on slide thirty-seven as we have detailed this morning the business continued to perform very often throughout the third quarter strong execution from the supply chain and outstanding performance by our teams across the company enabled us to exceed expectations for net sales during the third quarter while being margin and earnings targets as we continue to strategically invest in the business while managing inflation over all reported and organic net sales for the quarter increased 8.55 and 9.7% respectively compared to the same period a year ago adjusted gross margin increased 12 basis points to 27.5% and adjusted operating margin increased a 31 basis-point the 16% in the quarter adjusted ebitda increased 9.9% to $566 million in the quarter while adjusted diluted EPS prove.

$0.59 up $25 and half percent.

Why 38 illustrates the drivers of our 8.5% sales growth versus the same. A year ago the 9.7% increase in organic net sales was driven by a 6.1% increase in volume connected to the continued increase and at home food consumption as a result of the COVID-19 pandemic a favorable price mix impact contributed a 3.6% increase to organic sales growth has shown mentioned are organic sales growth was impacted a bit from the February winter storms that impacted our ability to deliver product for a short time during a quarter.

Are strong organic net sales growth was partially offset by the impact of a 1.2% decrease associated with the divestitures of the lenders HK Anderson and Peter Pan business as well as the exit of the private label peanut butter business as a reminder. We completed the divestiture of our Peter Pan business on January 25th, which was approximately two months into our fiscal third-quarter turning to slide thirty-nine. You will find a summary of our net sales by segment in the third quarter. We saw continued growth in each of our three retail segments on both of ordered an organic basis as the continuation of elevated demand for at home food consumption benefited these segments.

Our food service segments was negatively impacted by reduced demand away from home importantly Innovation momentum in our retail segments continued throughout the quarter inch wide 40 outlines the adjusted operating margin bridge for the third quarter versus the prior-year as you can see our adjusted operating margin increased Thirty basis points to 16% off line with our guidance range for the quarter our adjusted gross margin increased by 12 basis points in the quarter versus the same. A year ago as our margin levers of mix cost management fixed cost leverage and pricing more than offset the combination of inflation and COVID-19 related costs.

included in the 100

An 80 basis points of COVID-19 related costs is 60 basis points of additional Transportation Investments that we made during the quarter. I'll discuss those in more detail in a moment.

A&P increased 11.8% in the quarter primarily driven by higher e-commerce marketing Investments particularly for the refrigerated and Frozen segment. And finally our G&A rate was favorable to our operating margin by 30 basis points versus a year ago as net sales grew at a faster Pace than sg&a.

I know like to touch on certain Transportation investment, we made in the quarter. These are incremental Transportation costs incurred on top of the core Transportation inflation. We experienced so we've included these in our COVID-19 related costs in the margin Bridge these Investments had a negative impact on our margins, but they helped us deliver more profit dollars off as you can see by Q3 organic net sales exceeding guidance demand was higher than we expected during the quarter to adequately service this demand we made the decision took best approximately fifteen million dollars in the quarter this meant aggressively seeking out every available truck and adjusting how we shift the customers.

New best service demand for certain brands. We had to bypass our normal distribution Network and shipped directly to customers while we incurred additional cost to implement. These actions were impacted our operating margin this enabled us to minimize out of stocks maximize on shelf availability and maximize profit dollars.

Covid has provided a period of significant elevated consumer trial of Our Brands and our innovation has out performed expectations allowing us to gain share with existing and new consumer.

Investing to keep product on shelves to support this momentum and to support our retail customers while they managed tighter inventory levels was an easy business decision for us.

While we expect the man to remain elevated for the foreseeable future, we believe we will be in a position to start rebuilding inventory over the next two quarters, which we believe will start removing the need for these mental Investments.

I want to take a moment to comment on the input cost inflation. We're staying in the market and provide an overview of what we're doing to navigate it. As you can see on slide forty-two inflation increase of 3.9% in the third quarter. This was higher than our 3.5% estimate and reflects the broad-based impact on the cost of materials manufacturing and transportation and Logistics. We expect the rate of inflation to continue to accelerate over the next few quarters. Fortunately. We have a variety of levers that can be used to offset this pressure including pricing. We have already mobilized our inflation Justified pricing plans with some actions already in Market others communicated to customers and some yet to come.

history shows us

That price adjustment are more likely to be accepted in the market when industry-wide and broad-based input cost inflation occurs, and that's the environment we see today.

We will also leverage our capabilities Beyond just pricing to offset margin pressure including overall mix management costs cost savings measures such as our ongoing supply chain real life activity programs and the optimization of our fixed cost leverage in short. We will continue to closely evaluate the impact of inflation on our business and are confident in our ability to use utilize our entire tool kit to manage through this environment.

Turning to slide forty-three. You can see an outline of our adjusted operating profit and margin by segment for the quarter. We are very happy with the continued profit growth in our retail business in the quarter month, which more than offsets the decline in Foodservice.

White 44 summarizes the drivers of our third quarter adjusted diluted EPS from continuing operations in the quarter are adjusted diluted EPS of $0.59 increased by 25% compared to the same period a year ago the growth in the quarter voice was primarily driven by the increase in adjusted operating profit associated with the net sales increased and margin expansion pack as well as reduced interest expense driven by lower debt.

White 45 summarizes ConAgra net debt and cash flow information. We ended the third quarter with our net debt to adjusted ebitda leverage ratio at our longer-term Target.

The combination of the improved balance sheet and strong free cash flow generation has enabled us to return additional Capital to shareholders by our recently increased dividend wage. Well as by executing our first share repurchases since the close of the Pinnacle acquisition during the quarter, we opportunistically repurchased 8.8 million shares for 298 million demonstrating our willingness to capitalize on occasions when we believe we are undervalued looking forward. We will continue to be focused on executing a balance Capital allocation policy focused on driving sustainable value creation. We remain committed to maintaining solid investment-grade credit ratings as we use the strength of our cash flow and balance sheet to opportunistically play off as compelling investment opportunities arise in the future.

Why'd forty-six summarizes our current Outlook as we've said throughout our comments today ConAgra business is performing well, and we remain optimistic regarding our ability to generate continued strong performance in the quarters ahead for the fourth quarter. We expect organic net sales to decline approximately ten to 12% as we laughed at 21 and 1/2 Cent growth in queue for a year ago are to for guidance represents a strong two year growth rate of approximately seven to nine and a half percent as a reminder reported net sales rep will also be impacted by last year's 53rd week.

we expect

Our operating margin to be in the range of 14 to 15% This estimate includes the combination of continued Transportation Investments to support product availability at similar levels to Q3 the lag and timing between our pricing actions and the expected acceleration of inflation as well as a continuation of the A&P investment increase that start as a reminder our fiscal fourth-quarter is historically our lowest operating margin quarter given seasonality and it's just mentioned does not include a 53-week given these sales and margin factors. We expect to deliver fourth quarter adjusted EPS in the range of $49.55. Our fourth quarter guidance also contains to assume that the end-to-end supply chain operates effectively during this period of heightened demand.

And finally, we are reaffirming all of our fiscal 22 guidance metrics is Sean mentioned the benefits of the stickiness of COVID-19 related demand are not required to reach our fiscal 22 organic net sales guidance.

While the current inflationary environment more of a challenge than we were originally expecting. We remain focused on utilizing our entire tool kit to deliver our profitability off which we are reaffirming today.

When we report to 4 results in early, July, we plan to provide more detail on our fiscal 22 expectations.

That concludes my remarks this morning. Thanks for listening. I'll now pass it to the operator to open it up for questions.

Thank you. We will now begin the question-and-answer session to ask a question. You may press the one on your touch-tone phone. If you're using a speakerphone, we ask that you please pick up your handset before pressing the keys off to enjoy your question, please press start and two and today's first question comes from Andrew Lazar with Barclays, please go ahead great. Thanks very much for the question Sean Fowler in conversations with investors more recently. There there appears to be this sort of lingering concern that you know can aggregate take whatever actions necessary to deal with, you know, Rising inflation and in fiscal 2018, even if such actions might have sort of negative implications Beyond twenty-two, so in other words, you know ConAgra can hit its fiscal 22 goals, but do so in a way that is somehow deemed less sustainable or or lower quality and I guess in light of rising inflation seen in today's results on margins and sort of the margin commentary for next quarter, you know, I'd expect these concerns to only grow from here. So I guess I'd love your take on.

this and it may be that address this sort of very specific investor concern if you could

Pure. Thanks Andrew good to hear from you. Hope all is well. Well, the short answer is that that concern is totally unwarranted but let's copter up for a second. Just look at the big picture here over the past six years. We have totally transformed our company in our culture and the magnitude of the portfolio modernization we delivered is arguably Best in Class and that incredible work by our ConAgra team put us in a position to capitalize on the unique and unprecedented trialling opportunity to COVID-19 presented. We knew that are modernized products would perform and that are repeat purchases would be excellent. So, what do we do? We we invested during the pandemic to maximize trial and try to capture the lifetime value of these new mostly younger consumers. Look no further than our aggressive stance on Thursday and Solutions in e-commerce in Q3. So if you flash forward to fiscal twenty to our conviction around getting our products are modernized products into consumer.

mouths won't change we play the

Long game and we do not burn the furniture to create better margin percent Optics short-term, you know, this is my I think is my ninth year as a public company CEO, and I've never taken that route. So I don't think that concern is warranted. Thanks for that and then a quick follow-up. I didn't hear and I may have missed it the Synergy capture and the quarter. I don't think it was in the slide deck and it's been in there the last couple of quarters so long. Maybe I'm Dave. If you could just comment on how that came in in the quarter Andrew. We're right on target with Synergy. There was twenty-four million of incremental Synergy in the quarter that brings us to 207 a cumulative and and we're still on track to hit our Target of 305 Million by the end of next year. Thanks very much.

Beverage question today comes from Ken Goldman JPMorgan, please. Go ahead.

Joseph not

we can hear you now. Can we miss the beginning miss the beginning? Okay. Well, we'll try anyway and just cut me off if you can't hear me but you know Sean as you know, just to kind of piggyback a little bit on what Andrew was saying, you know, one of the bigger black invest your questions is whether you can hit that 18% minimum. Margin number next year, right? I'm sure you hear that more than we do you obviously maintain that range today, but the three Q margin came in life you expected as well as well. And then you have an acceleration of inflation into next year. So, you know, despite your reiteration and even though pricing and savings are going to accelerate, you know, there has to be made at your current numbers are saying these Tailwinds won't be quite enough to offset costs. So I guess my question is this just how confident are you in that eighteen to nineteen percent range and why is that it's somewhat at risk at least more than it was three months ago, you know given net cost inflation that we're seeing.

Well, you know, we we've reiterated twenty-two and and you know, we feel good about about the 22 algorithm overall Cannon, you know, the precise permutation how things unfold is not yet clear because things are are moving around still quite a bit. But you know, here's here's how I think about 22 in general versus where what we were originally envisioning the Top Line clearly looks stronger margins look more challenged short-term due to inflation and the lags that usually follow price increases wage and so given we're still in the midst of finalizing our annual operating plan and our pricing plans. It is premature to communicate that precise permutation of how things will unfold but in our eyes, we expect things to age-old in such a way that we deliver the guidance overall.

Great. I'll let it go there. Thank you.

Sunil next question today comes from Chris with Steve Holt, please. Go ahead.

Tide good morning. I mean just hi just had a couple of questions here for the first one just would be that as we think about the the levers you have to offset inflation going forward. There's multiple lovers obviously pricing and and promotional spending those sorts of things. I'm curious in in terms of like your cost savings and you have a little bit of residual synergies, but should we think of that as the phone and defense and and how much in the way of say like productivity savings? Do you have to help offset inflation before you jump into actual pricing and other lovers at the toll that makes sense? Yeah. All right. So let me start Chris with the big picture here and then go over to Dave with the more granular detail. Here's here's how I think about this whole relations slash levers pricing kind of concept. I simply when we're experiencing inflation as we are currently we will be very aggressive to offset it using multiple levers like our cost programs which you cited pricing trade and mix them.

With regard to inflation Justified pricing. It's really they're not a question of if we will move. It's a question of how closely.

The pricing actions impact on the p&l lines up with inflation's impact on the p&l and here not all businesses are equal, you know, the lag is typically shorter as you know in food service jobs and in those retail categories with the simpler, but you know, our expectation is to fully offset inflation over time and through all of these levers and we're working very aggressively to do that, you know, and as I pointed out before something else to keep in mind too, is that the priority for both ConAgra and our customers is to sustain growth now doing that. We got to keep our proven Innovation machine running and doing that means we have to offset inflation. So in other words our customers understand this more often than not because they've seen and they count count on the tremendous Vitality that our Innovation programs have driven into important categories like Frozen and snacks, you know, and last thing before I turn over to Dave is you know, by the way, I am very happy that we've been off.

And modernizing our portfolio for the past six years because you know, you can see the numbers the dedication that these consumers now have to our products will be another factor that helps them navigate disinflationary. Dave. Do you want to talk anymore about the the other the cost savings letters or anything? Sure. So showing hit the pricing. When is it relates to to realise productivity? You know, first of all, we have a factory experience supply chain organization with really strong processes across the entire network. So if you look historically we've we've approximated 3% of cost of goods sold realized productivity that is if you go back historically, you know efficiency in the plant Network opportunity sourcing there's just a series of different areas and we continue to execute projects to drive the club opportunity. So obviously this isn't changing as we look forward. There's other levers though is Andrew at as previously we're on track with our Pinnacle synergies to go from our 270 where we are here Tuesday.

This year to 3:05 by the end of next fiscal year less less COVID-19 related costs in fiscal 22, you know, it was people become vaccinated the entire engine supply chain going to benefit from less Supply disruption and that will enable us to reduce excess costs being incurred in fiscal 21 to support demand if the Q3 incremental Transportation investment that I discussed to my remarks, that's one example that was fifteen million of investment just in this quarter. Another area is supplementing volume with commands both the incremental cost of the KO man in a rental distribution costs to get it from the co man to the customer. And so that's another important lever. We're over a hundred million dollars a year to date and those COVID-19 related costs that as we looked at 22 should really be an opportunity for us to to get that out of the base. We will have some headwinds with fixed overhead absorption and overall segments mix but we think product mix is an odd.

Ready for us. And then as we always talk about margin and creative Innovation our Innovation continues to be strong and we're really bullish on making sure that it's it's margin of creative. So yeah, there's a lot of things a lot of money that's driving this right now, but based on the analysis we've done in the different scenarios, you know, we think we have various ways that we can reach our our 20 to profitability numbers off. Okay, great. That that was helpful. I have just one quick follow-on in relation to those Transportation Investments you made is there another $15 in the fourth quarter that the way to think about it. And is that basically helping you rebuild Iraq is more quickly that also a way to think about that investment.

Yeah, so I'm not going to give you the specific.

We do expect additional investment in Q4 not going to save it. It's exactly 15. It's a little fluid. Yep. The overall objective is is to optimize getting product to customers as quickly and efficiently as possible. So for certain categories and and Staples and snacking were inventories been tight. We made the decision to bypass our normal distribution system network box and shipped directly from plant or or directly from one selected DC. So that gives us a better inventory and allows us to to meet customer demand more efficiently off and it proves product availability, but it comes in an incremental cost and inefficient shipping lanes and and sporadic frequency of distribution routes. So there's a lot of Dynamics there that's going to continue into Q4 and we'll manage that number the best we can. Okay. Thank you very much for all the color.

Our next question comes from David Palmer, please. Go ahead.

Thanks, just to follow up on some of those questions with regard to fiscal twenty two, you mentioned pricing actions and you mentioned increasing inflation over the next few quarters. Do you anticipate that the grass margin Trends and perhaps earnings growth will be more of a back waited will make fiscal 22 more of a back waited year giving the timing of inflation vs pricing than I have a quick follow-up.

Yeah, David, we're not going to get into specifics on on fiscal 22 right now as we said in my comments, we expect the inflation rate to accelerate into Q4 and into early two thousand fiscal 22, but we'll get more color in July. When we we give our Q4 earnings, you know, David is Sean we've talked about how these you know inflationary periods work with respect pricing many times over the years and you know, this this lag concept is an important one right when you see broad-based inflation across an industry across the basket the way we're seeing now you home and to see the whole industry kind of acknowledge that that they're they they've got to contend with these things. They've got to deal with it and and not as I said a few minutes ago not all businesses are created equal and thumbs up when the positive impact the pricing shows up in the p&l versus the negative impact of the inflation there can be a lag. So it's over the course of a full year. That's kind of how you suck.

And to see it go as you see more of a headwind in the short-term and then you see recovery as pricing goes into the marketplace and then oftentimes there's a benefit the following year as as you begin to wrap. So we'll see how it plays out this year. You know, we can say at this point is, you know, we're flat-out on all of these integrated March and management levers that we that we go after and times like this.

And and just to follow up on the the topic of of setting up fiscal twenty-three after you you know, hope hopefully achieve your targets and fiscal 22, if you're achieving wage if the stickiness is above what your guidance implies and you mentioned that that you're not anticipating with this guidance at the COVID-19 related trial will relate will often end up with stickiness in that demand. But if you do have that you do have strong multi-year sales Trends and you have room to reinvest. What where do you anticipate those Investments going from here? Where do you see the most opportunity? Thanks David. It entirely depends upon. What is the barrier to maximizing trial in any given window? So humor is a very instructive example in this regard, you know, you could you could look at our Top Line and Q3 and say well we beat our guidance on the top line was that because of the A&P increase the answer to that is no we plan for a double dead.

increase in a fee and we still

Over delivered on our top-line. So what was it exactly that drove the incremental, uh lift on the top line. It was a deliberate and spontaneous Choice by our management team to invest in transportation solutions that are atypical for us. They come at a higher cost and we chose to do that and make that investment. Why did we do that? Because we've got phenomenal repeat in depth of repeat off data. And so we're very confident in the ROI of that investment because we're very serious about investing in the business in the short-term during this this trial. In order to capture this lifetime value. So we've been doing it all so that you know, the the decision to continue to lean hard on e-commerce where we tend to get the best Roi as we tend to over-index most with the younger consumers who are going to be the ones that deliver the lifetime value. This is very purposeful in our regard and you know, we are absolutely you know, where we do any comments today on Beyond 22, but what we can say is we're we're playing the game hard to optimize wage.

Beyond 22 looks like in terms of our our consumer base because we're having such good fortune generating loyalty.

Thank you.

Next question today comes from Alexia Howard with Bernstein, please.

Good morning, everyone. Hi. I hope you can hear me. Okay? So my first question is you've obviously made a number of years over the last several months and maybe longer than that now that we're coming up to the expiration of the Deferred tax asset. Are we done with that or is it possible that I might be more adapt to come?

Well, you know, obviously we have been active over the years and divestitures and you know, our our philosophy on that has really not changed. It's been that you know, if there's business that doesn't fit strategically if it's a chronic drag on our sales or chronic dragon or margins or somebody else just really puts a tremendous value on it. You know, we're open to divestitures should offer come along that we see clearing the hurdle of the intrinsic value of the business and that's kind of always been our case and that's you know, we're fully aware of the the timing of the capital loss carryforward and Thursday. We have invested assets, you know leveraging that along the way and and you know, frankly we we we have been open to other things as well. But you know, we're just it's not strategic phone number. Let me put it this way to pursue utilizing the capital loss carry-forward for the sake of utilizing the capitalized carry forward. It's it would be strategic for us to divest an asset that didn't fit off.

Core with something that wasn't priority for us as long as the valuation that was inbound. We were the intrinsic value of that. And if you know if that were to happen, you know at any point in time, you know, we would be open to it off. That's when that's in place. We've done deals great. And and then is it follow up your price mix is obviously in the third quarter at least, you know nicely positive. I guess that's partly because of the the pandemic and the I guess maybe lower promotional activity or or maybe it's different but I'm curious about the mix component there and what exactly is driving home if it is positive the mix to our peace and how you expect that to develop going forward. Thank you, and I'll pass it on.

Alexia

Just roughly of the you know, the price mix benefit. We we saw in the quarter. It's roughly 50-50 mix and kind of price and promotion. I'll kind of put into those two buckets as as it comes to the the mix part of it. A lot of that is is really segment mix. So we are growing our domestic retail segment wage significantly which are you know, strong in terms of you know, sales mix relative to our Foodservice business, which is down but we're also seeing favorable mixed with in the business office. So it's really a combination of segments and and kind of brand product mix. If you will see Sean here just one other thing that that I would encourage investors bank about as they think about our top-line long-term you think about our business, you've got three consumer domains. You've got frozen you've got snacks and you've got statements and so what does a long-term investor dead?

Have to believe feel good about our top-line going forward. I think they've got to believe that there's continued growth opportunity Frozen. I certainly do they gotta believe there's continued growth opportunity with this awesome snacks business. We have. We do but what's really interesting is the Staples business and that's a very strong margin business for us and it's been performing phenomenally. Well and this whole dynamic with younger consumers learning how to cook realizing the tremendous value proposition of cooking simple meals at home, you know beginning to form families and you know this kind of at home Nest Lounge, you know, it's a real phenomenon and that's that's a good thing because it would it would lead a reasonable person to believe that that business is at least going to be stable. So if you think about the total mix of the portfolio, you've got a big profitable stapled wage and to Growing domains, I like the way that shapes up for for years to come.

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

Our next question today comes from Brian Spillane with Bank of America, please go ahead. Hey, good morning. Everyone else on the guidance is the 22 reaffirmation. Is that led of Peter Pan divestiture or or is that I guess that's question. Is it the divestiture or not? Yeah. It's the messenger app sends out of there and then second question. I guess Sean is were thinking about the possibility or the you know potential that that you know, some of the demands or sticks going forward. How does that effect or it doesn't have an impact at all on on manufacturing manufacturing capacity and you know, it may be set this I guess over the next year or so. I guess some asking is is a potential that you might have to elevate Capital spending for a while or make them a position to to expand to pass.

Good enough manufacturing capacity to sort of support and and a base that would be elevated versus where it wasn't.

2019

Yeah, Brian, we we've already been doing that across a number of our businesses and and you know, top-line remains strong will continue to do that. Cuz if you look over time at the office as we get on, you know numerous and you know, broad-based Capital Investments the best irr Zar typically those associated with you know, increasing capacity on our our growing businesses like Slim Jim and Ed. So, you know that that's a great return all the time and will continue to look for opportunities to do that. And we you know, we spread it out based on on how we need it. But we've already been making those investments in added capacity both internally and not go Packers interestingly, you know the way it as you all know works with some of these co-packer Investments is those can be a headwind to margins in the short term. But if you believe that the divorce and on the other end of the consumer, there is sustainable. Typically when you repatriate, um that capacity back in house that's expansive to margin at that point in time so that concept remains intact as well and

We'll look for opportunities to do that going forward.

Oh, that's what comes from Jason English it Goldman Sachs. Good morning. Thank you. Send. Another strong quarter a couple questions first recently tactical one and building off Alexia Howard question the price next contribution. If you can sit around half from lower promotions with the pricing actions you. Is it reasonable to expect a decent chunk of that to be all set or mitigated by promotions coming back into the system or or do you think it's reasonable? We could actually continue to operate at a much more subdued promotional level.

Well, if you just go back over the years Jason, you've seen us pretty dramatically ratchet down our our promotion Reliance over the last six years. I think probably off on average. We probably reduced our Reliance promotion more than most most food companies and you know, frankly COVID-19 again illuminated some of the inefficiency that has emerged over the years in some of the traditional promotions. It's just, you know, the lips that the industry used to see on a lot of categories are our lot smaller today. So, you know it's odd but we're big Believers in in redeploying any inefficiency we can find in our total marketing spend and higher Roi ways that could be in trade as you've seen before we found tremendous inefficiency some of the A&P lines and we actually managed and reinvest some of that in store with retailers, but not against traditional kind of stack'em high and Watch em fly types of Investments so that type of you know wage

Investment in E, I'm assuming that's you're referring to retail media. It sounds like Walmarts making a pretty big push to to try to drive more with Canon integrating it with its joint business planning covers as well. It's reasonable to expect that investment to continue to climb next year is part one of the questions and part two is if so, where can you find it? Can this guy come out a trade or does it need to be incremental dollars into the female?

You know we're as as I mentioned many times we're agnostic to where we put brand building dollars as long as we get, you know, good impact and a good Roi and so, you know, your example on I think I was number of years ago. I said look, you know, a lot of people could have come come to us an offer to deploy media media is what we choose to run and it's a question of what the effectiveness and what's the odds so we're we're open-minded to different kinds of investment. By the way, that's not all that we've invested in an e-commerce, you know, as we talked before the importance of investments in Search and other things so that's a show up well in the digital shelf, so to speak are are very important. But you know, we we have been pretty good at keeping our overall level of total marketing investment banker rock-solid over the years. We just tend to move it around from you know pocket to pocket based on what specific opportunity in any given window gives us the greatest impact and the greatest return on investment.

So you can move it around it. It sounds like the answer is if it has to grow you can cellphone that great. You know, if we if we were ever going to add to what we would do it would be good because we see a return for that, you know, and and that's where that's where you know what I mean by that is it was incremental Investments to me, you know, when you see opportunities where they're not a tax on even actually an accelerant leave it because of what they do the Top Line, you know, that's that's positive Roi, you know, we've always been open to that kind of thing. I that's not something we're we're forecasting, but it's just principally how we think about those kinds of Investments for sure. That makes sense. Thanks. I'll pass it on.

Irish Question today comes from Robert moskow with credit Swiss, please. Go ahead.

Hi, thank you for the question. I was wondering in your forecast for the rest of the calendar year have you they've been any assumptions for government programs running out SNAP benefits which are elevated now, you know dissipating I would imagine that would affect, you know your consumer base a little more than than most packaged food companies. You know, you tell me if you agree and and is it is it possible to disassociate that with the stickiness you expect from all the new trial you got from COVID-19? How have you have you made your your macro overlay assumptions there with respect to the the stickiness stimulant and other things aside, you know, we obviously think it's real and that you know, our conviction there is growing even stronger day by day, you know, but we don't need that stick off.

As I said before to get to our regular.

Revenue algorithm, you know, hopefully as the database case for stickiness becomes more concrete some of the reflexive cynicism in the market around stickiness will pivot too Justified Optima and I think that's obviously going to unfold you know, based on how the the data continues to unfold in terms of, you know, things regulatory changes tax changes stimulus changes things like that snap, you know, we do our best to try to prognosticate exactly how that's going to land and factoring into our into our forecasting processes. And you know, you should assume that we we do that we've got I think you guys know we've got a really impressive demand science team and you know, they look at macro factors like that that could have an impact and and we, you know, we leverage them to get to the best forecast we can get to

Okay, and then one quick follow-up, are you expecting to increase it again in fourth quarter?

Yes is part of the the guidance I did that was in my prepared remarks. That's correct. Okay, great. All right. Thanks.

I'm waiting to see who's the question and answer session. I'd like to turn the conference back over to the management team, please. Hold on one box great. Thank you. So as a reminder, this calls been recorded and will be archived on the web page in our press release. The IR team is available for any follow-up discussions that anyone may have thank you for your interest in kind of France.

Thank you, sir. This concludes today's conference call. We thank you all for attending today's presentation. You may not have met your lines and have a wonderful day.