Q1 2022 Conagra Brands Inc Earnings Call

Good morning, and welcome to the Conagra Brands' first quarter fiscal year 2022 earnings conference call. All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing the Saar key followed by zero. After today's presentation, there will be an opportunity to ask questions.

I'll ask a question you May press Star then one on your Touchtone phone to withdraw from the question queue. Please press Star then two we ask that you limit yourself to one question and one follow up. Please note. This event is being recorded I would now like to turn the conference over to Brian Kearney Investor Relations. Please go ahead.

Good morning, everyone. Thanks for joining us.

I'll remind you that we will be making some forward looking statements today, while 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 filed with SEC.

Also we will be discussing some non-GAAP financial measures.

For instance to adjusted items, including organic net sales refer to measures that exclude items management believes impact the comparability for the period referenced.

Please see the earnings release for additional information on our comparability items.

The GAAP to non-GAAP reconciliations can be found in 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.

With that I'll turn it over to Sean.

Thanks, Brian Good morning, everyone and thank you for joining our first quarter fiscal 2022 earnings call today, Dave and I will discuss our results for the quarter, our updated outlook for the remainder of the year and why we believe that conagra continues to be well positioned for the future.

Slide five lays out our key messages for today.

First as everyone is aware the external environment is incredibly dynamic right now and we see many of these challenges persisting, but despite the complex operating situation.

Ongoing dedication resilience and agility of our team enabled us to deliver solid Q1 results on the back of strong sales.

We continue to benefit from our proven approach to brand building and the breadth of investments, we're making to increase consumer demand.

These efforts drive brand health, which is evidenced by the continued strength of our sales share and repeat rates across the portfolio.

As a result, we believe our brands are well positioned to continue managing through the current inflationary challenges and support ongoing inflation justified pricing actions.

Looking ahead, we're reaffirming our EPS outlook for the year.

However, we now see a slightly different path to achieving that EPS, we expect inflation to be higher than originally forecasted, but we also see continued strength in consumer demand even above our original expectations.

We believe that consumer demand, coupled with additional pricing and cost saving actions will enable us to deliver adjusted diluted EPS of about $58.0

So with that as the backdrop, let's jump right in.

We know that our long term performance is a function of the caliber and engagement of our team and.

And that has never been more true than today.

I'm extremely proud of the team's resilience and agility in adapting to the dynamic environment. We're currently experiencing.

As a result of our team's continued hard work and dedication we have been able to successfully execute through sustained elevated demand and challenging supply conditions first as we've already mentioned consumer demand has remained at higher levels than we expected.

Due to macro forces as well as the unique position of our portfolio.

This is a great problem to have but it increases the demands on our supply chain at a time when the industry is navigating labor shortages material supply issues and transportation costs and congestion challenges taken together. These factors created an upper control limit on the amount of product, we could produce and ship.

In Q1.

We had the capacity to meet all of the demand our numbers would likely have been even more impressive.

However, our ability to deliver solid results amid this dynamic environment is a testament to our team's ongoing commitment to executing the conagra way playbook, each and everyday.

The Conagra way playbook to portfolio modernization remains our north star in any operating environment, regardless of the external factors that may influence short term demand and supply dynamics in any given quarter. We define long term success is creating meaningful and lasting connections between consumers and our <unk>.

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We believe that our playbook is the most effective framework for delivering on that objective.

Those of you who have followed us for a while will recall that our modern approach to brand building is more comprehensive than legacy industry practices instead.

Instead of anchoring our brand building predominantly in broadcast advertising that pushes new messages on old products.

We anchor our investments and our efforts first in developing new modern and superior items then.

Once we created these more modern and provocative products, we invest to drive the physical availability of those items in store and online and finally, our investments to drive meaningful one to one communication to the right consumers at the right time at the right place enable us to remain salient and relevant.

This comprehensive approach and unwavering.

Commitment to modernizing and premium rising our portfolio continues to pay off and enables us to better manage our brands within any environment.

And as you can see on slide eight our team delivered solid results during the first quarter as you know our year over year growth rates were impacted by the elevated demand we experienced during the first quarter of fiscal 2021, when we were still in the early months of the pandemic given this dynamic will referenced some two year Phil.

Throughout today's presentation to provide more helpful context on what we believe is the underlying strength and trajectory of the business.

As you can see on a two year CAGR basis organic net sales for the first quarter increased 7% and adjusted EPS grew by nearly 8%.

Accordingly, our solid performance in the first quarter was broad based just take a look at slide nine <unk>.

Total Conagra weighted dollar share grew 0.8 points on a two year basis in the quarter with share gains in each of our domestic retail domains frozen snacks and staples.

Innovation remains a key to our success across the portfolio in Q1.

Slide 10 highlights the impact of our disciplined approach to delivering new products and modernizing our portfolio.

During the first quarter, our innovation outperformed the strong results we delivered in the year ago period. This reflects not only the quality of the products launch.

Also our efforts to support those launches with investments and capabilities that deliver deeper more meaningful consumer connections.

And as you can see our innovation rose to the top of the pack in several key categories, including snacks, and sweet treats frozen vegetables and frozen meals.

Our performance is a clear testament to the innovation and marketing engine at Conagra, and we believe the solid reputation we've built with customers and consumers.

In addition to developing superior products. We also remained focused on physical availability during the first quarter through both brick and mortar and online.

Slide 11 demonstrates how our ongoing investments in E. Commerce continued to yield strong results. Once again, we delivered quarterly growth in our $1 billion E Commerce business, both against our peers and as a percentage of our overall retail sales we outpaced the entire total edible category.

In terms of e-commerce retail sales growth during the first quarter just as we did throughout fiscal 2021.

E Commerce sales now represent more than 9% of our total retail sales more than double what they were just two years ago.

As we mentioned earlier, our solid topline performance during the first quarter was driven by strong demand robust brand building investments and inflation justified pricing actions slide 12 details the extent of our pricing actions to date, a few key points to keep in mind first we began implementing actions.

On some of our domestic retail products in the fourth quarter of fiscal 2021 in response to the inflation, we began to experience last fiscal year.

The majority of our domestic retail pricing actions. However, just started to hit the market at the end of Q1 in response to the inflation. We spoke to you about on our Q4 earnings call in July.

As a result, the benefit in the quarter is less than what we expect to see going forward.

You can see this playing out in the consumption data from the last four weeks all of which are part of our fiscal second quarter. During this period, our on shelf prices rose across all three domestic retail domains.

Looking ahead, our original plans for the year included additional inflation justified pricing in future periods, given the heightened inflationary environment. However, we now expect to take incremental actions beyond those original plants.

Of these actions have already been communicated to our customers and the benefits will be weighted towards the second half of the fiscal year.

We will keep you apprised, but it's important that we stress that our pricing actions are not a blunt instrument.

We take a fact based approach to pricing within the portfolio. We use a data driven approach to elasticities and thoughtfully execute actions to align with customer windows.

As we look ahead, we remain confident in the fiscal 2020 to EPS guidance, we outlined on our fourth quarter call, but we now expect to take a different path to achieving that guidance as.

As mentioned, we now expect inflation to be higher than originally forecasted. However, we believe that the combination of continued strength in consumer demand incremental inflation justified pricing and additional cost savings actions will enable us to offset the impact of that inflation.

Like to briefly unpack these factors starting with the update to our inflation expectations.

As you can see on slide 14.

We currently expect gross inflation to be approximately 11% for fiscal 2022 compared to the approximately 9% we anticipated at the time of our fourth quarter call.

The bulk of the incremental inflation can be attributed to continued increases in the cost of proteins edible fats and oils grains and steel cans since our Q4 call.

I want to emphasize that this is our best current estimate of gross inflation for the full year and does not account for the impact of supply chain productivity improvements or hedging.

Dave will provide more color on inflation in the various levers we are able to pull to help offset its impact.

Even in the face of this acutely inflationary environment, we remain squarely focused on continuing to invest in our brands and capturing the strong consumer demand.

And we're pleased to share that the consumer demand, we're experiencing we experienced during the first quarter exceeded our prior expectations.

You can see on slide 15, our total company retail sales on a two year CAGR basis were up nearly 7% in the first quarter with strong growth across our frozen snacks and staples domains.

And when you Peel back the onion further you find even more evidenced underscore the durable strength of our topline performance.

The chart on the left side of Slide 16 demonstrates that we continue to grow our household penetration during the first quarter building upon the significant new consumer acquisition, we've achieved over the past year and a half.

But what I believe believe is even more encouraging is the chart on the right. We didn't just acquire new consumers we kept them.

The data shows growth in repeat rates that demonstrates our new consumers discovered the incredible products and tremendous value proposition of our portfolio.

We're proud that our products are resonating with consumers and that those shoppers keep coming back for more.

Importantly, our performance on these metrics household penetration and repeat rates has not only been strong in the absolute but relative to the competition as well.

We're also encouraged by the elasticity of demand for our portfolio, which has been better than previously expected slide 17 demonstrates that our pricing actions to date have had limited impact on demand as I mentioned most of our pricing actions taken to date to date began to appear on shelf at the end of Q1.

And you can see how that dynamic is being reflected in the data for September which is part of our second quarter.

We continue to be cautiously optimistic that our elasticities will remain favorable as the full array of pricing enters the market.

As evidenced by our strong penetration and repeat rates are growing number of consumers have clearly discovered the convenience and value that our retail portfolio provides.

Taken together the net result of these factors I just detailed is the reaffirmation of our EPS guidance and margin and a few updates on how we expect to get there.

We're increasing our organic net sales guidance to be approximately plus 1% up from approximately flat at the time of our Q4 call.

We are reaffirming our adjusted operating margin guidance to remain at approximately 16%.

We're updating our gross inflation guidance to about 11% and we are reaffirming our adjusted EPS guidance of approximately $52.0

Before I turn the call over to Dave I want to briefly reinforce some of the longer term tailwind. We believe will benefit us for years to come. This includes enduring trends at pre date, the COVID-19, pandemic and new consumer behaviors adopted over the past 18 months.

As a reminder, we have a proven track record of successfully attracting millennials and Gen Z consumers at a higher rate than our categories as a whole.

By attracting younger consumers now we create the groundwork for future growth not only to these younger generations offered the opportunity to drive lifetime value, they're larger than the Gen X generation that immediately preceded them.

Historically younger adults have eaten at home less than older generations, the meaningful shift towards at home eating tends to happen during the family formation years in particular, we note that annual frozen category spend per buyer increases in households, with young kids and an increase.

As further as the kids grow up.

Importantly, almost half of millennials have yet to begin having kids and we fully expect their consumption of conagra products will grow along with the growth of their families.

Another enduring trend is the growth of snacking, which has long been the fastest growing occasion in food and shows no signs of slowing down we have a very strong 2 billion dollar ready to eat snacks business that spans multiple subcategories, where we either have the fastest growing brand the largest brand or both.

The COVID-19 pandemic has only served to accelerate these existing trends and create additional long term growth drivers.

One of the primary drivers for more at home eating is the shifting workplace dynamics that are meaningfully changing weekday eating behavior. This includes both the contracting workforce and the rise of remote work.

As more people work from home or exit the workforce the more likely these people are to eat at home, particularly on weekdays.

Importantly, some aspects of remote workforce adoption are expected to be permanent the way. We work is changing and that's driving changes in consumer eating habits as well.

More time at home also means more time devoted to preparing meals younger consumers are acquiring new skills and developing new food habits at a formative age.

The behavioral science tells us that when people learned to Cook at an early age they continue to cook at elevated levels as they get older and consumers of all ages are rediscovering their kitchens and cooking more at home.

All of these long term tailwind we believe our portfolio is uniquely positioned to meet the needs of today's consumers are frozen portfolio offers hyper convenient meals and sides perfect for the quick work lunch or family dinner, our snacks and sweet treats portfolio caters to those looking to experience both.

<unk> anytime flavors at home, while enjoying time with friends and family and our Staples portfolio offers the simple cooking AIDS and meal enhancers that both experienced and first time cooks are seeking.

In summary, Conagra portfolio has delivered against the recent behavioral shift better than the competition.

And as we move beyond the pandemic and millennials and Gen. Z years continue to age we believe that our brands are well positioned to become an even more regular part of their routines.

Now that I've highlighted our performance for the quarter and strong positioning for the future I will turn it over to Dave to provide more detail.

Thanks, Sean and good morning, everybody.

I'll start by going over some highlights from the quarter shown on slide 21.

As a reminder, our year over year comparisons reflect the lapping of extremely strong demand for at home food consumption. During the early months of the pandemic for that reason, we are also including two year comparisons for a number of important metrics to provide helpful context regarding the underlying health of our business.

We are pleased with the overall results of the first quarter, which as Sean discussed reflected our ability to successfully navigate the current dynamic environment.

Organic net sales declined by 4% compared to a year ago and increased 7% on a two year CAGR.

Adjusted gross profit and adjusted operating profit both decreased year over year, but were flat on a two year basis, demonstrating our ability to offset the double digit inflation experienced in the business during the quarter.

I also want to highlight the increase in our advertising and promotional spend on both a one and two year basis.

These investments reflect our continued commitment to building and maintaining strong brands.

Turning to slide 22, I'd like to spend a few minutes discussing our net sales for the quarter.

On an organic net sales basis, the <unk>, 4% decrease during the quarter was driven by a 2% decline in volume from lapping last year's elevated demand.

This decline was almost entirely offset by favorable brand mix and the pricing actions, we've taken to date and response to the inflationary environment.

There are two items I want to call out on price mix.

As a reminder, the majority of our domestic retail pricing actions just started to hit shelves at the end of Q1.

So the benefit in the quarter was limited compared to the benefits we expect to receive over the course of fiscal 'twenty two.

Second our one 6% benefit from price mix lapses 70 basis point benefit in the prior year period that was associated with the true up of fiscal <unk> fiscal 'twenty fourth quarter trade expense accrual without that item. The current quarter's price mix benefit would have been plus two 3%.

Divestitures resulted in a 110 basis point decline in net sales during the quarter and foreign exchange provided a 50 basis point benefit.

Together these factors drove a 1% decline in total conagra net sales for the quarter compared to a year ago.

Slide 23 shows our net sales summary by segment, both on a year over year and a two year compounded basis. As you can see we've had strong two year compounded net sales growth in each of our three retail segments with a slight decline in our foodservice segment.

Net sales for the entire company have increased 7% on a two year CAGR basis.

Our two year annual sales growth rate for the domestic retail segments is tracking closely with the retail consumption growth achieved over the same period.

Turning to adjusted operating margin Slide 24 details the puts and takes of our first quarter results.

First quarter inflation was 16, 6% driving our adjusted gross margin decline of 530 basis points compared to a year ago.

We delivered 550 points of benefit from our margin lever actions in the quarter.

Inflation justified pricing supply chain realized productivity.

Cost synergies associated with the Pinnacle foods acquisition and.

And lower pandemic related expenses.

However, these benefits were more than offset by the very significant inflation.

Note that the 16, 6% inflation shown on the slide represents gross market inflation for Q1 and does not include hedging our sourcing benefits.

We capture hedging as part of our realized productivity.

For the first quarter, our net inflation inclusive of hedging with high single digits.

Our Q1 adjusted operating margin was also impacted by year over year changes to A&P and adjusted SG&A.

As I previously mentioned, we continued to increase our investments in A&P in the quarter.

The adjusted operating profit and margin by segment for the quarter are shown on slide 25.

As a reminder, we expect our first quarter this fiscal year to benefit the least from our inflation justified pricing actions.

It's also worth highlighting again that our adjusted operating profit is flat on a two year basis.

Over a two year period, we have completely offset double digit inflation, while also increasing investment in the business.

As you can see on slide 26, our Q1 adjusted EPS of <unk> 50.

Was heavily impacted by inflation as well as by a slightly higher tax rate.

These headwinds were partially offset by strong performance from our ardent mills joint venture lower net interest expense and a slightly lower average diluted share count due to our share repurchases during the quarter.

Turning to slide 27, we ended the quarter with a net debt to EBITDA ratio of four times, which was in line with our expectations and reflects the seasonality of the business our.

Our cash flow from operations and free cash flow were also both in line with our expectations for the quarter.

Our capex increased year over year as we remained focused on continued capacity investments to maximize physical availability of our products.

We also continued to return capital to shareholders during the first quarter.

We repurchased approximately $50 million of common stock and paid approximately $132 million in cash dividends.

As a reminder, the board of directors approved a 14% increase to our annual dividend in July.

We paid our first dividend at the increased quarterly rate of 31, and a quarter cents per share or $26.0 per share on an annualized basis. Shortly after the conclusion of Q1.

As we have already detailed today, we continue to experience cost of goods sold inflation at a level that is both significant and in excess of the level projected at the time of our Q4 fiscal 'twenty one earnings call.

We now expect gross cost of goods sold inflation to be approximately 11% for fiscal 'twenty two.

We previously expected gross inflation of approximately 9%.

This heightened inflationary pressure is coming from increases across many inputs, particularly proteins edible fats and oils grain and metal based packaging we.

We are also seeing increasing costs and transportation given marketplace dynamics.

We have strong plans in place to mitigate the impact of this inflation.

First we will leverage sourcing and hedging.

Given our sourcing and hedging positions, we only expect two thirds of the 200 basis point increase in gross inflation to impact the fiscal 'twenty to P&L.

Regarding quarterly flow, we expect about half of the net impact from this heightened inflation to hit in the fourth quarter.

We expect the other half to impact Q2, and Q3 about equally.

As a reminder, the benefit of hedging actions as classified as realized productivity and our schedules.

In addition to hedging in sourcing we expect to have a number of drivers to help offset inflation in fiscal 'twenty two.

As Shaun already detailed these drivers include higher than expected consumer demand lower than expected elasticity of demand and incremental inflation justified pricing beyond our original plan.

As Sean noted the benefits of our incremental pricing actions will be weighted towards the second half of the fiscal year.

We are also taking additional actions to enhance supply chain productivity through the balance of fiscal 'twenty, two and as always we will maintain a disciplined approach to cost control, which continues to be a hallmark of our culture.

We now have additional cost savings actions planned beyond what was included as part of our initial guidance for the year in.

In summary, we intend to leverage our full range of margin drivers to offset the impact of inflation.

We expect to realize the benefits from these drivers as the year progresses with the benefits weighted towards the second half of the year.

We continue to expect margins to improve sequentially over the remainder of fiscal 'twenty two.

The updated inflation expectations, the higher than expected consumer demand and the comprehensive actions. We are taking to combat rising costs are all reflected in the updated fiscal 'twenty two guidance we issued this morning.

We remain confident in our original adjusted EPS guidance of approximately $52.0 for the year, but.

But the path to achieve that guidance has changed.

We now expect organic net sales growth of approximately 1% compared to our prior expectations of approximately flat growth.

Also we expect our adjusted operating margin to continue to be approximately 16%, but see some modest compression versus our original forecast we.

We expect the increase in dollar profit from higher net sales together with incremental cost savings to offset the incremental net inflation dollars.

As I explained on last quarter's call. This guidance is our best estimate of how we will perform in fiscal 'twenty, two but our ultimate performance will be highly dependent on multiple factors, including first.

How consumers purchase food as foodservice establishments continue to reopen and people return to in office work and in person school.

Second the level of inflation, we ultimately experience.

Third the elasticity of demand impact as consumers respond to higher prices and finally, the ability of our end to end supply chain to continue to operate effectively as the pandemic continues to evolve.

Before turning it over to the operator for Q&A.

To reiterate John's comments regarding our confidence in the resiliency of our business.

Our ability to deliver solid results amid such a dynamic environment reflects the continued dedication of our team as well as the strength of our brands and the Conagra way playbook.

Thanks for listening everyone that concludes my remarks, I'll now pass it to the operator for questions.

We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone. If you are using a speakerphone. Please pick up your handset before pressing the keys to withdraw from the question queue. Please press Star then two we ask that you limit yourself to one question and one follow up.

Our first question comes from Andrew was our of Barclays. Please go ahead great.

Great. Thanks very much.

Maybe to start off you know many companies in the food space are certainly seeing better topline but.

Had incremental trouble servicing that demand efficiently due to the labor challenges and sort of other supply chain disruptions I guess conagra is looking for higher sales than initially expected and sort of a similar margin for the full year. So so really improved operating profit dollars I was hoping you could provide us maybe a bit more color on the sort of a key buckets and maybe quantify some of them.

Those key puts and takes for us because I guess, that's where I'm getting at.

A bit of pushback this morning in terms of.

The higher operating profit that you would now see in light of all of these.

All of these challenges and then secondly, just what would be the offset to the better operating profit for the full year that keeps EPS roughly in a similar place for the full year. Thanks, so much.

Good morning, Andrew Let me take.

Take the first part of your question and Dave You can you can add here just comment a little bit on the supply chain situation, well as youre, implying high with respect to supply chain. It is a daily grind. So I am incredibly appreciative and proud of our team clearly when demand from consumers is strong at the same time that the supply chain strain.

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The service can suffer and to manage that to the best of our abilities and maximize our sales we attack each of the root causes as aggressively as we can.

So with respect to the labor environment. It is about recruiting as aggressively as we can and then keeping people healthy when they get in the door.

With respect to materials and ingredients, it's about keeping the pressure on suppliers and having contingencies and with respect to logistics, it's about being as creative and aggressive as we can and so in times like these it does come down to agility and resilience and Thats really how our culture is wired and we.

Talk about having a refuse to lose attitude every day and in the end. These supply chain challenges will ultimately abate and when they do the fact that our consumers have such affinity for our product sets us up very well for the future. So that's that's really our goal is to do everything within our power to get as many boxes of our products as we.

Can out the door to help offset some of the <unk>.

Cost pressures, Dave you want to add anything to that on the yes, Let me let me address your operating profit margin question Andrew.

As I mentioned in my prepared remarks, given the dynamic of increasing profit from our higher sales dollars offsetting the dollar impact of inflation the math on that compresses margins a bit. So we expect higher sales at same operating profit. So our guidance on operating margin was approximately 16%.

We were expecting to tip a bit above that in previous guidance now we're expecting to tip a bit below it but we're still sort of guiding to approximately 16%. So that's the that's the dynamic on your operating profit question as you look at the kind of the bridge to two roughly how we get there last quarter I gave a bridge just updating it now.

We expect 800 basis points of operating margin headwind from the 11% gross inflation with our inflation going up we expect about 490 points of operating margin tailwind from the cost coming out, including our realized productivity and that includes our hedging in sourcing as well as our lower LOE.

Sure Covid costs, and the pinnacle synergies and we expect about 190 basis points of operating margin tailwind from all of our price mix actions, including our pricing merchandising.

Alex and segment mix, and then a little bit of a headwind on SG&A to operating margin. So.

That's sort of the rough bridge to get you to the.

Little bit below 16%.

Great and then just the EPS staying about the same.

I guess now that you've kind of talked about the margin a little bit I guess theres no no significant change in sort of below the line items necessarily versus what you had expected previously.

No. We have you see we had a good quarter for ardent and so might have a little bit of benefit there, but our tax rate was a tick higher as well so they kind of wash great. Thank you.

The next question is from Ken Goldman of Jpmorgan. Please go ahead.

Oh, hi, thank you.

Are there any Dave.

Steve are there any notable tailwind or headwinds just as we think about modeling the second quarter. I know you don't give full guidance, but maybe just so we can avoid some surprises I know you've said many times the progression of fiscal 'twenty, two pricing and savings will be back half loaded. So hopefully people have gotten that message, but is there anything specific we should be reminded of additional <unk>.

Great accrual lapse anything like that.

Yeah, Ken I would tell you.

There's nothing like that really the second quarter, we're going to see more of a benefit from price mix versus what we saw in the first quarter. The gross inflation is going to be roughly the same as we saw in the first quarter. So it'll be the second half where the percentage of gross inflation will start to decline it will still be up but it will be at a lower rate for the second quarter.

Inflation gross inflation is going to be roughly the same so it is going to be the increased benefit from price mix.

Okay. Thank you for that and then one more for me Sean.

We've seen some labor strikes at Mondo leaves and now it looks like there is some fairly major ones at Kellogg.

As you look at your relationships with your employees in general how much risk do you think there is for I guess, a similarly unfavorable event with Conagra and I realize these things are still hard to forecast and just curious for your broader thoughts there.

Yes.

As I just mentioned in my.

Earlier remarks.

Tight labor market and it.

It takes a lot of ingenuity and creativity and effort.

To attract and retain employees to the best of our ability. So we're obviously always trying to cultivate the strongest possible relationships with our employees. So that they feel good about coming to work every day and I feel good about where we sit right now, but there is no denying it's a daily grind.

And I'm really proud of what the team is doing because we are.

Able to as you saw in our Q1 sales to produce at levels that while the service may not be where we want it to be.

Very strong in the absolute and Thats our goal is to keep keep the trains rolling.

Great. Thanks, so much.

The next question is from David Palmer of Evercore ISI. Please go ahead.

Thanks, just.

Just a quick one Dave on the on the inflation front the second half of fiscal 'twenty. Two what is your visibility on that inflation and perhaps just specifically what is that rate that you anticipate for the second half that goes with the 11% for the full year. So a quick follow up.

Yes, I mean, we were 16 little 16, 6% Q1 will be in that general area for Q2, So obviously for total 11% work.

Or kind.

Kind of higher single digits for the second half.

Okay.

And visibility on that is that.

Fairly contracted or could.

Could you give us a percentage.

Kind of year to go we're 35% to 40% locked in for the rest of the year.

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So theres just as I've talked about in the past David there is.

There is just certain commodities.

Commodities like proteins, where we're limited in our ability to lock in.

Things like edible oils, we do a better job in and can lock in more so that's where we are right now so it's our it's our best estimate right now our procurement team does an amazing job really understanding the dynamics in each one of these categories really every one of them varies you know whether it's weather.

Weather related impacts sort of wheat in resins more the oils as more of like capacity in terms of demand in.

Renewable diesel so every category just has different dynamics and they are all over it so but that's our best call as of now.

And then the follow up really is about the long term I mean, you had some long term targets, 18% plus EBIT margins, 1% to 2% topline, you're obviously going to be blowing away that organic sales number.

But theres a bit of an interesting timing and dynamic cost and price environment. That's going on this year I'm wondering if you still see that the 18% plus being something that's in play over the medium term can you get back there in other words is the 16% that we're at this year or roughly.

Is that really a timing thing or do you think about things maybe differently more in terms of getting back to gross profit dollars not gross the margins that you would have had how are you thinking about that I'll pass it on.

Hey, David It's Sean Yes.

Obviously, we're not going to get into specifics today on future margins as you know we plan on doing an investor meeting in the.

The spring.

But also as you know our focus is not only an absolute margin, but importantly margin trajectory in the future and we've always had levers in place to help us capture a positive trajectory as we move forward not to mentioned the pricing actions that we're taking today sets us up well, we believe for future in terms of.

Overall price realization per unit and margin. So we'll leave it at that for now.

And we'll share more as we get toward our investor meeting.

Thank you.

The next question is from Alexia Howard of Bernstein. Please go ahead.

Good morning, everyone.

Good morning.

Can I ask about.

The productivity outlook for the year.

If you were to parse out.

The impact of hedging.

Maybe also separating out the impact of the Covid related call coming out are you able to give us a sense for the underlying productivity.

Improvements.

And how much more the cost synergies from the telco deal.

Naming here or are we coming to the tail end of that.

Yeah, Let me start with the last question first we have about $10 million left on the pinnacle synergies $10 million a year to go and we should have those all in by the end of the fiscal year as I had mentioned previously we expect 490 basis points.

Margin tailwind coming out of our realized productivity.

It's a little difficult to get really precise with how much is hedging sourcing versus how.

How much is just core realized productivity there is a lot moving around there is a little bit of overlap there.

We're driving savings because of.

Scale, we have in buying in particular commodity, but then that commodities inflating and then where we're hedging it. So it's all in one bucket and it's why we reported that way. So we've historically averaged 3% realized productivity and we're still on that same track. There's obviously a lot of other cost floating around.

But we still feel really good about our core realized productivity delivery, that's in that 490 basis points of benefit.

So that's what I would say.

Great. Thank you and then as a follow up on the leverage at four times I mean, obviously, given the pandemic related benefits that you've enjoyed.

Several quarters now that was a bit of a bump to EBIT.

Might we expect the leverage to tick up and Nacho to over the next couple of quarters, just just because the EBITDA numbers might be normalizing.

Yes, Alexia. So this level of four times is in line with our expectations and it reflects the seasonality of the business as we increase our spending on inventory to prepare for our heavier sales quarters, which are Q2 Q3. So we yes, we expect leverage to peak in Q2, and then come back towards our target level in the second half.

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

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

Hey, good morning folks thanks for slipping me in.

Okay.

A couple of quick questions here first the outlook for inflation to moderate from 16% gross inflation in the front half of the year to somewhere in the high single digit range.

Cost levels are underpinning that or are you assuming that spot costs come in are you assuming spot cost continue to inflate in the rate of inflation just moderates as we lapped prior year any more specificity or color you can give to help us understand that would be appreciated.

Yes, the biggest thing there Jason is the lapping right. So we really started to see inflation tick up in the second half of last year really tick up in Q4, and so we are lapping on those bigger basis and so.

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It's kind of more of the run rate of kind of where we are but.

That's the biggest driver for second half being more high single digits.

I'm, just going to paraphrase to make sure I understand it it sounds like Youre, saying youre kind of assuming spot runs flat from here.

We cycled the run up last year, which caused some moderation correct.

Yes.

And then in terms of the pricing build can you put some teeth on this for us I understand that sort of underlying absent lapping the trade accrual youre running about 230 bps of price growth this quarter.

What does that look like clearly there's a step up from the price increases you took at the end of the quarter and would expect a meaningful meaningfully higher price in the second quarter.

Where are we going to be run rating at the end of the year.

Yes, so last call I talked about price mix for fiscal 'twenty, two of 3% to 4%.

Given this update we're really more at 4%, 4% plus for the year.

So obviously with us delivering the one 6% price mix in Q1.

What's your sort of the higher 4% kind of to go so that's what we expect.

We took our we took some pricing the end of fiscal 'twenty, one, but we took.

A big amount of pricing the last month of Q1, so we really didn't see the benefit. So we will start seeing that benefit starting in Q2. So that really supports that kind of estimate for total price mix. John anything you want to I would just say in addition to that we've got more pricing coming in the second half and some of which was not contemplated in our original plan.

<unk> <unk>.

Got it take more yet we will it's all principal based.

And in the meantime demand has been very strong well elasticities have been negligible.

For sure for sure. It makes sense, thanks, guys I'll pass it on.

Thank you.

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

Hi, Thank you for the question.

Hi, Dave I was surprised too.

<unk> not here, you mentioned freight and transportation in the increasing inflation guide from nine to 11.

You just talked about food and packaging.

Is that is that located elsewhere.

No its in there and I mentioned freight and transportation in my prepared comments. So that was I did mention that.

I was giving examples of particular commodities and dynamics, but.

Absolutely.

It's a very challenging environment right now with transportation in terms of.

Not just cost but.

The reliability of trucks in.

You staff up the ship and making sure that trucks trucks show up and so theres a lot going on there. So that's part of the 11% for sure. Okay. So that's definitely okay. Thank you and also about the timing of the new price increases can all of that happened in fiscal 'twenty two.

Or does some of it spill over into 'twenty, three just because of timing.

While the actions Rob will take place.

<unk> 22, and so we will start getting the benefit in 'twenty two undoubtedly and then some of the benefit will continue to spill over into next year, where we will be lapping a period, where we didn't have the pricing in place. So that's one of the reasons, we think the setup looks good as we kind of.

Get through this because these cycles are usually proved to be transitory in terms of rate of change and so the fact that the pricing in a broad based way will be in place and then the rate of change it.

It will abate.

That is.

Good setup lives.

Okay, but all of it can hit the shelves in fiscal 'twenty two right.

Yes, we should we should you should be seeing it in the scanner data apps over the next wave that comes in the second half you will see show up in the scanner data as we get into the second half.

Okay alright, thank you.

Yes.

The next question is from Bryan Spillane of Bank of America. Please go ahead, hi, Thank you operator, good morning, everyone.

So first question for me just Dave.

We've talked a lot about inflation, but just can.

Can you comment at all on on maybe any tightness in availability of supply of inputs and more specifically.

Like the tomato crop in California was stressed by the heat over the summer. We are hearing that there is some tightness in availability of steel cans.

And maybe some other protos items. So just can you just give us any any color on like availability of raw materials and does that at all having an impact on.

I guess basically sales right are you at all supply constrained just just on availability of raw materials.

Yes, Brian Sean.

With my earlier comments within the kind of strain as I'll call it within supply chain.

The three buckets that I mentioned are labor, obviously materials and ingredients and logistics. So we are working all three of those buckets aggressively every day and there are periodically youll see a particular input.

That will get strength and so we've got to go the extra mile to get our fair share of what's available, but also have contingency plans. So that we can shift our mix as necessary. If we have to go through a period, where we get shorted on a particular ingredient we will try to make it up with other products that.

That we've got capacity to kind of.

Push out the door. So this.

This is why I describe this as kind of a daily grind.

This is a year of perseverance, where we've got to make sure. We are on top of what is available.

The maximum quantity, we can keep our people healthy get the trucks to get the products to our customers and get as many boxes of our stuff out the door as we can because on the other side of that challenge is tremendously strong consumer demand and we want to take full advantage of that because our depth of repeat helps.

Helps us to capture the lifetime value of these consumers so.

It's volatile we're dealing with it every company in our space is dealing with it and I think our team is doing a really good job in the face of it.

Okay, and then just a follow up I guess in terms of the strong demand and the pricing is just.

Sean can you talk a little bit about how youre approaching some of the holiday windows.

I guess as we're thinking about pricing as a function of list price increases and promotional frequency and depth.

Is there more of an opportunity to take advantage of those Hollywood Hollywood not needing to promote as aggressively I guess in the holiday windows.

Just simply because demand is strong in.

Those are periods, where people are going to show up and shop anyway or.

Is it more getting more price realization outside of those those holiday windows.

Yes, it's interesting Brian somebody asked me recently, why don't customers just try to shape demand downward by by taking more more price than the inflation. It is now my answer was that's not the way customers tend to behave I can't say I've ever ever seen a price above inflation to steer demand downward.

But they have been willing to accept price increments in an hour.

Sure and.

When you're in a strained supply situation, we do look at promotional reductions to keep demand and check and not exacerbate supply challenges. So as we were.

Work with our retailers on some of the stuff that they like to get out on the floor. During the holidays you have got two aspects of those holiday promotions you've got the.

The location getting it out on the floor and then you've got the amount of discount the magnitude of the discount certainly we want to help our consumers to find our products during the holidays, but the magnitude of the discount.

It does not we don't need to fan the flames of supply challenges. So you make a very fair reasonable point much how.

We behaved during the height of the pandemic with respect to promotion.

Okay. Thanks, John Thanks, Mike.

Thanks, Brian.

The next question is from Priya <unk> Gupta of.

Barclays. Please go ahead.

Great. Thank you so much for taking the question Dave I appreciate your comments around sort of the seasonality of the leverage.

Just given the difficulty in sort of parsing through some of the trends in the last couple of years as we think about should we get forward looking trends is this cadence and leverage that you discussed.

An uptake into the first quarter continuing into the second quarter in terms of net leverage before coming back in the back half something that we should.

Expect on a go forward basis.

Yes, so as we look at fiscal 'twenty, two will click up in Q2 will peak in Q2, and then we will come back down in Q3, and then Q4. It is it's hard to look historically because of the M&A activity. We've had but if you had a more normalized pattern and that's what you would see for the business given.

The seasonality because we sell we sell a lot of product in our second and third quarters, and so theres a lot of investment in working capital as we kind of go through the first half so yes.

That's sort of how it will play out.

Okay. That's helpful. And then as we think about sort of that improvement in the back half should we anticipate most of that I mean, I guess just given some of the EBITDA dynamics. This year, how much of that should come from.

Additional debt paydown, whether it's sort of CP oriented or any other potential debt actions that you could take.

Yes.

I mean, we're.

Constantly looking at that previous so I don't want to quote an exact number where kind of that is going to come in we target a leverage ratio.

Art kind of leverage ratio target is three five times. So that's what we're always managing too. So it's really kind of the dynamics of.

The debt and the EBITDA and so we kind of look at it holistically like that message to the ratio.

Okay. That's helpful and to confirm we should be back at that three and a half by year end, yes, we're moving towards that so that.

I'm not saying we'd be exactly at three five by the end of the queue, but that's generally kind of where we'll be tracking too.

Okay, great. Thank you.

Okay.

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

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 calls that anyone may have to feel free to reach out. Thank you for your interest in Conagra brands.

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