Q3 2022 Conagra Brands Inc Earnings Call

Good morning, and welcome to the Conagra brands third quarter fiscal year 2022 earnings Conference call. All participants will be in a listen only mode should you need assistance. Please signal our conference specialist by pressing the star key followed by zero.

After todays presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on your telephone keypad to withdraw your question. Please press Star then two.

Please note this event is being recorded.

I would now like to turn the conference over to Bally Ellis. Please go ahead.

Good morning, everyone. Thanks for joining us I'll remind you that we will be making some forward looking statements today.

We are making those statements in good faith, we do not have any guarantee about the results we will achieve.

Descriptions of risk factors are included in the documents we filed the S E T.

No we won't be discussing some non-GAAP financial measures.

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

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 Bailey good morning, everyone and thank you for joining our third quarter fiscal 2022 earnings call today, David and I will detail our results for the quarter and our updated outlook for the remainder of the year.

Well then open the line to your questions.

I'd like to start with the key messages, we want to share with you. This morning.

As we navigate a dynamic external environment our team delivered a solid Q3 that was largely in line with our expectations on the top line and adjusted EPS.

We remained laser focused on successfully executing the conagra way playbook by creating superior products, and ensuring physical and mental availability to create lasting connections between consumers and our brands.

This enabled us to deliver a robust plus 6% organic net sales growth for the third quarter in line with what we expected.

The strength of our topline can be measured both in the absolute and relative to peers as we gained share in key categories on a one and two year basis.

And it's important to note that in response to inflation driven pricing that has been executed in the market to date elasticities have been favorable to historical patterns, even more so than what we expected unit demand remained strong as consumers continue to recognize the superior.

Relative value that our portfolio provides.

As worldwide events contributed to an already challenging environment, our teams remain agile and nimble to respond effectively and continue to serve our customers.

Our third quarter results reflect strong contributions from our latest innovations and we have another exciting innovation slate planned for fiscal 2023.

But we also experienced higher than anticipated inflation as the third quarter unfolded in the face of these heightened costs. We again made the deliberate decision to continue to invest the service orders and meet the strong consumer demand for our products.

Ensuring physical availability is an important part of maintaining and building trust and loyalty with consumers.

While these strategic investments contributed to margin compression in Q3, we believe making them was the right decision as we position Conagra for the long term.

Ultimately, we landed Q3 EPS a bit differently than we previously anticipated, but we did get there our adjusted Q3 EPS actualized in line with our expectations.

Above forecasted performance in our ardent mills joint venture offset incremental Q3 inflation headwinds.

As we look to the remainder of the fiscal year the environment isn't getting much easier in the near term. We now expect an additional $100 million of market inflation in Q4.

Updated Q4 inflation forecast equates to a 26% increase versus two years ago.

As we'll detail further today is higher than expected inflation is disproportionately impacting some of our strongest businesses, including meat snacks and frozen.

Keep in mind that these businesses rely on inputs like protein and dairy which are harder to offset in the short term and that frozen requires more specialized temperature controlled transportation.

But as we started to see this latest wave of inflation coming we took action on pricing just as we have throughout the year. These new pricing moves go into effect in Q1 of fiscal 'twenty, three and our highly targeted towards frozen and protein snacks.

These businesses have been distinguished by innovation, driven sales growth favorable elasticities continued share gains and limited private label competition.

So although we are experiencing pressure on our total company margins near term, we will see the benefits of the new pricing actions, we've taken to offset this latest wave of inflation beginning in Q1 of fiscal 'twenty three.

With this context, we're updating our outlook for the remainder of fiscal 2022, our updated outlook reflects expectations for continued strong consumer demand for our products and lower than historical elasticities as well as the further increase in our gross inflation expectations for the year and the timing.

Of the related pricing actions, specifically, we now expect organic net sales for the year to be plus 4% and we project adjusted diluted EPS to land at about $2 35, which translates to approximately $2.65 of earnings power when taking into account the.

Impact of the lag between inflation and our end market pricing this fiscal year.

With that overview, let's dig into the quarter.

As you can see on slide six our team delivered solid Q3 results in the face of a highly dynamic and challenging operating environment on a two year CAGR basis organic net sales for the third quarter increased just under 8% and adjusted EPS grew by over 11%.

Looking at slide seven you can see that we continued to grow sales on both a one and two year basis total conagra domestic retail sales were up 18, 5% on a two year basis in the quarter.

We also continued to gain share in the quarter with our category weighted share growth up on both a one and two year basis.

And on a relative basis, our share performance continued to compare favorably to the industry overall and two our largest peers slide eight demonstrates that we gained category share at levels that outpaced our top 15 peers during the quarter if.

If you take a look at the chart on the right the share gains in our frozen and snacks domains were particularly notable.

As you can see on slide nine our performance in frozen and snacks has driven our total conagra share gains fiscal year to date and during the third quarter importantly, our categories are healthy attractive and growing.

As you can see from the chart on the left our frozen and snacks domains have grown nearly eight and 9% during the fiscal year to date and third quarter, respectively. So we're not just gaining share we're gaining share in some of the most attractive parts of the store.

These results are holding notwithstanding our need to put significant inflation driven pricing into the market.

Slide 10, you can see the extent of our recent actions, which increased in Q3 and have accelerated over the last five weeks on shelf prices for our brands rose across all three domestic retail domains compared to the same period, a year ago with inflation driven price increases most concentrated.

Frozen and protein snacks.

We implement these pricing actions, we're watching the impact on volumes closely and we are pleased that the price elasticity has remained below historical levels.

I'd 11 demonstrates that unit sales have remained consistently positive on a two year basis, even as the on shelf prices for our brands have increased this.

Dynamic is a testament to the fact that despite the broad based inflationary environment. We're operating in the targeted nature of our inflation driven pricing actions and the superior relative value of our products continue to resonate with our customers and consumers.

A great example of this is our banquet brand in our frozen business.

We've discussed before the banquet brand is a mainstay in American households, and has undergone considerable modernization to ensure that the brand delivers on its promise of relevant flavors Hardy portions and a great value.

Tumor see the relative quality and availability of our banquet products and continue to choose banquet. Despite inflation driven price increases banquet volume has remained consistent as prices went up in Stark contrast to a key competitor we.

We see a similar story in our snacks domain with Slim Jim Another brand that has made lasting connections with its consumers through perpetual modernization relevancy and availability. Despite the increased cost of protein and associated pricing actions slim Jim volumes have increased considerably.

Far outpacing a key competitor.

In addition to strong relative performance compared with other branded products. We also continue to maintain share relative to private label products.

14 shows private label dollar share across the edible industry at large.

The categories in which conagra competes and across conagra's frozen and snacking categories specifically.

Two things stand out about this chart first we compete in parts of the store with less private label penetration than the edible space at large second the share of private label sales has remained stable amid the highly inflationary environment over the past several years.

We believe the data shows that consumers are finding comfort in the quality reliability and familiarity that national brands provide particularly modernized brands like those in our portfolio.

And we have not backed off from our modernization focus in the current environment innovation has remained a key to our success slide.

Slide 15 shows the impact of our disciplined approach to delivering new product and a modernized portfolio.

During the third quarter, our innovation outperformed with strong results with the strong results, we delivered in the year ago period, and once again, our innovation rose to the top of the pack in several key categories, including whip toppings frozen vegetables, and frozen plant based meat alternatives.

And we have another exciting lineup of new innovations set to hit the shelves during fiscal 2023.

The new products you see on slide 16 are already being accepted by customers, who have come to respect the innovation and marketing engine at Conagra and our ability to drive demand in key categories.

Our ongoing investments in E. Commerce also continue to yield strong results in the third quarter, we delivered compelling quarterly growth in our $1 billion E Commerce business as we outpaced the entire total edible category in terms of E Commerce retail sales growth in Q3 building on our momentum.

For fiscal 2021.

Looking at the chart on the right you can see that our E. Commerce business has continued to grow as a percentage of our total retail sales as we continue to invest behind supporting our brands.

I'd like to briefly detail our performance across our three retail domains, starting with our frozen business on slide 18.

<unk> continues to be one of the strongest businesses in our portfolio and offers convenience and quality that make it the perfect fit for today's consumer in Q3, we continued to deliver strong growth on both a one and two year basis within this domain meat substitutes single serve meals desserts.

And multi serve meals were the main drivers of our results.

Driven by the appeal of our products to the consumer and the investments we've made in brand building and innovation, our leading frozen portfolio again grew share in Q3.

Both in the domain overall and within key categories.

Now, let's talk about snacks slide 20 highlights the meaningful acceleration in retail sales growth that we've experienced in our snacks business in the third quarter, our snacks business grew 11% year over year that equates to more than 30% growth over the same period in 2020.

Within snacks, we have seen growth across key categories highlighted by more than 20% year over year growth in meat snacks.

Similar to our frozen business, our snacks portfolio is gaining share in large and growing don't in this large and growing domain.

We delivered share gains in multiple snack categories, including several popcorn categories meat snacks and hot cocoa.

Our staples retail sales have also been growing over a two year period and that trend continued in Q3, specifically we saw very large increases in retail sales for refrigerated whipped toppings and cooking spray both of which were up over 25% in Q3 on a two year basis.

Since the onset of COVID-19, many consumers have rediscovered their kitchens reinvigorating the relevance of our staples portfolio as demonstrated on slide 23, our staples portfolio has increased its share. During this critical time frame with two year share gains across many key categories.

<unk> Asian sauces, refrigerated with toppings Europe .

Copy, Joe and canned meat.

When you take a step back and look across our portfolio and retail domains in which we operate you see broad based strength and healthy categories. We are driving growth gaining share in attractive categories and remaining disciplined in executing the conagra way to create lasting connections with consumers.

The health of our business is what will enable us to deliver profitable growth for the long term and the immediate however, we face a volatile cost environment that continues to be very challenging as.

As the third quarter unfolded, our expectations for full year fiscal 2022 gross inflation increased from approximately 14% to approximately 16%.

The biggest driver of this change is the market inflation that we now expect for Q4.

At the time of our Q2 call. We expected Q4 gross inflation of about 11% today, we expect Q4 gross inflation of approximately 16%.

On a two year basis Q4, gross inflation is expected to be an unprecedented 26%.

And as I noted earlier these incremental costs are disproportionately impacting our strong frozen and snacks businesses, both rely on inputs like protein and dairy which are harder to offset in the short term and in the case of frozen require specialized temperature controlled transportation.

As noted on slide 25, we're updating our guidance for the full year to reflect the trends I just covered we now expect organic net sales growth of approximately 4% adjusted operating margin to be approximately 14, 5% adjusted EPS to be approximately $2 35.

And as I just mentioned, we're updating our gross inflation guidance to approximately 16%.

We're also providing guidance for the fourth quarter to reflect the higher estimated inflation and the lag and the offsetting pricing actions.

In Q4, we expect organic net sales growth of approximately 7%.

Adjusted operating margin of approximately 15, 5% adjusted EPS of approximately 64 cents and gross inflation of approximately 16%.

While the environment remains challenging our team continues to stay focused on executing our conagra way playbook and positioning our business for long term growth and value creation, we delivered strong sales growth and continued to gain share, particularly in our healthy and growing frozen and snacks categories, both of which continue.

New to resonate with consumers despite necessary price adjustments to help offset the impact of inflation.

While accelerated inflation has put pressure on our near term earnings we're confident in our ability to offset the impact with additional inflation driven pricing actions and overall due to the strength of our brands and consistent approach to creating <unk>.

Lasting connections with consumers, we are confident in the underlying health of the business and the many value creation opportunities ahead, we.

We hope to see you at our upcoming Investor Day on July 28 that the New York stock exchange, where the team and I will be sharing more on our plans for the future. We look forward to seeing many of you there in person.

Now that I've highlighted our performance for the quarter I will turn it over to Dave to provide more detail on our financials.

Could you Sean and good morning, everyone.

I'll start by reviewing our quarterly results at a summary level as shown here on slide 28.

As Sean discussed we delivered strong organic net sales of plus 6% in Q3.

Collecting the continued relevancy of our portfolio to consumers we.

We experienced better than anticipated elasticity is on volume in the face of our inflation driven price increases inflation pressures accelerated as Q3 unfolded as reflected in our Q3 operating margins at the same time, our ardent mills joint venture reflected in the equity earnings line had a strong.

Quarter, driven by favorable market conditions.

Q3, adjusted EPS of <unk> 58.

Was largely in line with our expectations down one 7% versus prior year and up 11, 1% on a two year compounded growth basis overall, a very solid Q3 financial performance given the volatile operating environment.

We show a breakdown of our Q3 net sales bridge on slide 29.

Our 6% organic net sales growth was driven by a strong price mix increase of eight 6%, reflecting the inflation driven pricing actions. We have taken in every segment of our business over the last year.

Volume declined two 6% primarily due to the elasticity impacts of the price increases along with supply constraints on certain refrigerated and frozen products.

Looking at reported net sales drivers the divestitures of our peanut butter and egg beaters businesses drove an 80 basis point decline and foreign exchange was an additional 10 basis point headwind.

Together. These factors contributed to five 1% growth in total Conagra net sales for the quarter versus a year ago.

Slide 30 shows our Q3 net sales summary by reporting segment on a one and two year basis we.

We delivered organic net sales growth across each of our segments this quarter.

Due to inflation driven pricing and continued strong consumer demand.

Growth was particularly strong within our foodservice segment, where volume continued to rebound as restaurant traffic recovers from the impact of COVID-19.

Foodservice third quarter organic net sales were in line with pre Covid sales levels.

Within our two domestic retail businesses, both grocery and snacks and refrigerated and frozen delivered strong price mix results for the quarter.

Volumes were down a bit more in refrigerated and frozen and grocery and snacks as we had some higher than expected supply disruptions and refrigerated and frozen in the quarter associated with labor and materials challenges, but.

But we expect this dynamic to improve as we progressed through Q4.

For total Conagra organic net sales grew at a two year compounded growth rate of seven 8% in the third quarter.

We show the operating profit and margin summary of each of our reporting segments on slide 31.

Adjusted operating profit was down nine 9% in Q3 and was essentially flat on a two year compounded basis.

As you can see from our results inflation and cost pressures, where most concentrated in our refrigerated and frozen segment this quarter.

I have a slide later in my remarks with specifics, but at a summary level as Q3 unfolded, we began to experience higher than anticipated inflation on protein and higher costs in the temperature controlled transportation network, both of which are harder to offset in the short term.

But as you heard from Sean are frozen businesses continue to win with consumers.

While we look forward to getting back to a more normalized cost environment. We believe that our frozen portfolio is well positioned to support the additional additional price increases that the current inflationary environment require.

We've recently announced new pricing actions for our frozen businesses as well as for our protein banking businesses, which are also experiencing elevated levels of inflation.

We will see the benefits of these new pricing actions in Q1 of fiscal year 'twenty three.

Page 32 summarizes total conagra operating margin, excluding ardent mills for the third quarter.

This page really highlights the significant impact that inflation had on the business in the third quarter.

Q3, total market inflation was 15, 4% and negatively impacted operating margin by 10 six percentage points in the quarter.

This inflation level was higher than what we estimated when we discussed our outlook with you following Q2.

And it's driven the additional pricing actions I just mentioned the.

The good news is that our eight 6% increase in price mix in sales translated to five seven percentage points of operating margin improvement in the quarter.

We also delivered one five percentage points of productivity improvement net of operational offsets in the quarter.

Our teams were able to deliver this level of net productivity, even in the face of meaningful labor disruption.

The level of base productivity, we achieved in our plants and our production output where both challenged in Q3 due to omicron related labor disruptions.

But with the labor situation now starting to stabilize we expect these headwinds to abate as we progress through Q4.

We also saw marginal benefits from A&P and adjusted SG&A savings in Q3.

These factors combined to deliver adjusted operating margin of 13, 7% for the third quarter.

Turning to slide 33, you can see our adjusted EPS bridge for the quarter.

The operating profit drivers I just discussed resulted in a 6% decrease in adjusted EPS versus Q3 of last year.

The primary operating profit headwind was the 15, 4% inflation rate.

The other major headwind in Q3 was the unfavorable operating efficiencies related to labor disruptions in our operations that I just mentioned.

The tailwind for the quarter were the significant price mix benefits and realized productivity that we delivered.

We also had lower SG&A and A&P cost in the quarter.

Q3, EPS was also favorably impacted by a lower weighted average interest rate on outstanding debt and by a very strong quarter from ardent mills give.

Given the nature of arden's business, it can benefit from volatile market conditions.

Although our net income is recorded below operating margin in our financial statements.

It is a cash generating business that has performed well in this highly inflationary environment.

As you've seen in our materials. This morning, the highly inflationary environment has caused us to reduce our adjusted EPS guidance for the year.

However, we believe it's important to provide some additional details on how we view the underlying earnings power of our portfolio, which we believe is strong.

On a pro forma basis, we estimate that fiscal 'twenty, two adjusted EPS approximate $2 65 versus the updated guidance of $2 35, we're sharing today.

So what does that $2 65 represent.

First as you can see on the chart. It incorporates the impact of the updated market inflation estimate we're now expecting in Q4 driving a reduction in our previous EPS estimate of about 18 pence.

The $2 65 also reflects estimated favorability of approximately <unk> <unk> versus the previous full year EPS estimate for ardent mills.

Beyond those items the $2 65 reflects our estimate of all the pricing lags we faced this fiscal year.

As you've heard us discuss in recent quarters the.

The reality of a CPG food business is that inflation hits, the P&L before a corresponding pricing response can be executed with with customers.

Generally that lag is about 90 days.

We've estimated the impact of our pricing lags net of elasticities for fiscal year 'twenty two.

We believe that the full year EPS impact of these lags is approximately 30.

This estimated impact excludes our foodservice and international segments as we only quantified it for the domestic retail businesses.

Of course, it is important to understand what this estimate represents.

It is not our fiscal year 'twenty three EPS guidance, we will provide more insight on our expectations for fiscal 'twenty three after fiscal year 'twenty two ends.

But it is our estimate of what adjusted EPS might've been in fiscal 'twenty. Two if price increases were effective at the same time that inflation actually hit our P&L.

Better demonstrating the underlying earnings power of the business.

Slide 35 breaks down our revised inflation expectations a bit further as you can see the expected inflation rate for Q4, as the biggest delta compared to our previous expectations.

If you look at the chart on the right Q4 inflation is expected to be approximately 26% versus two years ago, clearly an unprecedented level of market inflation that we are managing through.

Slide 36th goes into more detail on where we saw this inflation impact on our supply chain most severely in the third quarter and.

And where the bulk of the incremental $100 million of new inflation is coming from.

As Sean and I have both mentioned <unk>.

Transportation and proteins were particularly challenging in Q3 and remain so as we started Q4.

Gary has also been a headwind versus our prior expectations.

Let's talk a bit more about each of these.

Beginning with transportation Q3 costs were heavily impacted by driver and truck availability, which resulted in more inflationary pressures from spot market usage and rates. Additionally, as you are all aware fuel prices were driven up significantly during the quarter due to unforeseen worldwide events.

With respect to proteins and dairy we also saw Q3 inflation at rates higher than previously forecasted.

Meat based proteins are difficult to hedge and current industry freeze our inventory positions are at multiyear lows.

This supply dynamic limits, our ability to build our freezer stock inventory, which is our typical coverage strategy.

For a bit more perspective on cost our total meat based protein spend in fiscal 'twenty, one approximated $675 million.

For fiscal 'twenty, two we now estimate total meat based protein market inflation of approximately 50%, which is approximately $340 million of additional market cost and this one commodity area.

Driving nearly 40% of our total gross materials inflation in fiscal 'twenty two.

In summary, these three categories alone are estimated to drive 16 of the incremental gross cost inflation, we're now expecting for Q4.

Turning to the balance sheet and cash flows we stayed the course on our balanced capital allocation approach this quarter.

As outlined on slide 37, we reduced net debt by approximately $240 million in Q3, getting our net debt to EBITDA ratio to four two times.

As more of our pricing actions flow through our balance sheet in the fourth quarter. We expect this leverage ratio to drop to approximately three nine times.

We remain committed to an investment grade credit rating and to our long term net leverage target of roughly three five times.

I'll wrap up with a repeat of the updated guidance that Sean walked you through.

Our new fiscal 'twenty, two and Q4 guidance are shown on slide 38.

As you've heard from US. This morning, we expect our strong top line momentum to continue with benefits from our pricing actions and favorable elasticities driving organic net sales growth of approximately 7% in Q4 and approximately 4% for the full year.

Up from approximately 3% and our previous got previous guidance and up from approximately flat and our original fiscal 'twenty two guidance.

Because of the incremental inflation, we have discussed today and the additional lag in the pricing actions. We are estimating Q4 EPS to approximate 64 cents.

Strong increase of 18, 5% versus the prior year.

This resulted in EPS for fiscal year 'twenty two of approximately $2 35.

Down from approximately $2 50.

We also now expect market inflation for the year to approximate 16%.

Up from approximately 14% and we expect adjusted operating margin to be approximately 15, 5% in Q4, and approximately 14, 5% for the full year.

We remain confident in the brand strength and underlying earnings power of our business.

Following the Conagra way playbook, we continue to invest in our brands to create innovative products that resonate with consumers and we believe these investments have positioned our portfolio well to manage through this challenging environment.

We look forward to diving deeper into the progress we have made and the future opportunities we see at our upcoming Investor Day scheduled for July 28, The New York City.

You will also hear from our new supply chain leader Al a Emily who will review the strategic actions, we are planning to drive further efficiencies in our supply chain.

We will also communicate our algorithm for longer term financial performance, we look forward to seeing many of you then.

Thank you for listening everyone that concludes my prepared remarks today.

I'll now hand, it back to the operator for questions.

And thank you we will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad, if youre using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then two.

At this time, we will pause momentarily to assemble our roster.

And the first question will be from Andrew Lazar with Barclays. Please go ahead.

Great. Thanks, very much I guess, Sean to start off I know, it's obviously early to detail fiscal 'twenty three expectations and things are still fluid, but perhaps you can at least give us a bit more color on how conagra, maybe sort of a hedged on some key inputs as we as we go into fiscal 'twenty three more so we have a sense of your level of visibility to the cost.

File and therefore may be the time that you have to try and better match inflation with pricing as you move forward I guess I'm getting at is should we expect this sort of a lag to continue to maybe impact results to start the new fiscal year or do you think by that time, given where costs are today, you will have more effectively caught up and then I've just got a follow up thanks.

Well, Andrew what the ask is let's Dave give you some comments on kind of how we're hedged for next year and then let me give you. Some some of my thoughts on this lag dynamic yeah. So Andrew where we are right now if you look at for Q4 within the quarter, we're over 80% hedged on all our materials for Q4.

As you look to fiscal 'twenty three at this point, we're about 40% hedged overall that obviously varies by different area, so certain ingredients and packaging.

It would be above that but certain areas like the meat based proteins, which we've talked about a lot today.

Less than that so it really does vary. So we will obviously continue to update that as we move closer to the end of the fiscal year, but that's where we are now and that's that's pretty much in line with where we would normally be this time of the year for next fiscal year, Yeah, and I would just add that the bottom line is that but for the lag effects. Our business has performed remarkably.

<unk> well this year and is proving to be quite resilient that said lag effects come with the territory and when manufacturers like us get hit with these waves of inflation plural.

Need two things to navigate you need strong brands and perseverance and we've got both.

It's really not a matter of getting them racing to lineup.

Better with when the inflation is because mechanically the way. This works is pretty straightforward first we experienced a rise in our cost base that triggers a price increase from us to our retail customers and then at about the 90 day, Mark we begin to see the benefit of that pricing in our P&L and that's pretty standard and.

We experienced multiple waves of inflation as we have this year, we repeat that process over again, and we start recovering the immediate profit squeeze and each wave after that 90 day lagged passes I think the most critical thing is as that process unfolds is watching what happens with volumes and for us.

That assessment has shown the tremendous strength of our brands because we are experiencing fairly modest elasticity demand across each of our three consumer domains frozen snacks and staples and that's due in large part to the success of the innovation we've got in the marketplace. So we're growing we're gaining share.

And in fact, three of our largest brands healthy choice birds eye Voila and slim Jim have posted double digit growth for the past quarter in the scanner data with positive volumes. Despite price increases that are pretty meaningful and I think that shows you that consumers are concluding that these brands are in fact offering superior relative.

Value versus things like other in store alternatives or eating out.

Got it and then just a quick follow up is just on some of those brands where maybe.

Broken through some what have been sort of key maybe historic pricing thresholds have you seen more elasticity in those items, specifically, which were not which maybe gives you a bit more of a forward look on how broader elasticity may play out for the company is more pricing cluster. Thank you.

Yes, as I mentioned, Andrew in my prepared remarks, we do scrutinize elasticity is very carefully across all of the domains and what we.

And you see in each of our three domains is very favorable.

Patterns versus historical norms, and that's even after multiple waves of inflation and the follow on pricing now if we were to experience additional waves of inflation, we absolutely would price again, but I would expect elasticities to remain favorable versus historical norms and I think you got to think about the work that we've.

Undertaken to modernize this portfolio over the last seven years, it's a pretty massive transformation pretty incredible modernization and it's working for consumers and you see it in our share gains even as prices increases.

So that's kind of how we see things now the one other nuance that I will point out with respect to elasticities that I think gets overlooked a lot and that is that elasticity effects.

Our portfolio anyway tend to wane as time goes on.

Because consumers are adapting so in light of the fact that we've had waves of pricing in any given window going forward, we might have older pricing, where elasticities are weaning, which can offset newer pricing that's been put in place where list elasticities are first appearing so theres a bit of an inherent hedge.

And as time passes when you've got a broad portfolio and you've got multiple waves of pricing.

Thank you.

Thank you and our next question will come from Ken Goldman with Jpmorgan. Please go ahead.

Hi, Thanks, so much.

Dave again with the understanding that the situation is fluid you're not ready to really talk about fiscal 'twenty three yet I just wanted to get a sense just to build on your commentary about where you are hedged.

Best guess as things stand today, where might we expect cost inflation to be at its worst in terms of general time of the year and when might you be anticipate pricing being at its peak.

I know, we can't be overly precise here I, just really want to get an idea of rough timing for these factors. If you have that general sense for us.

Yes, Ken.

One opening comment I would make is there is nothing normal about the current environment. So if you just look at.

<unk> we've had.

A 26% two year inflation stack in Q4 I've been in food for a long time and I've never seen anything like that so.

There is nothing normal right now, but having said that.

We put out there we attempted to try to quantify what we think the impact of the pricing lag on fiscal 'twenty. Two is if we didn't if we could price when we got hit with the inflation and we walked through that that's 30 to get us to $2 65 that is not guidance for next year.

Okay. What it is is it's more of a pro forma kind of assessment of where our underlying.

Profit is our our earnings power.

We looked at 'twenty three there are a lot of different items that we have to work through before we finalize our estimates. So what are those things will obviously, we've taken a lot of pricing. This year that we're going to wrap on so we're going to have a big benefit next year, because we're going to get a full year benefit of pricing.

We're also going to have the full year wrap up of inflation because inflation has been going up during the year. Two so we have to work through all those details we have to update what our demand is going to look like based on elasticity estimates Shawn just articulated very well, how we're seeing things now and we have to continue to monitor that monitor that.

Big thing is and this is your question.

It is our updated assessment of fiscal 'twenty, three and inflation and any related pricing that may be necessary from that so we're in the process of looking at all the markets.

Answered the previous question that we're about 40% covered for 23 right now.

But we're still working through that necessity the markets and the last piece that affects next year is.

Updating our productivity estimates as the supply chain rebounds from all the operational challenges that we're dealing with in fiscal 'twenty. Two so as you can appreciate that.

There are a lot of big factors that are going to impact fiscal 'twenty three.

I can't really give you any specific numbers at this point hopefully that gives you a little bit of color of how we're thinking about it Ken I'll just add a couple of thoughts here I just want to point out.

We have not been and we will not be overly optimistic in terms of our inflation outlook if.

If you look back to what we were calling for at our last quarter in Q4, we called for 11% inflation and that was on top of big inflation in Q4 last year. So specifically, we called for about a 20.5% two year stack on inflation in Q4, and that's a big number and had it.

Come in we would have landed full year EPS this year at $2 50.

So that's kind of been our posture. There was no way, we could have called the 26% two year stack in the 16% Q4 inflation versus 11, but we obviously now we have experienced it and it will it will cause us to continue to be.

Balanced in our outlook and I understand it believe we've spent a lot of time talking inflation today, but I think.

Equally important topic is in fact, the broad based strength, we're seeing in the portfolio. It is undoubtedly the byproduct of seven years of heavy lifting to modernize this business. It matters a lot because it's given us the ability to take meaningful inflation, driven pricing and it enabled us to maintain consumer loyalty, even after taking price.

As evidenced by modest elasticities, we've experienced so yes, we've experienced a lot of inflation, but we've also been aggressive in taking the justified actions to offset it and I just looked at the scanner data.

For the week ending March 27th for 10 companies us and nine competitors.

And what it shows is that versus two years ago and the most recent four week period Conagra's price per unit change versus prior year ranked number one and for the most recent 13 week period, we ranked number three and for the most recent 52 week period, we ranked number four so the actions we've taken are clear in the data.

The consumer has also seen it with their conclusion based on their purchase patterns remains the same and that is that our portfolio is giving them superior relative value even after raising price.

All of that makes great sense and I really do appreciate the color Dave if I can just ask a quick follow up just is something that you said you talked about I think lapping some of the challenges you've had in terms of inefficiencies in fiscal 'twenty. Two is it reasonable to expect that beyond just the lapping.

Should anticipate some incremental cost savings.

That are more long term in nature, they will implement in 2023 and beyond whether it's automation.

Anything along those lines that we could look forward to perhaps again not quantify just trying to get a qualitative sense Ken.

We're going to actually talk about that quite a bit at our investor day on July 28.

Joined us after a long illustrious career at Unilever He is.

He is off to a fantastic start modernization of the supply chain in the food industry. I think is a real opportunity going forward. So we've got exciting plans there and we'll be we'll be sharing kind of how we see things here.

See you all at the stock exchange on July 28.

Thanks very much.

Thanks.

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

Thanks, operator, good morning, everybody.

Maybe just a follow up to Ken's question, just now Dave I think it was in the slides it.

Slide 32, where you've got the operating margin bridge and Theres productivity net of operational offsets can you just kind of drill into that a little bit how much of that does that at all include the benefit from lapping some of the inefficiencies from last year that.

That Ken mentioned or the Covid related costs, just trying to understand what the pieces are inside that.

Yes, so just breaking it out if you look at sourcing and productivity, that's about 400 basis points of tailwind of positive.

So our.

Kind of supply chain inefficiencies, so with our output being down.

Higher than expected absorption of fixed cost there and just labor disruptions in premiums we have to pay to kind of keep the manufacturing plants running and meeting demand.

And just everything that went through that all those inefficiencies are netted in there. So that's about 250 basis points of a headwind to get to the one 5%.

So David is the way to think about that because the prior year base would have had inefficiency I'm assuming right that the prior year base had the I think you had called out last year like inefficiencies related to Covid shutdown. So Blake.

Blake.

The gross to net here on productivity as some of these things go away will you actually capture more of the productivity intended or the gross productivity going forward without having to do anything else. Additionally.

Yes, so a lot of the productivity that we see right there sourcing we capture to sort of elements of productivity right. There's the sourcing which is because we always quote inflation gross and then we're able to hedge and do other things to reduce some of that market cost. So thats in there and then we have our core productivity programs in <unk> and <unk>.

What's happening is those programs so driving favorable yields in all the different things that happen to drive productivity people do those things and there's projects that manage those things will when youre short labor and it's all hands on deck to produce you do that does disrupt your core productivity programs right. So it almost can.

Become a double whammy because you are not driving the savings and you have to pay additional costs just to get the right staff to be able to produce what you need. So it's hard to quote a number conceptually I would say, yes, but we also have to have stability with labor right. We didn't know a quarter ago, what the extent of armour.

<unk> was going to be so there's just so many things that have happened that we haven't been able to predict so assuming we don't have more of those things that we could get stability will be able to get back to some of our core programs. Yes, yes, okay. Alright, that's helpful. I'll pass it on thanks, guys. Thank you.

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

Thanks, just to follow up on gross margins.

It looks like fiscal 'twenty two.

Gross margins might be 300 basis points lower than that of fiscal 19, and your comments about the 30 <unk> of lag between price and inflation would imply.

Something like 200 basis points of margin recovery, if that lag would too narrow.

And so I'm wondering thinking about trying to think about the sort of the stacked performance of price versus inflation and how we could have that be that.

Perhaps that gross margin might narrow to as little as 100 basis points.

And you had so much inflation, 26% you said stacked inflation, you've had 10% price stacked currently some more to come but it's hard to believe that you would get all the way up into the mid Twenty's. So I'm wondering could you help us think about how you might be able to bridge to only a 100 basis points.

Of gross margin pressure, if that that lag narrows in 'twenty three.

Yes, David that's a.

Yes.

It's tough right now for me to kind of get into that I think.

A lot of it comes down to what the additional inflation is going to be and what the additional pricing is going to be that we need so.

As of now we're taking significant pricing that will hit in Q1 from the inflation that we just saw it's mostly in our frozen and snack business.

And so that will be a significant benefit in Q1.

If we get inflation rates that can get back to a more moderate levels that it is going to be able for us to expand our gross margin and then as I mentioned previously our productivity how quickly can we bounce back to get more stabilized labor and get our productivity programs up to where they are historically so there's just so many factors that we are.

Working through that I can't give you a precision right now on 23 margins.

Well, maybe just a follow up if you were to say identify.

Maybe one or two top factors or risks that you are thinking about as you're thinking about getting that margin recovery from the price price versus and flip <unk> lag maybe risks to that margin recovery and it might not just be the price elasticity.

Of demand it might be some other things what are some of the top risks that you see there. Thanks.

I think it would be another year of excess of inflation on top of this year, which is 16%.

That would be one because as Sean mentioned earlier once we get above a certain level, we price and theres, a lag there right, which impacts gross margin.

The productivity programs that we have.

Can we get stability.

And our operations so that we can get back to driving more cost savings and be more efficient get rid of some of the absorption on favorability that we've had but it really depends on the stability of labor. So I feel like I'm talking about the same things that are impacting this year, what we feel good about David is the pricing the fact that.

The pricing we've taken this year, we're getting into market. The elasticities are favorable and that's a really good sign like if you go back to the beginning of the year you just look at our guidance to start the year, we had guided for organic net sales of flat and.

And we had said we think price say, we estimated pricing to be 3% to 4% and volume to be down 3% to 4% on that.

That flat base if.

If you look at where we are now with our guidance. We're looking at pricing for the year, that's going to be about 7% and volume that's going to be down around 3%. So the volume estimate didn't change and we've gotten twice the amount of pricing that we thought we were going to get so that is obviously real.

Really important for this company as we move into 'twenty three because we are able to price for inflation and thats going to help us drive our margins. So it's all of those factors that I just mentioned are going to impact margins for next year and David It's Sean just to weigh in here I like to think in terms of opportunities and risks both sides.

The coin.

Because we are obviously always on the outlook for both and on the opportunity side I think the bottom line is the fundamentals of the business are incredibly strong you've got strong organic growth. We've got very resident innovation, we got great share gains and importantly, we've got the ability because it would work we've done in the portfolio to take these inflation.

Adjusted by pricing actions and the consumer is not responding negatively to that so that is really on the opportunity side of the ledger on the risk side of ledger as I tried to explain today. The mechanics of successive waves of inflation are such that that means there are success of pricing actions and the corresponding lags that go with it those.

<unk> carried in a window of time period risk and then the other risk that we've talked about today as well as on investors' minds as well as Hey, if you continue to have these waves of innovation will elasticities at some point go south and get worse, and we don't see anything.

That is indicating that is the case and in part it's due.

Due to what I talked about on last quarter's call, which is the comparator set for these consumers as they are really assessing total.

Value right now is not just an item versus what's to the left and the right of it on the shelf.

Item versus what else they could buy and when people are in the top kind of negative.

Negative outlook environment, and Theyre looking to cut costs. They tender switches switch out of the highest ticket items first and that means we expect to continue to source a lot of our growth as we have been from people electing to eat in home instead of out of home and that is one of the things that is favorably impacting our elasticities.

Thank you.

Thank you and the next question will be from Rob Dickerson from Jefferies. Please go ahead.

Great. Thanks, so much.

Might be Kevin overly basic question, but.

Curious.

So.

The operating margin guide for Q4 relative to Q3, it's a little bit higher.

But at the same time, you are speaking to the <unk>.

Higher cost inflation relative to what you'd expected, there's an incremental pricing forthcoming it doesn't sorry, that's coming until mostly Q1. So I'm just curious if you could provide some color as to like what what does improve it seems like even though albeit slightly.

What does improve kind of in that Q4 relative to Q2 it.

That's the first question.

Yes, Rob Youll see.

We had additional pricing that we took that does come into effect kind of midway through Q4. So that's been a help our gross margin versus prior year and versus prior quarter.

As well as our SG&A and A&P combined we're going to see some some favorability there relative to the prior year and in Q3 as well.

Alright fair enough.

And then I guess, just kind of broadly speaking step away from that population conversation is just.

Portfolio positioning overall right charter and you continue to kind of speak to that.

We had a stronger portfolio investing in our brands, even more pricing power.

Would you say is you're still kind of think on a go forward lets say the next three years.

Yes.

The role of your kind of Staples part of the portfolio is still viewed as positively today.

Maybe it has been over the past two years, just kind of given all the benefits you saw with Covid or are there areas to kind of maybe increasingly focused our portfolio.

Refrigerated frozen snacks et cetera.

Et cetera are kind of more on the growth side and I'll just leave it at that thanks.

Hey, Rob over time, you've seen our portfolio has significantly increased in refrigerated and frozen and snacks relative to our staples business that said, we've been very deliberate in being aggressive to reshape that staples business, because theres a lot of good to get out of staples businesses overall.

What we've done is we've identified the businesses within staples that are more commodity like in nature, where we see more private label development and there's less pricing power and we have divested those businesses and what we're focused on and staples are.

Staples is cooking ingredients and Enhancers and these can be incredibly high margin businesses with very solid topline performance if not growth potential. So we've got just gems in our staples business across that business like Pam cooking spray and ROE talent lots of other places where.

We've got extremely strong relative market shares extremely strong margins in a pretty nice topline but.

Just continuing to reshape that business because it does throw off a tremendous amount of cash that then becomes an engine for the growth and innovation that we've extracted out of frozen and refrigerated and out of snacks. So it plays an important role in the portfolio not to mention to our customers. These are traffic builders a lot of our staples products. So they are really.

Important to our customers and it helps us from a scale perspective.

Having some leverage when we're talking to these large retailers.

We will continue to look at perpetually reshaping our portfolio for better growth and better margins at kind of what would you every day around here.

Alright, Thanks I appreciate it thank you.

Yes.

The next question is from Chris growing from Stifel. Please go ahead.

Hi, good morning.

Good morning, Chris Thanks for the time I just had a quick question for you and a question for Sean just around where you see the consumer today, we've talked a lot about favorable levels of elasticity. There is some indication that private label starting to pick up for example, and maybe some trade down in certain categories, just want to get a sense without going through every category, but from a high level, what you're seeing across <unk>.

And some of your key categories.

Yes.

First of all Chris our overall, our portfolio under indexes in terms of private label development versus food in general and a lot of our peers.

In our two high growth areas of frozen meals and snacks, we have.

Very little.

Private label develop development in some places not.

So theres not a lot of interaction there what's important about that is a lot of the targeted pricing that we're taking in in in Q1 of next year to offset this Q4 inflation is very focused in frozen refrigerated and meat snacks and so those are our very strongest business has very low private label development, so that again bodes very well but.

In terms of private label overall.

I often tell you all it's very category specific and what I look for what.

What I see when I see private label switching and interaction is a it tends to be a more commodity oriented categories and cooking oil ibuprofen things like that where the consumer is very smart, they're low switching costs and if those spreads between the two brands gets you why it's easy to switch and so we don't have a lot of those categories. We did.

Cooking oil peanut butter liquid eggs, we've exited those businesses and we don't we've got a couple that we don't have a lot across the board the other place where you see trading.

Trading down switching is when you have a very high ticket item $15 $20.

A purchase.

We don't have a lot of those products in the portfolio actually elsewhere in CPG cleaning products things like that they can experience those tradeoffs.

The closest analogy for US is is eating away from home that's a high ticket item and that's where we've seen trading down but instead of that trading down going to private label. We are the beneficiaries of that trading down and we will take it.

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

Yes.

What we've done from the beginning as we initially we we kind of started modeling elasticity based on historical elasticities, we are not experiencing anything close to historical elasticity, so, but we do bake in elasticities and we've got pretty good models now that are calling them pretty accurately and we attach elasticities to.

Each successive wave of pricing that we had to take and.

And we don't really model in the waning of elasticities on the older pricing that we've got but we actually can see that in the marketplace and that's the dynamic.

<unk>.

As long as I've been doing this people do adapt to higher prices. If you look over last year's price it pretty much anything you buy is has changed many times over.

Thank you I just had one quick question for Dave on that chart, where you show like the pro forma EPS in the 30 cents of from the impact of the pricing lag.

I'm, just trying to understand that number because the market inflation use site on there is a 'twenty one center egg at the operating profit level. What's the difference between those two is that where you unfavorable hedges that the way to say it or when we should understand a difference between the 30 and maybe like the market inflation or even the profit there are negative 18.

Yes, so it's really two different things.

The bridge.

The left part of that chart, Chris is to get you from the $2 50 guidance to the $2 35.

The only thing we talked about so it's the it's the additional inflation that we've seen in proteins in transportation and then some upside relative to what we expected for audit. So thats just to give you a high level bridge two to $2 35, which is our new call for the year. The 30 <unk> is just a pro forma concept to say, okay in that too.

35, we were disadvantaged because we got hit with inflation in Q2 Q3 Q4.

That we didn't get the benefit of pricing for so what we did is we went we looked at the pricing we actually took in each of those quarters and the pricing. We expect in Q1 of next year and we said if we were able to do that 90 days sooner net of the elasticity. So we do take out the volume decline what would the pro forma EPS b.

On that just to align that up so it's just a timing thing of the pricing actions that we've taken in response to the inflation.

Understood.

I appreciate the color. Thank you.

Okay.

Yeah.

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

Great. Thank you and as a reminder, this call has been recorded as detailed in the press release issued today. The IR team is available for follow up calls feel free to reach out and thank you for your interest in Conagra brands.

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

Yes.

Okay.

Yes.

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Okay.