Q1 2023 Conagra Brands Inc Earnings Call
Good morning, and welcome to the Conagra Brands' first quarter full year 'twenty 'twenty three earnings call.
All participants will be in listen only mode should you need assistance. Please signal conference specialist by pressing the star key followed by zero.
After today's presentation there'll be an opportunity to ask questions. Please note that this event is being recorded.
I would now like to turn the conference over to Melissa Napier. Please go ahead.
Good morning, Thanks for joining us for the Conagra brands first quarter fiscal 2023 earnings call.
I'm here with John Connolly, our CEO and Dave Marburger, our CFO , who will discuss our business performance will take your questions when our prepared remarks conclude.
On today's call, we will be making some forward looking statements and while we are making these statements in good faith, we do not have any guarantee about the results we will achieve this.
Scripps is of our risk factors are included in the documents, we filed with the FCC.
Well also be discussing some non-GAAP financial measures. These non-GAAP and adjusted numbers refer to measures that exclude items management believes impact the comparability for the period referenced.
Please see the earnings release for additional information on our comparability items the.
The GAAP to non-GAAP reconciliation can be found in the earnings press release, and the slides that will be reviewing on today's call both of which can be found in the investor Relations section of our website.
I'll now turn the call over to Sean.
Thanks, Melissa good morning, everyone and thank you for joining our first quarter fiscal 'twenty three earnings call.
Let's jump right in with what we want you to take away from our presentation shown here on slide five overall.
Overall Conagra delivered strong first quarter results.
We had robust net sales growth across our portfolio, mainly due to the impact of our inflation driven pricing actions, coupled with ongoing limited elasticities.
We continued to gain market share at a total portfolio level, particularly within our strategic frozen and snacks domains and drove solid profit improvement during the quarter.
We also saw another strong performance from ardent Mills is effective management enabled the joint venture to continue capitalizing on volatility in the weak markets.
Our supply chain productivity continued to improve however, we experienced some internal and external operational challenges during the quarter like many of our peers. These challenges led to both increased costs and inefficiencies, which more than offset the benefits from improved productivity.
Impacted our business in the quarter I'll unpack. This later in the presentation.
Also continued to strengthen our balance sheet, improving our leverage ratio during the quarter, while investing in our business and returning cash to shareholders.
Finally, our stock our solid start to the year reaffirms our confidence in our fiscal 'twenty three guidance, we announced last quarter.
With that backdrop, let's dive into the results shown on slide six.
As you can see in the quarter, we delivered organic net sales of just over $2 9 billion.
Representing a nine 7% increase over the year ago period.
Adjusted operating margin of 13, 7%, which is down slightly compared to last year as a result of the supply chain inefficiencies I mentioned a moment ago.
And adjusted earnings per share of 57.
14% higher than what we generated last year.
Slide seven breaks down our strong sales performance during the quarter.
The total conagra level retail sales grew by almost 9% compared to the first quarter of last year, and just over 24% compared to three years ago.
Our momentum continued as we gained share in the marketplace demonstrating the valuable connection our brands have with consumers. These share gains are most pronounced in our frozen and snacks domains, which increased share <unk> eight and one five percentage points on a one and three year basis, respectively.
Diving further into our top line performance by retail domain, you can see on slide eight that frozen generated a significant acceleration of quarterly sales growth on a one and three year basis of 8% and 27% respectively clearly are.
Focus on catering to consumer preferences for convenience quality and great taste.
Can you to resonate.
Similar to prior quarters. This growth was led by key categories, such as plant based protein and single serve meals, which along with breakfast sausages increased sales by double digits compared to the first quarter of fiscal 'twenty, two while gaining market share from our competitors.
Our snacks domain also continued to deliver strong sales growth on a one and three year basis shown here on slide nine.
Compared to the first quarter last year.
<unk> retail sales increased 13%.
And as you can see we have delivered sustained growth versus the period three years ago, including 36% in the most recent quarter.
In particular, we saw significant growth in sales of microwave popcorn, which increased more than 20% compared to the prior year.
Our highly relevant staples domain also accelerated sales growth, increasing 8% compared to the prior year and 15% versus three years ago.
This was driven by strong performance in single serve dinners and entrees.
Toppings, pickles and canned Tomatoes.
Slide 11 highlights the relationship between price and volume over time.
As I mentioned on last quarter's earnings call. We continued to take strategic pricing actions during the first quarter to help offset ongoing cogs inflation.
As you would expect pricing has driven some volume elasticities, both for Conagra and the overall industry is tends to be most acute in the immediate aftermath of new pricing and wanes overtime as consumers adjust.
As you can see at the bottom of this slide our net elasticities have remained nearly flat over the past few quarters.
Relatively modest elasticities, both compared to historic norms, and our peers are a testament to the strength of our brands.
As we monitor the impact of our pricing actions on volume. We also look at the relative impact between branded foods and private label.
As you can see on slide 12 private label has increased its dollar share of certain categories on average since 2019, including a jump in share gains at the beginning of this calendar year.
However, it's worth noting that those share gains are much more modest in the categories in which we compete where.
We're confident that the continued investments in our brands as part of the Conagra way, we'll ensure they continue to resonate with consumers.
These important efforts combined with our limited exposure to private label will help us retain the market share we gained during the pandemic.
Before I turn the call over to Dave I want to talk about Conagra supply chain and both the improvements and inefficiencies I referenced earlier.
As I said, our supply chain continues to make progress.
Pricing actions, we implemented in the quarter and over the last year were largely able to offset continued inflation and our service metrics continued to improve in Q1.
While we're pleased with what we've accomplished to date our supply chain is not yet fully normalized we.
We've continued to see some discrete inefficiencies pop up that resulted in higher cost in Q1.
I'll give you two examples to illustrate this.
In our foodservice business, we identified an off spec finished good issue, while producing product for our customer we disposed of the product and lost manufacturing time during our diagnostic this pulled sales and gross margin below where they should have been.
A second example is in our can Chile, and beans businesses, where late in Q1, we found cans that work off spec.
No product was recalled and while production is now backing back up and running properly the lost inventory effect will linger into Q2 impacting volumes and margins.
The point is these types of challenges can result in downtime needed to determine and solve the root cause of the issue as well as proper testing to ramp production back up that lost time and result in higher costs and less production.
Looking ahead, we're not expecting these discrete supply chain interruptions to disappear overnight as the external environment remains dynamic.
Despite these transitory disruptions, we are making good progress in the supply chain with core productivity continuing to improve.
Accordingly, we remain committed to our operating margin target for the year and to the productivity targets, we announced at our Investor Day in July .
In summary, we're off to a strong start in fiscal 'twenty three fueled by robust topline growth as a result of inflation driven pricing increases and you Didnt elasticities operationally, we continue to make progress in our specific areas of focus.
For the balance of the year, we're planning for the operating environment to remain dynamic while we expect consumer response to our brands to stay strong. We are planning for this quarter's volumes to be impacted by the supply chain disruptions I just outlined and from our most recent wave of inflation driven pricing introduce.
To the market in early Q2, however, as I covered earlier, we expect this elasticity to wane over time.
While inflation remains persistent we are starting to see moderation in certain areas and anticipate relief for commodities as the year unfolds.
Overall, we're off to a great start, but one quarter doesn't make a year and we remain focused on delivering for our customers and consumers.
We continue to see a clear path to achieving the guidance, we issued for fiscal 'twenty three behind the strength of our brands and ongoing productivity initiatives.
Leading us to reaffirm those targets with that I'll pass it over to Dave.
Thanks, Sean and good morning, everyone.
I'll begin by discussing a few highlights from the quarter as shown on slide 16 overall.
Overall, we are pleased with our start to fiscal 'twenty, three and remain confident in our ability to achieve our full year guidance targets.
We delivered strong organic net sales growth of nine 7% in Q1, reflecting the continued relevancy of our portfolio to consumers.
Adjusted gross margin came in at 24, 9% inline with expectations.
Adjusted gross profit dollar growth was up seven 1% benefiting from higher organic net sales and continued progress on supply chain productivity initiatives, although supply chain operational challenges did impact our business as Sean referenced the.
The ardent mills joint venture continues to operate as an effective inflation hedge as favorable market conditions and effective management drove another strong quarterly performance reflected in the equity earnings line and contributing to adjusted EBITDA growth of nine 1%.
Turning to slide 17, the nine 7% increase in organic net sales was driven by a 14, 3% improvement in price mix are result of continued inflation driven pricing actions.
This was partially offset by a four 6% decrease in volume primarily due to the elasticity impact from those increases.
A small headwind from the impact of foreign exchange was the final contributor to net sales during the quarter.
Slide 18 shows the topline performance for each segment in Q1 as mentioned we are pleased with the robust net sales growth and continued share gains across our entire portfolio, particularly within our domestic retail businesses.
Our grocery and snacks and refrigerated <unk> frozen segments achieved net sales growth of 10.5, and nine 6% respectively.
The unfavorable impact of foreign exchange was reflected in the net sales decrease for our international segment.
I'd now like to spend some time discussing our Q1 adjusted margin bridge found on slide 19, we.
We drove a 10.5% benefit from improved price mix during the quarter.
Reflecting previously communicated pricing actions.
We also realized a one 2% benefit from continued progress on our supply chain productivity initiatives.
Which is net of operational inefficiencies Sean discussed.
These price and productivity benefits were muted by continued inflationary pressure with 15% gross market inflation impacting our operating margins by nearly 11%.
Market based sourcing at a negative margin impact of one 6%.
As commodity prices rose quickly last year, we benefited from locking in contracted costs that were lower than the market and have rolled off this quarter.
As a reminder, even when commodity inflation eases, we will not immediately realize a benefit as our cost may remain higher than the spot market due to timing of contracts.
This is transitory and a product of a dynamic operating environment.
Slide 20 breaks down our adjusted operating profit and margin by segment.
We were pleased that higher organic net sales and supply chain productivity drove increased adjusted operating profit growth across three of our four segments in Q1.
The strength of our grocery and snacks segment stands out on this slide with adjusted operating margin in this segment, increasing by 90 basis points compared to a year ago.
Although refrigerated and frozen operating margin was down 21 basis points. In Q1. This segment's gross margins were better than Q4 gross margins demonstrating gross margin inflection that we expect to continue year to go.
Inflation supply chain pressures and elevated operating cost headwinds offset higher sales and realized productivity and our refrigerated and frozen foodservice and international segments.
Before unpacking adjusted EPS on slide 21, I'd like to provide some context on the goodwill and brand impairment charges that impacted our reported numbers during.
During the quarter, we made the decision to reorganize the reporting structure for certain brands in our refrigerated and frozen segment.
In connection with these changes and in accordance with GAAP, we conducted an evaluation of goodwill for impairment.
Given the increases in the current interest rate environment.
It has further increased from the rates. We recently used in our standard Q4 impairment testing a higher discount rate primarily drove the noncash goodwill and brand impairment charges of $386 million for the quarter and reported SG&A expenses.
The charges are not shown on the slide because they do not impact our adjusted numbers, but all reconciliations can be found in the tables at the back of this presentation.
Our Q1, adjusted EPS increased <unk> <unk> or 14%.
Sales and gross profit ardent mills' strong performance and a slight benefit from adjusted taxes were the primary positive contributors to our adjusted EPS performance in the quarter.
These positives were offset by higher adjusted SG&A from the comparison to lower incentive compensation in the prior year's first quarter as.
As well as lower pension and post retirement income and higher interest expense.
You can see how we are continuing to strengthen our balance sheet on slide 22.
At the end of the quarter, our net leverage ratio was three nine times down from four times at the end of fiscal 'twenty two.
We expect to end fiscal 'twenty, three with a net leverage ratio of roughly three seven times keeping.
Keep in mind that historically Q2 is a heavier use of cash quarter from a working capital perspective.
So we expect progress on our net leverage reduction to be greater in the back half of the fiscal year.
Capex decreased by $30 million year over year to $125 million during the quarter, while free cash flow increased $138 million from negative $15 million in Q1 'twenty two.
Partially due to the accelerated receipt of.
The outstanding receivables as we capitalized on certain customer payment terms.
We paid $150 million in dividends in Q1 fiscal 'twenty, three an increase of $18 million compared to Q1, a year ago, highlighting our commitment to returning capital to shareholders.
And we repurchased $50 million worth of shares in the first quarter.
In line with our stated objective of offsetting dilution from our share based incentive compensation plans.
We will continue to evaluate the highest and best use of capital to optimize shareholder value as we progress through the fiscal year.
Once again, we are reaffirming our fiscal 'twenty three guidance across all metrics, given our strong quarter and expectations for solid performance for the balance of the year.
Before opening up the call for questions I want to walk through the considerations and assumptions behind our guidance.
We continue to expect the inflationary environment to persist, but moderate through calendar year 'twenty three.
Which will result in a low teens inflation rate for our fiscal year 'twenty three weighted towards the first half of the fiscal year.
We also expect previously communicated pricing actions in light of these costs to become effective early in the second quarter.
Likely causing volume to decline.
We recently communicated some additional pricing that will be effective in Q3.
However, the magnitude will be smaller and more targeted than previous pricing actions as.
As always we will continue to monitor inflation levels and price as needed to manage future volatility.
We expect Capex spend of approximately 500 million in fiscal 'twenty three as we make investments to support our growth and productivity priorities with a focus on capacity expansion and automation.
Finally, we anticipate interest expense to be roughly $410 million and pension and post retirement income to be approximately $25 million for the year driven by the higher interest rate environment.
Our full year tax rate estimate is approximately 24%.
To reiterate we are pleased with our strong start to the year and remain confident in our outlook for fiscal 'twenty three.
Our ability to deliver solid results amid such a dynamic environment is a testament to the hard work and skills of our team the strength of our brands and our execution of the Conagra way playbook.
Thank you for listening that concludes our prepared remarks for today's call I'll now pass it back to the operator to open the line for questions.
Thank you we will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.
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.
Our first question comes from <unk>.
Andrew Lazar from Barclays. Please go ahead.
Thanks, very much good morning, everybody.
Good morning.
If the two questions I guess first off have you seen any change in sort of volume trends elasticity or retailer reaction since the new pricing has come into into play into two more since announcing the more targeted pricing for <unk> and again or are you just sort of being I guess more prudent.
And the way you are forecasting your sort of volume elasticity going forward just trying to get a sense of if anything has changed that you see that we don't see like let's say in the data yet.
Sure Andrew Here's how I think about the elasticities than we had this in our.
Materials they are benign.
And they are stable and we kind of shared this concept of stable net elasticities and the way to think about that is that that is basically the combination of.
Waning earlier pricing elasticities being offset by elasticity is associated with more recent pricing, but the net effect is flat and benign elasticities and this far into a inflation in pricing cycle I view that as very very positive news.
And as we mentioned at our Investor day, our elasticities have consistently been.
Better than that by that I mean, more benign than our peers and that reflects the strength of our brands and the important work we've done to modernize our portfolio and as you look ahead and this may be nuanced, but it's an important nuance at this point given how stable our elasticities have been I expect continued strong elasticity coefficient.
But we are pricing more of the portfolio. So those coefficients applied to a larger volume base, which is why we've planned for some incremental volume weakness, it's not that the elasticity coefficient has changed is that that benign elasticity is now being applied to a broad.
<unk> piece of the portfolio. So that's why as you look at in the industry as you look at competitors that have <unk>.
Reising in and dollar sales that go from plus 7% plus 14% plus 20, youre going to see volumes move directionally, along with that but what <unk> seen in our company and more broadly is that the volume effect is is quite modest compared to anything we've seen historically and I think most important it's been very stable for.
I'm, an elasticity coefficient standpoint.
Alright, very helpful color, and then and I guess I wanted to go a little bit deeper on gross margin. It's improved sequentially I think for the past five quarters.
You had previously said that fiscal <unk> was really the quarter, where conagra would see the largest sort of mismatch right between pricing and costs.
The year in 'twenty three.
Could we see gross margins start to expand year over year, starting in fiscal <unk> as the street still has lower gross margins year over year.
If not why would that be I understand some of the operational issues, but you had some of those in <unk>, but margins still came in better than the street was looking for so any color on that I think it would be helpful. Because again, we're trying to get a read on for you and the industry sort of the timing around the potential for actual margin recovery as opposed to just covering the sort of a dollar cost.
You will.
Yeah, Let me tell you how I think about kind of margins overall than Dave.
Getting a little bit more of the detail here, but margins are heading in the right direction and we expect that to continue but it's not necessarily a straight line because obviously in the external environment remains dynamic. If you think about last quarter. We saw year on year margin expansion in grocery <unk> snacks and foodservice. This quarter, we gave a little of that.
Back in foodservice due to the transitory operational issue I discussed a few minutes ago, but we made good progress in frozen and refrigerated and plus core productivity is in a good place. So you take all of that coupled with strong brands broad based pricing and benign and stable elasticities that I, just mentioned and overall I'd say it.
Bodes well, Dave you want to build on that yes sure. So Andrew you know, we don't give specific quarterly guidance, but we do expect sequential improvement in gross margin and operating margins moving forward based on the assumptions we have now.
We expect the highest percentage of inflation for the fiscal year in Q1, we just delivered.
So we expect the percentage will moderate moving forward.
We're seeing the full magnitude of pricing from fiscal 2022 in the quarter, but we also took pricing during Q1 and we've taken additional pricing at the beginning of Q2. So we will see the full impact of that starting in Q2 and.
And we also expect to see some gradual improvement in our net productivity as the supply chain and service levels continue to normalize so all those things give us confidence that we'll improve our margins sequentially moving forward.
Thanks very much.
Okay.
The next question comes from Ken Goldman from JP Morgan. Please go ahead.
Alright, thank you.
You reiterated your outlook for low teens Cogs inflation. This year I don't think it was expected that you would alter this outlook.
But Sean you said, you're seeing some maybe initial relief in some areas and we can surely see that chicken and pork prices have dropped and those are two areas that were maybe some maybe troublesome for you in the past. So I guess I'm curious as we think about some of the Cogs tailwind are there any other key drivers that will become more difficult more difficult I guess recently.
That would offset that I guess I'm asking in a nutshell are you more optimistic or pessimistic about cost inflation in general for the year then than you were a quarter ago. Thank you.
Ken I'll make a brief comment and turn it over to Dave.
We're seeing some green shoots obviously in some commodities and I think that does bode well, we are obviously much longer into an inflation cycle than anybody hoped we would be this thing has persisted longer than ever but.
I do see positive things shaping up but as you can imagine when you contract and some of these commodities those contracts don't necessarily drop off the very minute you start seeing positive news on the forward curve, so that negative sourcing factories, it's just a reality of being at the at the end of one of these cycles and the good news is I feel good.
About how our purchasing team has managed this because when youre coming to the end of the deflation cycle, you don't want to be overly long right and I think the team has done a very good job of that Dave do you want to add any more.
Debit color yeah for sure so regarding inflation, Ken Q1 came in largely in line with the art market estimate that we had which that's the first time that's happened in several quarters right. The market has just continued to be very volatile. So we like to believe that that's a proxy for a little bit less volatility moving forward.
Inflation estimate for the full year is still low teens. So that's a double digit number off of two years of very high inflation. So it's not like we're in a deflationary environment, but we feel like that we we use our market indicators, we feel like that we've adequately estimated and planned and built some concern.
It tells them into our forecast for this so.
And the last year and a half has told us that things can change very quickly, but based on Q1 coming in where we thought based on our forecast based on procurement that Sean just talked about with very strong team as we sit here today, we feel feel good about our estimates and how it will affect each quarter going forward.
Thank you and then a quick follow up you know one of the I'm sure you hear this all the time the more bearish cases on the industry is that your customers.
Are there consumer start weakening and maybe as vendor gross margins start to improve but some of those retailers restarted demand a bit more from you and your peers, whether in the form of higher promotions or in store advertising. So we really haven't seen an indication of this taking place in your I think your tone today would suggest you're not either but I'm just curious if you're seeing or hearing.
Any talk in the industry or any talk in your categories about either your competitors getting more aggressive on price and promotion or your customers kind of pushing back a little bit as these list prices continue to rise it doesn't seem like we're seeing it in the data, but as Andrew said before sometimes the data don't.
Tell the whole story. Thank you.
Yes, Ken I think that the.
The two most.
Common words I've heard from customers in the last year plus as supply is surety that is the priority.
Making sure that we can continue to get our service levels moving in the right direction. So that they've got the products in stock. They don't want to go through out of stocks, especially now as we're about to enter the holiday sets, particularly sensitive period. So.
If you think about it with the supply chain not yet fully normalized across the industry I think the last thing anybody wants to do right now is it drove fuel on the fire and exacerbate.
Inventory issues out of stock issues things like that so I think the environment remains.
Pretty rational right now and.
You know I have no reason to believe that's not going to continue for the foreseeable future.
Thanks, so much.
Are you.
The next question comes from Jason English from Goldman Sachs. Please go ahead.
Hey, good morning folks thanks for slotting and good morning.
You mentioned service levels still subdued can you give us an update on where they stand and how that compares to where you were maybe last quarter.
Actually on adjacent service levels have improved pretty dramatically.
It's it's quite positive.
So moving in the right direction getting.
North.
During the peak of Covid, you saw service levels in CPG and broader in fluid drop into some companies were down 15% and recently you've seen companies backup over 90%. So that's it's category specific so you can kind of assume that's everywhere, we still have certain categories, where our demand is just so strong.
We'd like to be cranking out more volume selling more like slim Jim.
But but I would say.
Here's how to think about the supply chain overall.
There is clear progress happening in supply chain, it's at Conagra, it's across the industry and it's improving service levels have materially improved as I. Just said core productivity is tracking well clear progress is it flawless no its not flawless as you heard some things keep popping up as we are.
Offline so the external environment remains dynamic and that's why we think it's prudent and.
And you heard some of our comments on commentary on Q2, we just want to take a prudent stance forward looking to say look we are going to be taking some more pricing.
That's broader on the portfolio that will have some modest impact tied to it and.
And we've got.
We're going to assume that the supply chain dynamism is continues for a bit longer. We just think that's the right way to handle it.
As close into the year, but overall service levels viewpoint or are making real progress.
And Sean as we continued to improve would you expect promotional activity to improve with it.
I think we're I think we're quite a ways from that and to the degree it does Jason.
Couple of things to keep in mind about our company. If you look at our volume base.
And you say what percentage of the total volume is promoted it's one of the lowest levels of promotion in the industry and as you know that has been a deliberate part of our playbook.
But we're not opposed to promotion, we do some promotion and we do it on certain brands and we do at certain times of the year because it drives incremental volume. Good example of that is the work we do around holidays and promotion because it's kind of binary if you're not on promotion on holidays youre going to Miss some sales and we'll take those sales because thats pure ROIC.
So we're very we've become very focused on very selective pursuit of promotion and a high ROI focus on promotion and.
We're probably at record lows right now at some point that will come up modestly, but I'm not anticipating any kind of material change.
Understood makes sense. Thanks for your time I'll pass it on.
The next question comes from Bryan Spillane from Bank of America. Please go ahead alright.
Alright, thanks, operator, good morning, everyone.
So two quick ones for me the first one and then maybe just going back to the issues that Sean you called out with in foodservice and.
And in the can Chilean beans, just can you and.
Maybe Dave you could do this just can you give us some sense of just the magnitude how much it impacted volume or revenue and the impact on margins just trying to.
Tease out how much better things would've been.
If you didn't have these issues.
Yes, Brian why don't I take that so if you see on our.
Our margin bridge that we had in the deck that the realized productivity and other Cogs was plus one 2% so.
Clearly those two issues impacted that I'm not going to give a specific amount but.
Our our core productivity that's in that number.
As you know we shoot for about 3% of cost of goods sold which equates too when you look at margin about two 2%. So two 2% margin improvement would be what our core productivity is and we came in at one point too. So that's about one percentage point of impact now that wasn't just the things Sean.
<unk> talked about we also had some some other things and absorption and different things that hit but Sean just gave you a couple of examples that are in all of the things that Gabe gave us a headwind against that kind of core productivity numbers. So we're pleased about core productivity in the plants, we're making great progress.
Just some of these isolated things that we look at it as transitory.
<unk> kind of headwinds to that net that number yeah, Brian okay.
Got it.
We know the market as you guys are looking for to say are we making progress here and obviously an important one for all of us.
For our margins and last quarter as I mentioned, we have.
Action versus year ago on two of the four segments at that time, we said, we expect the other two segments to inflect positively as we move through this year. We of course still do but we gave up a little bit of ground in foodservice in the quarter and while this one of the reasons. We wanted to put a little color on some of these examples as foodservice is not a big piece of the portfolio, but this issue in foodservice.
<unk> hopped up impacted foodservice so.
It's why you see some of the directional volatility there were specific root causes.
Hi.
You don't anticipate in advance that we want to pop up and we don't want that to be read as something more systemic happening in foodservice and we gave up ground for some broader reason that's not the case, it's tied to the in that segment. The incidence that we described in the prepared remarks, Okay and then just one other.
The follow up is just given the recent you know.
Hurricane in Florida, and the impact there anything that we should be thinking about with regard to I guess this quarter.
Either.
Pull forward of sales or any impact on operations just anything we should be we should be thinking about there.
Brian I don't think so that's a really tough one to call because obviously some people. Unfortunately are not in a position where they can shop right. Now are there stores might be closed in and so you can argue that there might be missed sales because of that by the same token maybe their pantry inventories were obliterated in has to be replenished in the future. So it's just too early to know.
Exactly what that looks like and in the scheme of the whole national business I don't anticipate that that would be at a material loss.
Disruption, one way or another debut on it yet and just the last part of that there was no material impact on our operations as a result of hurricane.
Okay. Thanks, guys.
Thank you.
The next question comes from Robert Moskow from Credit Suisse. Please go ahead.
Hi, Thanks for the question I'm actually a few small ones.
Was there any benefit from rate reloading inventory in the quarter I think you mentioned it as a headwind.
Inventory de loading in for it so.
I don't know about that.
Also I took a peek at <unk> last year. It looks like there was a pretty sizable hedging benefit maybe 200 basis points in <unk> last year.
Do you think that will be a 200 basis point headwind.
This year as a result of the duration of hedges.
Why don't I start John you can jump in at any color.
On your first question, Rob we continue to ship in line with consumption. So if you look in Q1, we shipped a bit ahead of consumption, but when you look at the percentages, but if you look at Q1, a year ago, we shipped a little bit below so when we look at our days of supply numbers with retailers in.
Retailer inventories.
We are in line with where we've been in prior year, and where we expect to be so we don't see any significant you know.
Kind of issue with retailer inventories right now, we're right right, where we where we want to be and we're basically shipping to consumption. So theres no theres, no kind of loading or de loading dynamic right there right.
In terms of your second question, Yes, we as you saw in the first quarter results. We did have negative sourcing right because we come off favorable contract. So.
That will continue to happen that's all baked in our estimates that we get right. So we <unk>.
<unk> market inflation, and kind of where we were locked in when those contracts or hedges come off. So that's all part of the forecast that we get so I'm not going to give a very specific number that you asked but generally that's how we forecast and plan it for the full year.
Okay.
Quick follow up maybe for Sean I think the plan is to increase A&P spending this year, but it was flat in the first quarter is anything getting shifted into the next three quarters.
Yes.
Let me start that Robyn.
I'll flip it over to Dave here.
I think the intent behind the question is are we do.
Do we have a good plan in place to support our brand building activities and the answer that question is clearly, yes, just look at our results with dollar sales over there.
The past 52 weeks versus three years ago, I think we're up over 19% while volumes over that same period or roughly flat despite quite a bit of pricing.
So the brand support that we've got out there is strong and for those of you who are listening who did not.
Watch our Investor day presentation, I would direct you to the presentation from Darren Serrao on how we think about brand building broadly because A&P as a piece of it but it's only a piece of it and I think that was very instructive.
With respect to where we sit on the year on A&P, Dave you want to kind of describe how it's unfolded in Q1 and how it unfolds from here, yes sure. So we had given guidance that we expect A&P will grow above our organic net sales for the full year.
So this is a timing thing we expect A&P will ramp up year to go if you just look at where we came in at Q4.
If you look at A&P in Q1 versus Q4 were up $16 million or over 30% just on a sequential basis. So we expect A&P to ramp up a year ago.
Thank you.
The next question comes from Cody Ross from UBS. Please go ahead.
Hey, good morning, Thank you for taking our question.
I just wanted to go back to your pricing actions that you noted to be effective in <unk> can you just describe how much is how much is it what parts of your portfolio is and and then how much is locked in at this point.
Hey, Cody, it's Sean we're not going to get into details on the specific zip codes or the pricing for obviously for competitive reasons, but.
These are very surgical pricing actions on parts of the portfolio, it's not a broad based action across the whole portfolio.
And so again, we've got meaning meaningful pricing happening now in Q2 and then.
More surgical actions later in <unk>, and we don't know what's going to unfold after that if we need to take additional actions but that.
That is the plan right now the good news as I pointed out earlier is that.
The elasticity coefficient just haven't budged.
They are flat as a pancake as I showed you in the presentation and they're low overall and that's encouraging given how many waves of pricing have already been experienced in the marketplace that is those coefficients are a reflection of the consumer response to our brands and the pricing and we're not seeing it move.
<unk> sentiment what youre seeing in the volume Delta again as I mentioned, a few minutes ago is that the pricing is getting more of the portfolio and therefore, it will have some benign impact associated with it but until the previous pricing elasticity wanes it'll build that's how this whole pricing and elasticity dynamic goes it it will it will.
And then it will flow.
And the fact that they're stable net elasticity coefficients are stable overall and benign I think it is a very positive sign.
Thank you for that and then just one quick question on SG&A SG&A ex A&P was up 10% or so it looks like incentive comp drove about 8% of that is that correct and how should we think about SG&A and incentive comp for the remainder of the year. Thanks, Yes, let me take that so.
Yeah, as we said at the beginning of the year with our guidance, we expect our SG&A to increase at a greater rate than our sales. So we did we were very clear on that.
Yes incentive compensation for fiscal 'twenty, three will be up versus fiscal 'twenty. Two now there was a component of timing for incentive comp that was in Q1. So that's part we were up 10, 5% of just pure adjusted SG&A in Q1, some of that is timing of incentive comp and some of that is just absolutely.
<unk> increase, but we were very clear that we expect SG&A to be up greater than our sales growth for the full fiscal year 'twenty three.
Great. Thanks, I'll pass it on thank you.
The next question comes from Chris Growe from Stifel. Please go ahead.
Hi, good morning.
Good morning.
Good morning, I just had a question for you if I could first on the pricing you have some more price increases in <unk> and something like some smaller targeted increases in <unk>, what will it be at that point in time that your pricing will fully offset your inflation could that happen sooner based on like the wraparound effect of pricing.
In a sense of how your how that's going to happen sequentially through the year.
Yeah, let me take that so.
We've been very clear that our principle around pricing is its inflation justified. So when we go and we put a price increase on the table. It's all grounded in the inflation that we're realizing and we've been very clear there's been a lag. So all of these price increases what we took in Q1, what we've taken at the beginning of Q2 and then the smaller more.
Nickel increases that we've communicated for Q3 are all tied to that inflation. So yes.
At this point in time, given the inflation that we've recognized an estimate we have offset that cumulatively in the consumption numbers that I find really support that is if you go back and look at volume and total dollar consumption.
52 weeks now versus three years ago.
Our dollar consumption is close to plus 20% and our volumes are pretty much flat. So that shows you that that's the kind of pricing that we're seeing in market and that ties to the cost inflation that we're seeing so that the consumption data data supports that overall catch up.
Thank you for that and I had one other question on some of those supply chain challenges operational challenges.
Obviously across the industry I think what most companies have seen though is and again this can be different for you, but but less of those this year than last year. It's certainly there's unique factors that can happen I just want to get a sense of is this like the challenges you call. It this year or are those more than they were last year and then I guess to get a sense of if you look at your gross margin today like what are those.
Operational challenges still how much of those are really weighing on the gross margin today like what could you get out over time as our supply chain operations normalize.
This is Shawn I'll comment on the first piece and let Dave comment on kind of the impact of it but you know this is one of these things where I think.
People in my seat a really wont be careful not to jinx themselves because the thing about about the some of these whack a mole disruptions is that theyre not foreseen in many cases, they pop up so.
You go through these periods, where the frequency appears to diminish and it feels like you know hey, this could be good but then you'll have something pop up again thats. The nature of kind of this kind of friction that we've seen so.
<unk>.
And being very deliberate and saying I don't think these things are going to go away overnight.
From a planning posture standpoint.
Our view is lets just assume that they will continue to pop up but yeah youre absolutely correct. We watch very carefully to say do we see these things kind of diminishing in frequency and we don't want we don't want to jinx ourselves there and get out over our skis, but that's that's obviously, what we're hoping for Dave do you want to add to that Sean So so Chris.
Let me.
Again, it's sort of a little bit what I said to Brian's question, but if you look at our margin bridge I think that's a good place to start.
If you look our realized productivity and other Cogs for Q1 was plus one 2%.
If you just go back and say, okay. Our target for realized productivity is 3% of cost of goods sold right that basically equates to two 2% margin improvement right, because our targets or percentage of Cogs, which when converted to margin is two 2% we delivered one 2% so.
We are 100 basis points off of all of that realized productivity dropping to the bottom line now.
There are other investments and things that we make in a normal kind of course, but the examples of the things that Sean talked about are in that 100 basis points of headwind. So as we move forward, we do expect that that will.
Improve you know as.
As we move forward and get more normalized so that's how to think about it.
Okay I appreciate that thank you.
The next question comes from Nik Modi from RBC capital markets. Please go ahead.
Yes. Thanks, good morning, everyone. So shall I was hoping you can I mean I. Appreciate the fact that you guys been able to get the pricing through but when I look at some of the household penetration metrics.
Even going back to pre COVID-19, it looks like some of them.
Our brands are actually below those levels. So I was hoping you could just give us some context on how you're thinking about that in terms of rebuilding household penetration, especially in this inflationary environment and then do you worry that the price gaps have narrowed between let's call. It some of the frozen prepared meals and <unk> because we've seen inflation obviously go.
Higher than the <unk>.
Off premise and on premise.
Yes, Nick first of all on the second one absolutely not I don't worry about that.
The relative pricing between away from home eating options and at home eating options remains strongly in favor of at home eating options and we haven't even declared we're in a recession yet. So so that's one of the reasons you clearly are seeing benign elasticities and stable elasticity is quite frankly multiple way.
The pricing into this cycle is that the calculus of the consumer is such that they are saying, hey, it's a far better value proposition to eat.
At home than it is to eat out of home.
And then within certain of our some of our categories. There's just there isn't really no trade down option as you look about frozen single serve meals. As an example, we span the good better best continuum, there with the value options the mainstream options and the premium option. So.
The business remains very strong with respect to household penetration I did see your research the other day, Nick on household penetration.
<unk>.
What I would say to you is you've got to be very careful when you look at household penetration not to lose the impact of seasonality household penetration varies pretty materially by company by category.
By seasonality. So you have to make sure you're looking at apples to apples overall with what you should expect.
Super cycle of pricing like we've seen right now is that there will there will be modest short term impacts on household penetration as consumers.
For purchases.
And that's kind of you see it really show up in the shopping data when people. They are big trips become smaller trips and they postponed purchases and theyre buying rate will drop a bit so.
Nothing really I would say noteworthy about household penetration certainly nothing concerning at all that we're seeing at this point.
Great Thanks for that perspective.
Yeah.
The next question comes from Pamela Kaufman from Morgan Stanley . Please go ahead.
Hi, good morning.
Hey, Tim.
I just wanted to follow up on you are pricing the additional pricing that you're taking in the coming quarters.
The Rsi if that was embedded in your initial guidance at the beginning of the year.
And how has the composition of your outlook for Orange sales changed for this year relative to last quarter. So do you still expect low teens price mix.
Would be higher now.
Expecting softer volumes relative to your initial expectations.
Yes.
With respect to the pricing. We're taking you know you don't price until you clearly see the inflation wave materialize, it's got to be inflation justified pricing with customers. So what we're doing in the back half of the year was not <unk>.
Locked and loaded.
At the beginning of the year when we gave guidance right, but there were also positive things that are broken our way in the first quarter as well so and that'll by the way that'll continue if we continue to see new waves of inflation come in we will take additional pricing and then we'll we'll give you guys are the dates and you have to bake in the lag et cetera et cetera. So.
So.
That dynamic would continue Dave do you want it yes, just to build on that so the Q1 and Q2 was in our in.
In our guidance and in our forecast Q3 now.
Got it okay. Thanks, and then just in terms of.
Our guidance Q1 results were ahead of consensus expectations.
But curious if they were in line with our forecast.
Wondering why you maintained your full year guidance, despite the upside in the quarter.
Yes, Pam clearly Q1 was a strong quarter and that's good news, but it's still early the environment remains dynamic and we just prefer to get a bit further into the year before we make any new declarations about how we expect to finish the year.
Okay. Thank you.
Thanks.
The next question comes from Carla Casella from J P. Morgan. Please go ahead.
Hi, Thanks for taking the question.
It looks like your leverage will still be kind of in the three high threes range at year end I'm wondering if on the M&A front. If you would look to wait until you get your leverage down to your target range or if the right acquisition comes up with you would temporarily take care of that retire and kind of how your thoughts are around M&A or if you have asked.
Net sales to offset something if you do find something that's appropriate.
Sure. This is Sean I'll take the question, we've been as everybody knows very intensely focused on reducing our debt deleveraging on schedule and we will continue to be focused on that and very confident in the commitments we've made.
With respect to M&A, we don't have anything in our sights to to give you right now, but certainly we are.
Not in the mode right now where we are.
Looking at anything bigger we're focused on deleveraging as I mentioned, but we always keep our eye on smaller bolt on things because they could be beneficial to our business going forward and there is also a defensive aspect to why we do that we want to make sure that interesting assets out there that are always that could be helpful to our business don't end up in somebody else's hands. So we're always looking.
<unk>.
But we are at the same time, we're we're intensely focused on deleveraging that's how I would describe it.
Okay, great. Thanks, a lot and have you said the timeframe in terms of getting to your three times target.
The timeframe for that.
No we didn't give a specific it's a long term target. We did say in the prepared remarks that we estimate leverage will be at approximately three seven times by the end of the fiscal year.
Okay, great. Thank you. Thank you.
There are no more questions in the queue. This concludes our question and answer session I would like to turn the conference back over to Melissa Napier for any closing remarks.
Thank you very much to everyone for joining us. This morning, an investor relations is around if you have any follow up questions.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
[music].
Yes.
[music].