Q2 2023 Conagra Brands Inc Earnings Call
Speaker 2: Ten.
Speaker 3: I for.
Speaker 4: Good morning everyone and welcome to the Conegro brand second quarter and first half fiscal of 2023 earnings conference call.
Speaker 5: All participants will be in a listen-only mode. Should you need assistance, please send to a conference specialist by pressing the star key followed by zero.
Speaker 6: After today's presentation, there will be an opportunity to ask questions.
Speaker 7: To join the question queue, please press star and then 1. To withdraw yourself from the question queue, you may press star and 2.
Speaker 8: Please also note today's event is being recorded.
Speaker 9: At this time, I'd like to turn the floor over to Melissa Napier, Senior Vice President of Investor Relations. Thank you.
Speaker 10: Ma'am, please go ahead.
Speaker 11: Good morning. Thanks for joining us today for the ConAgra Brands second quarter and first half fiscal 2023 earnings call.
Speaker 12: I'm here with Sean Connolly, our CEO , and Dave Marburger, our CFO , who will discuss our business performance. We will take your questions when our prepared remarks conclude.
Speaker 13: 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. Examples of our risk factors are included in the documents we filed with the FCC.
Speaker 14: We will 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 reference.
Speaker 15: Please see the earnings release for additional information on our comparability items.
Speaker 16: The gap to non-gap reconciliations can be found in the earnings press release and the slides that we'll 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.
Speaker 17: I hope you all are off to a happy and healthy start to the new year. Thank you for joining our second quarter fiscal 23 earnings call.
Speaker 18: I'd like to start by covering some key points for the quarter on slide 5.
Speaker 19: Despite our most recent wave of inflation-justified pricing,
Speaker 20: Consumer demand for our products in the second quarter was strong as elasticities remained muted and well below historical norms.
Speaker 21: The ongoing durability of demand is a testament to the strength of our portfolio and demonstrates how the ConAgraWay Playbook has positioned our brands to continue to resonate with consumers even in an inflationary environment.
Speaker 22: A successful execution of our playbook is clear in our second quarter results.
Speaker 23: We drove a significant increase in our top line.
Speaker 24: We continued to have solid share performance across the portfolio, especially in our key frozen and snacks domains. And we made excellent progress recovering both gross and operating margin. Operationally, we made good headway on our supply chain and productivity initiatives.
Speaker 25: While we're pleased with what we've accomplished to date, our supply chain is not yet fully normalized. That will improve, and overall, we see a long runway of opportunity ahead.
Speaker 26: We also continue to prioritize strengthening our balance sheet while making strategic investments in our business and returning capital to shareholders.
Speaker 27: In short, ConAgra had a strong quarter across the board.
Speaker 28: Given our positive results during the first half of fiscal 23, we have increased our expectations for the year, raising our full year guidance across all metrics.
Speaker 29: including organic net sales growth, adjusted operating margin, and adjusted earnings per share.
Speaker 30: With that overview, let's dive into the results on slide 6.
Speaker 31: As you can see, we delivered organic net sales of more than $3.3 billion, representing an 8% increase over the prior year period.
Speaker 32: Our adjusted gross margin of 28.2% represents a 310 basis point increase over the second quarter of last year.
and our adjusted operating margin of 17% represents a 237 basis point increase over that same period.
Adjusted EPS rose 26.6% from last year to $0.81 per share.
Slide 7 goes into more detail on our sales results on a one and three year basis.
Given the timing when the pandemic and inflation began to impact our industry, we believe that the three-year comparison provides important context to highlight the underlying strength of our performance.
At the total ConAgra level, we grew retail sales more than 10% on a one-year basis.
and more than 26% on a three-year basis.
We're pleased with our solid share performance.
including how our strong brands allowed us to largely maintain total company market share while taking several inflation justified pricing actions, particularly during the past year.
Notably, we have continued to drive robust share gains in key frozen and snack strategic domains on both a one and three year basis.
I want to spend a minute putting our sales growth in context.
Slide 8 shows our performance over the past three years compared to our near-in peer group, including Campbell's, General Mills, Kellogg's, Kraft Heinz, and Smucker's.
We have a great deal of respect for our peers, all of which have been navigating the same macro demand and inflation dynamics over the past three years.
Among this group, ConAgra ranked second in dollar sales growth and first in unit sales performance.
It's important to keep in mind that all of these peers have taken pricing actions to help offset inflation and ConAgra is in the middle of the peer set in terms of the price per unit increases in this time period.
It's clear that consumers continue to appreciate the quality, convenience, and the quality of their products.
and superior relative value that our strong brands have to offer, which has enabled ConAgra to perform extremely well on both an absolute and relative basis.
Let's take a closer look at our top-line performance during the second quarter by retail domain, starting with Frozen on slide 9.
We maintained our momentum, delivering strong retail sales growth on both a one- and three-year basis.
improving 9% and 26% respectively.
This growth was driven by a number of our key categories including breakfast, sausages, and single-serve meals, which both experienced double-digit retail sales growth compared to last year.
Turning to snacks on slide 10, you can see a similar story. We drove a 14% increase in retail sales compared to the second quarter of fiscal 22, and a 41% increase over the second quarter of fiscal 20.
the continued momentum of our snacks business.
broad-based across a number of categories.
Compared to last year, microwave popcorn was up 21%, seeds was up 18%, and meat snacks and hot cocoa both rose more than 14%.
We also accelerated growth in our highly relevant staples portfolio, increasing retail sales 10% this quarter compared to the second quarter of last year.
and 22% compared to the same period three years ago. This growth was led by pickles and whipped toppings which grew more than 11% and 10% respectively on a year-over-year basis.
As I've mentioned, our strong top-line performance was primarily driven by inflation-justified price increases coupled with ongoing muted elasticities.
Slide 12 details the relationship between pricing and volume over time.
As you would expect, increased pricing does have an impact on volume, both for ConAgra and the total industry.
However, you can see how elasticities have remained steady even as we have continued to increase the price per unit of our products to help offset ongoing COGS inflation.
And as we detailed a few minutes ago, ConAgra's three-year CAGR on unit sales performance leads its near-end peer group.
The relatively modest elasticities, both compared to historic norms and our peers, are a testament to the strength of our brand.
Now that we've unpacked the relationship between price and volume and the resulting net sales, I'd like to spend a few minutes on the relationship between net sales and COGS and the resulting impact on our margin performance on slide 13.
Generally speaking.
When a business has strong brands, strong processes, and strong people as ConAgra does
It is able to navigate inflationary cycles.
in discrete, predictable phases.
As we have detailed for some time, when unprecedented inflation increased our cost of goods, we took strategic pricing actions to help offset the rising costs.
However, there was an inherent lag between when we implemented pricing actions and when we realized the benefits of those actions in our top line results.
This pricing lag resulted in temporary margin compression.
Furthermore, continued inflation extended this period of margin compression as new inflation-justified pricing actions led to additional lag effects.
That is the dynamic we have experienced over the last several quarters as we continue to play catch-up.
by increasing price incrementally to account for the extraordinary extended rise in inflation.
At the end of the first quarter we reach a significant inflection point in the relationship between net sales and COGS marking the end of the temporary margin compression phase and the beginning of the margin recovery phase. As you can see in the chart, inflation has begun to moderate in certain areas.
enabling our inflation justified pricing actions to catch up to the rising costs.
Slide 14 shows the impact this inflection has had on our gross margin results.
As continuously rising inflation weighed on our COGS throughout fiscal 22 and into the first quarter of fiscal 23, our margins were compressed. Now, predictably, as pricing has finally caught up to COGS inflation, you can see the recovery of our gross margin to be more in line.
with pre-pandemic levels. While our gross margin can vary quarter to quarter due to a range of internal and external factors,
the strategic pricing actions we have successfully executed, combined with moderating inflation and our strong brands, position us well to recover and maintain.
healthy gross margin going forward.
Of course, inflation remains elevated in many areas and we continue to closely monitor our costs just as we have in the past.
We will continue to take appropriate inflation justified pricing actions as needed.
Another key driver of our margin recovery is our supply chain performance shown on slide 15.
This is due to a combination of macro factors as well as the strategic initiatives we are executing to improve our operations.
We made good progress on our supply chain during the second quarter, which benefited from improvements in the service we provided to our customers.
continued headway on our ongoing productivity initiatives which remain on track to achieve the targets we outlined at our most recent investor day.
more moderate increases in commodity prices and improved inventory levels due to an increase in the availability of materials.
The takeaway here is that we're pleased with the progress we're making, but industry-wide challenges do persist. There's more room for improvement as we advance our productivity initiatives and the macro environment continues to normalize.
As a result of our strong performance this quarter and the first half of fiscal year 2023 we are raising our full year guidance for all metrics detailed here on slide 16.
We now expect organic net sales to grow between 7 and 8 percent.
We expect organic net sales to grow between 7 and 8 percent compared to fiscal 22.
adjusted operating margin to be between 15.3 and 15.6 percent, and full year adjusted EPS growth of 10% to 14% or $2.60 to $2.70 per share.
Dave will provide more detail on the underlying assumptions behind these expectations.
Before I turn the mic over, I want to summarize what I've covered today. Our strong performance during the first half of Fiscal 23 was primarily driven by a combination of inflation-justified pricing actions and muted elasticities reflecting the strength of our brands.
consumers continued to recognize the value our brands provide despite the higher prices, allowing us to gain share in key domains such as frozen and snacks.
Our top-line growth was coupled with encouraging progress in a number of different areas of our supply chain.
that enabled us to operate more efficiently.
Together, these factors, as well as improvement in the inflationary environment, helped us recover our margins to near pre-pandemic levels.
As a result of our strong performance, we're raising our full year Fiscal 23 guidance for organic net sales, adjusted operating margin, and adjusted EPS.
Finally, we're looking forward to seeing everyone who can make it to CAGNY this year.
We plan to host our annual kickoff dinner on February 20th and are scheduled to present the following morning.
We will follow up with more details on the event as we get closer.
With that, I'll pass the call over to Dave to cover the financials from the quarter in more detail.
Thanks, Sean, and good morning, everyone.
I'll begin by discussing a few highlights from the quarter as shown on slide 19.
We are very pleased with our second quarter results, which reflect the ongoing strength of our business and successful execution of the ConAgraWay playbook.
For the quarter, we delivered organic net sales growth of 8.6%, primarily driven by inflation-justified pricing and muted elasticities.
Adjusted Gross Margin increased to 28.2%, and Adjusted Gross Profit Dollar Growth was up 21.7%.
benefiting from higher organic net sales and productivity initiatives.
The increase in adjusted gross profit, combined with another strong performance from our Ardent Mills joint venture, contributed to adjusted EBITDA growth of 21.5%.
Y20 provides a breakdown of our net sales. As you can see, the 8.6% increase in organic net sales was driven by a 17% improvement in price mix.
which was a result of inflation-justified pricing actions that were reflected in the marketplace throughout the quarter.
This was partially offset by an 8.4% decrease in volume, primarily due to the elasticity impact from those pricing actions.
However, the impact was favorable to both expectations and historical levels.
Slide 21 shows the top-line performance for each segment in Q2.
We are pleased with the robust net sales growth across our entire portfolio.
Net sales growth in our domestic retail portfolio remains strong.
with our grocery and snack segment and refrigerated and frozen segment achieving net sales growth of 6.8 and 10.5% respectively.
The difference between the organic and reported net sales performance in our international segment reflects the unfavorable impact of foreign exchange.
I'll now discuss our Q2 adjusted margin bridge found on slide 22.
We drove a 12.2% benefit from improved price mix during the quarter driven by the previously discussed inflation-justified pricing actions.
We also realized a 1.3% benefit from continued progress on our supply chain productivity initiatives.
These pricing and productivity benefits were partially offset by continued inflationary pressure.
with 11% gross market inflation negatively impacting our operating margins by 7.5%, and a negative margin impact of 2.9% from market-based sourcing.
As a reminder, as commodity prices rose quickly last year, we benefited from locking in contracted costs that were lower than the market.
Even though we see commodity inflation moderating, we will not immediately realize a benefit to the P&L, as our costs may remain higher than the spot market due to the timing of our contracts and when they roll off.
Flight 23 breaks down our adjusted operating profit and margin by segment.
As Shawn detailed, our decisive inflation-justified pricing actions coupled with improved service levels and productivity allowed us to successfully navigate ongoing inflationary pressures and industry-wide supply chain challenges and deliver adjusted operating margin expansion.
in each segment during the quarter. We were also pleased that higher sales and productivity once again offset headwinds from inflation and elevated supply chain operating costs across all four segments in Q2.
As a result of this continued strong performance, total adjusted operating profit increased 25.9% to 563 million during the quarter, despite an increase in adjusted corporate expense during the period primarily due to increased incentive compensation.
Slide 24 shows our adjusted EPS bridge for the quarter.
Q2 adjusted EPS increased 17 cents, or 26.6 percent compared to the prior year.
This significant increase was primarily driven by higher sales and gross profit, as well as a small benefit from a continued strong performance from Ardent Mills.
Slightly offsetting these positives were higher A&P and adjusted SG&A compared to the prior year period, as well as lower pension and post-retirement income, higher interest expense, and the impact of adjusted taxes.
Slide 25 reflects the continued progress we made on our commitment to strengthening our balance sheet.
Our net leverage ratio remained at 3.9 times at the end of Q2.
down from 4.3 times at the end of Q2 in the prior year period.
As we have previously communicated, Q2 is historically 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 year.
With that in mind, we continue to expect to end the fiscal year with a net leverage ratio of roughly 3.7 times.
Year-to-date capex of $188 million decreased by $69 million compared to the prior year period while free cash flow increased by $104 million year-over-year.
We remain committed to returning capital to shareholders as evidenced by our payment of 159 million in dividends in Q2, Fiscal 23,
and $309 million year-to-date.
The first half dividend increase of $27 million compared to the first half of Fiscal 22 reflects the quarterly dividend rate of $0.33 per share.
We also repurchased $100 million worth of shares in the second quarter and $150 million worth of shares year-to-date to offset most of the longer-term performance-based shares we estimate issuing.
As we enter the second half of the fiscal year, we will continue to evaluate the highest and best use of capital to strengthen our balance sheet and optimize shareholder value.
As Sean mentioned, we are raising our Fiscal 23 guidance for net sales growth, adjusted operating margin, and adjusted diluted earnings per share, given our strong performance in the first half of Fiscal 23.
and expectations for a solid performance for the balance of the year.
Turning to slide 27, I'd like to take a minute to walk through the considerations and assumptions behind our guidance.
We expect gross inflation to continue but moderate through the remainder of the fiscal year, resulting in an inflation rate of approximately 10% for fiscal 23. Additional inflation-justified pricing actions that have previously been communicated and accepted will go into market in Q3.
However, the magnitude of these pricing actions will be smaller and more targeted than previous pricing actions. As always, we will continue to monitor inflation levels and price as needed to manage future volatility.
We anticipate capex spend of approximately $425 million in fiscal 23, as we make investments to support our growth and productivity priorities with a focus on capacity expansion and automation.
Approximately 200 million of the 425 million was spent in the first half of fiscal 23.
Lastly, we expect interest expense to approximate $405 million and pension and post-retirement income to approximate $25 million for the year, driven by the higher interest rate environment.
Our full year tax rate estimate remains approximately 24%.
To sum things up, we are extremely pleased with our strong performance in the first half of Fiscal 23, especially the recovery of Q2 adjusted gross margins to near pre-COVID levels.
This, along with our expected continued positive business momentum, led to raising our full fiscal year 23 guidance.
Our strong performance amidst such a dynamic environment would not be possible without the hard work of our entire team and reflects the ongoing strength of our brands and successful execution of the ConAgraWay playbook.
Looking forward, we remain committed to executing on our strategic business priorities and generating value for our shareholders.
That concludes our prepared remarks for today's call. Thank you for listening.
I'll now pass it back to the operator to open the line for questions.
Ladies and gentlemen, we'll now begin the question and answer session.
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Once again, that is star and then one to join the question queue. Our first question today comes from Andrew Lazar from Barclays. Please go ahead with your question.
Great, thanks very much. Happy New Year everybody. Morning. Shaun, obviously you had expected and talked about sequential gross margin improvement as you move through the year. The 310 basis point jump certainly in gross margins is certainly far greater than investors were expecting. I have to imagine greater than what maybe you were expecting internally.
So I guess what was it that came in, you know, that much better in the quarter than you anticipated? And, you know, I asked this with a view towards getting a better sense on really how sustainable these levels of gross margin are as we move through the year. Because as you've said previously, you expected sequential improvement as the year progresses. So is this still the case from this new high level as we go through the back half of the year?
or are there any reasons to expect a step back? Thanks so much.
Andrew, yeah everything we're seeing is very consistent directionally with with what we've expected precisely as things come in by month by quarter there's a little bit of variability there but you know I'd say overall I know these inflation super cycles are a complicated thing for our investors to unpack which is why we always try to be instructive as to the
90-day clock starts ticking, then the customer's 90-day clock expires, elasticities exist but they're in fact benign relative to history and consistent overall, and margins recover. And sometimes if it's multiple waves of inflation, you rinse and repeat that whole process. And everything we are seeing.
Sales wise and margin wise is consistent overall with these textbook mechanics and therefore entirely good news and not some Negative surprise so, you know to come full circle, you know, we don't see The margins that we're looking at right now as a peak we see them as the successful Execution of our playbook Dave you want to?
Excuse me.
You really need to look at the relationship of price mix that we deliver each quarter versus the market inflation each quarter going back to the fourth quarter of 21. ConAgra got hit with inflation earlier and to a much higher level than most food companies. So
we came out of the gate and it impacted our margin significantly very quickly. So, if you just look at fiscal 22, we had inflation every quarter that was 16 to 17 percent, and we never got to that level of pricing even in the fourth quarter. In fact, our pricing Q1 of last year was only 1.6 percent. So, our pricing ramped up.
but had it not caught up to that significant inflation. Q1 of this year, our pricing was at 14%, inflation was 15%, so we were getting close. This quarter, pricing 17% market inflation is 11%, so it's the first quarter where we've actually seen the flip.
And now that that flips there, Sean had a chart in his deck, that's when you see the margin recover. So we saw it in Q2, and that delta is, we expect it to continue as we go forward each quarter. Now, I will call out Q2 for ConAgra is our highest sales quarter.
So the absolute gross margin of 28.2 is usually our highest. But in terms of looking forward, look at the delta that we delivered in Q2 as being a proxy for going forward. Really helpful, thanks so much.
Our next question comes from Cody Ross from UBS. Please go ahead with your question.
Good morning. Thank you for taking our question. Two questions here. First one, you put up a slide showing how your unit sales on a three-year CAGR basis are performing much better than your peers. What do you attribute that to? Well, as you know, Cody, we...
Going into COVID, at the beginning of COVID, we performed extremely well in the peer set. And I made the point then that that was not entirely a function of just people being forced to eat in their home. It was in part due to the fact that we've taken one of the largest portfolios of food in North America and completely overhauled it in terms of modernization and makeover.
remarkably strong. So you put all that together along with the fact that a lot of these younger consumers that spent so much time eating away from home pre-pandemic are still eating in the home now because prices are so high away from home that has conspired to lead to benign elasticities overall for our industry.
And as we pointed out before, our elasticities not only remain low versus historical norms, but they're consistent and they are among the lowest, if not the lowest in the entire peer group. So it's always a function of your brand strength. And the other thing I would add is, recall, we spent a lot of time in the last few years exiting businesses that are more commoditized.
where that we're more susceptible to trade down and people consumers shifting to private label so cooking oil peanut butter liquid eggs I could go on we've done that so we've done a lot of reshaping of the portfolio to be more resilient for a cycle like this and we're seeing it in the data
Great, thank you. And then I just want to follow up on gross margin here. You revised your inflation outlook down to about 10% from low teens, implying approximately 8% inflation in the second half. What gives you the confidence to lower your inflation outlook? Where are you seeing the most easing? Thank you. Amanda De Nikol?
Yeah, Cody, if you really look at this, you have to go back to the base, right? So when inflation started for us, so similar to what I just said, inflation started hitting us in the fourth quarter of our fiscal 21, and then every quarter of fiscal 22, we were in the 16 to 17%.
Range so as we, as you look this year, and we're estimating 10% for the year that may appear a little bit lower than maybe some others. But that's off of a much higher base than others. So that's just that the percentages in the quarter. We saw inflation in packaging, so our cans and some of the other pack.
you know, we expect it to moderate, but it's still off a very high base. Um, and that's our latest call based on the way we call inflation is market by market. We go through and then remember, and you see this on our gross margin bridge. We have the sourcing component, right? So we always quote inflation as gross inflation based on market.
And then based on how we lock it in with contracts or our hedges, the actual cost nets out in that sourcing line. So right now, for the quarter, our sourcing was a little negative, just because we're locked into some higher contracts in a couple areas where the market has dropped.
Great, thank you. I will pass it along.
Our next question comes from Ken Goldman from JP Morgan. Please go ahead with your question. I'm happy to acidify both of your questions.
Hi, thank you. Good morning. I wanted to dig in a little bit more toward the around the operating margin guidance and thank you for the help in terms of how to think about the gross margin in the back half Dave. It seems just back of the envelope math that to get to where your operating margin.
will be, you know, sort of that mid 15s for the year. And given that you're talking, you know, roughly about a 300 basis point increase continually in the gross margin, that you're going to have to have a step up in SG&A as a percentage of sales. And I'm just, A, is my back of the envelope math correct there? And B, what would cause that step up as we think about going into the back half?
higher than sales and that's indeed what we're seeing. So if you look at Q2 and the increase in SG&A, that's a reasonable estimate to estimate our H2 second half increase in SG&A and that's basically investments that we're making in automation and in our people.
And there's some incentive compensation increase in there partially from this year, but partially wrapping on last year. So they're really the big drivers of SG&A. We are expecting AMP to ramp. So we came in higher this quarter at 2.4% and we we expect that to continue to ramp up in H2 as well. Yeah, on that I would say, you know, we do spend
A&P can. So we don't do a lot of inline TV because we don't think it's particularly effective But we do spend A&P and it does vary quarter to quarter Depending upon the programs that we've got as you know, it's a lot of influencer type spend digital spend Things like that. And so as we've got new innovations unfolding we do back them Based on the windows who we've got products coming to market. So there you will see movement
and good trial.
Thank you. That's helpful. Just a very quick follow-up to Dave's comment about kind of extrapolating that 2Q SG&A out. Dave, are you talking about the absolute dollars that were spent in 2Q or the year-on-year change that we should kind of think about extrapolating? The year-on-year change, Ken. Great. Thanks so much. Yep. Our next question comes from Alexia Howard from Bernstein.
Please go ahead with your questions. Great. Good morning, everyone.
So two questions. The first one is a bit more of a take a step back. In my conversations with a lot of investors, people are commenting on the fact that you're not really getting a lot of valuation credit for your faster growing snack business. And they also want you to get the leverage down, which I think you commented on in the prepared remarks.
Surely one solution might be to dispose of some of your more mature categories. I'm just wondering how you're thinking about some of those smaller growth businesses and non-snack areas and whether you might think of that being a way into addressing some of those concerns more quickly. And then I have a follow-up. Yep. Great, great question, Alexia. You know, we've said since I got here that...
We are going to pursue the consistent improvement in our sales rate and consistent improvement in our margins. We'll do it three ways. We'll strengthen the businesses we own, we'll acquire new businesses that fit, and we'll divest stuff that is a drag on our sales and our margin. And if you look at
the sheer amount of work that we've done in the last eight years. It's right up there near the top of the list in terms of activity. So that's part of our playbook. It will continue to be part of our playbook. We always look at that and I always tell investors, if you've got an idea as to how we might reshape in a way that unlocks shareholder value, you can copy, paste it on a agenda document and add it in your book.
up big chunks of the business and you look at doing something, spinning them out or selling them, something like that, you have to look very carefully at what happens with stranded overheads, what happens with the fixed cost base of the company and does it flow back to that which remains and therefore compress margins because you've got to be very sensitive to ensuring that these kinds of actions create value and don't actually end up...
destroying value. And so, you know, that's one of the things we look at. The other thing we look at is we're basically a US company, and we have tremendous scale and scope within the US. And we think that scale and scope works very well for us in terms of, you know, our relationship with our customers, the importance of our total portfolio with our customers.
and the ability to leverage certain parts of our portfolio to do very strategic things in other parts of our portfolio, whether that's, you know, leverage the cash flow or just leverage the fact that it's these are important items to shoppers. So we look at all of that stuff. We're open-minded to anything that truly creates value and that's...
you know, that's kind of our philosophy on that. It's always been that way. Great. Thank you very much. And just a quick follow-up. Promotional activity, are you seeing any shift in what retailers are expecting, or is that all still very much business as usual at the moment, even though I think it's a lot lower than it was before the pandemic? Yeah, that's a hot topic these days. Let me give you kind of our perspective.
the store across the street to get the items that they couldn't find in their stores.
And then third, you know, we're not opposed to smart promotions. In fact, we're already doing high ROI promotions already that's kind of in line with our pre-pandemic levels from a frequency basis. At some point we may be able to add a little bit more, but here I'm talking about surgical...
strategically valuable high ROI and frankly often seasonal promotions, often holidays that are emotionally important to our consumers. And in those instances, we want our brand in those promotions. But through COVID, some of those promotions were cut back on given obvious supply challenges.
going forward you know that'll get better and some of those quality opportunities will reemerge but I think the big point is we're not talking about a surge of deep discount promotions here that's not been our playbook for at least seven years now and I just don't see you.
That'll get better and some of those quality opportunities will reemerge. But I think the big point is we're not talking about a surge of deep discount promotions here. That's not been our playbook for at least seven years now. I just don't see a lot of room for that.
Great. Thank you very much. I'll pass it on. Our next question comes from David Palmer from Evercore ISI. Please go ahead with your question.
Thanks guys. Slide 12, the one where you showed the price lag phase being followed by the margin recovery phase. I'm wondering how you think about the shape and the length of this recovery phase.
It was five or six quarters long on the lag phase. Do you see it playing out at a similar length for the recovery phase? Yes, it's interesting, David. In my office up on my whiteboard for the last year, I've got this little handwritten analysis I've done of the earnings power of a cohort of...
of 10 units and how the P&L unfolds when you're faced with multiple waves of inflation, which require multiple waves of pricing. And as I said to Andrew earlier, it's very predictable, it's very mechanical. What's been unusual in this cycle...
is the sheer magnitude of the inflation supercycle and the number of waves. So the reason the shape of that curve on that slide you see it is because it reflects multiple waves of COGS inflation and the follow-on pricing effect. The sheer number of those waves is now slowing down and that is why you're seeing the sharp recovery.
and sometimes it slows down faster than you might expect, which is why the recovery might come in faster. But overall, the mechanics of it are very predictable. You know, if we got hit with another, you know, 18 months of five waves, it would kind of, you know, that's the rinse and repeat comment. You know, the cycle starts all over again.
I can't find a lot of examples of that happening in history after a supercycle like this. So I think what you're seeing now is a reflection of good execution on our part and kind of the beginning of the sun setting of this supercycle.
And that's why we say we think we've got some runway from here as the supply chain continues to improve and productivity continues to ramp up. Dave, you want to add to that? Yeah, just to build on that and David, back to something I said earlier, for H2 gross margins, we expect that delta of approximately 300 basis points to hold. So that, you know, translated to that chart, that just means that that relationship for the second half will continue, right?
So that drives that margin improvement for the second half.
And just to follow up on that, in the, I'm looking at the volume numbers in grocery and snacks, for example, that was a little weaker than we would have expected. I wonder just if you back up a second and say prep.
what is the big worry that people would think of? Is that perhaps there would be a need for promotion, give back to stabilize volume in your higher price elasticity categories out there. Is there something that you're monitoring that would tell you that perhaps there would be a slamming of a door and a quick end to this recovery phase.
Are there things that you're really watching out for? And perhaps I'm leading the witness a little bit on the grocery and snacks. Is that volume concerning to you at all in that area? Let's talk about it. First, no door slam. So what we're seeing right now is very consistent with what we expect. And it was an excellent quarter, and things are unfolding the way we'd expect.
With respect to grocery and snack volumes, grocery and snacks volumes came in right where they should have come in, given the magnitude of pricing we've taken in the first half of this year. Now, in terms of what you're observing, good eye, the shipment numbers look about two points worse.
than what you might expect given the elasticities that we've talked about. That does not reflect a Q2 phenomenon. That reflects strong shipments in this segment in Q2 a year ago. Why was that? Because that's precisely when we came off allocation on a handful of brands in GNS.
And our customers, as you can imagine, these are good, strong brands, we're quite eager to replenish their inventories.
So that's that's that's there's when you when I look at that number I see about two points of what might look like an excess drop on volumes It's entirely about the year ago period nothing about right now. So net net, you know But what what keeps up keeps us up at night. It's the stuff that we can't
Predict, you know, it's like a return of some kind of new code strain or, you know, more, um, unexpected. Friction and supply chain, because you can't get materials from suppliers, things like that. You know, as we said, we're making good progress as supply chain, but it's not perfect yet. We still have more junior people in our labor situations got significantly better, but we've got
Newer employees who are still ramping up the learning curve. These are the things that drive the volatility and it's led us to have our year to go outlook stay in a range I would describe as prudent given that we're making progress, but it's not all the way back to right. Dave, you want to answer that? Yeah, I would just add I think David when you start looking quarter to quarter and then it's the second.
We feel good about our own inventories, the elasticities as we showed on the chart, are at that sort of 0.5 level and they've been there and that's the entire portfolio. So you do get some dynamics quarter to quarter which Sean described, but generally we're tracking in line with consumption. Yeah, before we go to the next question, I want to come back to volumes.
a second because this is a really important one for folks to get right as you think about assessing kind of where we are and is it is it a good guy or a bad guy. You know to accurately assess volume performance across a cohort of companies you have to look at total scanned volume change over time for the whole peer set.
And as you saw on slide eight, ConAgra ranks number one in our peer group in terms of volume and resiliency over the past three years, which is obviously a testament to our brand health.
as I said in my prepared remarks there's always some elasticity when you price as much as we have cumulatively but those elasticities have in fact been relatively benign and remarkably consistent and they've been lower than our peers, lower. That's the data. So but in any given quarter and in any given segment frankly
you may see more or less volume impact based on the recency of the pricing actions that you take. And as you know, we took a lot in Q1 and in Q2, but overall we're in very good shape in the absolute and versus others. And you know, don't forget, as we've said many times, over time these elasticities tend to wane as consumers adapt.
Thank you. Our next question comes from Matt from BNP. Please go ahead with your question.
Thanks for the question. I'm wondering beyond prices at the last this lease, which can sometimes be a bit of a blunt measurement of the reaction of consumers to price increases, especially given the broad based nature of pricing across the industry. I'm wondering if you've seen any changes in the degree or ways in which consumers are trading down, for instance.
from food away from home to food at home, from branded to private label, or to more value branded products, or maybe between grocery categories. Just curious what you're seeing on that front and how you'd expect this study.
to develop from here. Thanks. So Matt, I think it's pretty simple. The first big trade down is the trade down from away from home to at home. You know if you're looking at consumers over $100,000 a year income, you're still seeing they're going out to eat. But below that threshold, you know, it's not where it was.
pre-pandemic. So one of the reasons, a big one of the reasons why you see muted elasticities across the sector on average is because there has been, there was a trade down into at-home eating during COVID and that has not fully reverted to away from home because the prices away from home.
have gone up so high that it's a better value to continue to eat in home as people are trying to stretch their household balance sheet. And we are, you know, the beneficiary of that and it shows up in muted elasticity.
when you double click down from there within grocery what you see is there is trade down taking effect and if you look at private label by category you can see that in certain categories they are making progress. Those categories almost always tend to be categories that are more highly commoditized.
So you know things like in food like cooking oil and outside of food things like ibuprofen you know when when the consumer knows it's a single ingredient product and One is a lot cheaper than the other it's switching costs are lower It's easier to make the trade down so that is happening the good news for us is we don't have a lot of those categories
We had them, we exited them, and now our private label interaction is lower than average in the space. And on the strategically important stuff that's really vital to our go-forward cash flows, things like frozen, our snacks categories, we've got very strong relative market shares, very little.
private label alternative and that's one of the reasons we continue to thrive. Great, thanks very much and one follow-up. It looks like you took your Catholic guidance down from $500 million to $425 million. I'm just wondering what's driving that change. Thanks very much.
Yeah, Matt, that's all timing. We're still prioritizing investing in capacity and automation in our supply chain, which we've talked about. So that's all just timing for the fiscal year.
Our next question comes from Pamela Kaufman from Morgan Stanley . Please go ahead with your question.
Our next question comes from Pamela Kaufman from Morgan Stanley . Please go ahead with your question. Hi, good morning. Thanks for answering. Thanks.
Hi, Ben. Good morning. Just had a follow-up to your last response. In general, it seems like the softer macro backdrop this year creates a favorable environment for your business and for food at home consumption.
So, as consumers look for savings.
Can you talk about how your categories and how frozen dinners have performed in prior recessions and how are you leaning into this opportunity and highlighting the value to consumers.
Yeah, our frozen business has been unbelievably strong and I don't think you can compare it at all to the 2008 period, the financial crash, because the category looked totally different. We started doing a massive overhaul of the frozen section of the grocery store, ConAgra did, in 2015, starting with frozen single serve meals. We completely changed the water level with our frozen fisheth levee.
What we're doing now is keeping the momentum in frozen in single serve meals where we've been so successful because there are structural things in place that have only...
furthered the opportunity there. Things like more people working from home during the week, that obviously contributes to more breakfast and more lunch occasion at home where these products fit. So we're capitalizing on that. The other part of our strategy is to continue to, we've got a great suite of brands, continue to extend them into adjacencies like
like multi-serve meals, appetizers, snacks, desserts, novelties, things like that. There are a lot of zip codes in the frozen space that still have opportunity to be overhauled the way we've overhauled frozen single serve meals. And that's a big part of our go-forward strategy and one of the things that's going to help create value with this portfolio.
along with this awesome snacks business that we've got. And we'll talk about both of these very, very strong, attractive portfolios in frozen and snacks in quite some detail at Cagney.
Just on the supply chain, it sounds like it's getting better, but there's still room for improvement. Can you talk about where you still see supply chain challenges and where there's room for improvement? Where are your service levels today versus targeted, and how much gross margin recovery can this drive?
labor across the end-to-end supply chain that's not stated. You're hearing that from me, you're hearing it from my peers. So it is possible for ConAgra to make meaningful progress but also to see continue to see pockets of friction. In terms of specifically what are we seeing productivity is improving and we are pleased with progress on our supply chain initiative. Service levels and fill rates have continued to improve over the last few weeks.
savings aren't fully offsetting input cost increases from commodities volatility, things like labor, transportation costs, and other supply chain inefficiencies since the supply chain is not yet fully normalized. We on labor we have filled more positions, we're seeing less turnover, but because our labor force, as I mentioned a few minutes ago, is less experienced it's still less efficient, but obviously that's going to improve.
as these newer employees crash the learning curve. So that's kind of what we're seeing overall. Dave, you want to add anything? I don't know how to hit it. Yeah, I would just add to your question about margin. So if you look at the Q2 bridge that we have in the deck, the operating margin bridge, you see the productivity and other cost of goods sold at plus 1.3% of margin points....
Once we get to a more normalized supply chain operation, we would expect that to improve. We're not going to get specific numbers, but that's where you would see it in the margins.
normalized supply chain operation, we would expect that to improve. We're not going to give specific numbers, but that's where you would see it in the margins. Got it. Thank you.
And our next question comes from Robert Moscow from Credit Suisse. Please go ahead with your question.
And our next question comes from Robert Moscow from Credit Suisse. Please go ahead with your question. Hi, thanks.
You know, Sean and Dave, like, one of the major concerns I hear from investors is that the top line trends that are so robust right now are going to dissipate by the end of the year because you're going to lap the vast majority of the pricing actions that you've taken, but you did talk about more sequential pricing that's going on right now, so
I guess I'd like to know, by the end of the calendar year, and I know you can't talk about fiscal 24, but by the end of the calendar year, do you think you'll still be in kind of like mid-single digit pricing territory given where pricing is today in fiscal 3Q?
And then lastly, maybe you can talk a little bit about the retail reaction to all the price increases. The rhetoric seems to be getting a little more combative on the margin. And I wanted to know if you thought there's any changes in those negotiations. Thanks. All right, let me try to hit each of those. Dave, I missed anything. Jump.
in with respect to dollar sales and the year on year, putting up 9%, whatever. That's not just as a reminder, that's not our long term algorithm. That is a function of where we are in this inflation super cycle. So that's not gonna be
that go forward run rate on sales forever. That goes without saying. In terms of the pricing that we've taken, we took price in early Q1, we took price, that's pretty meaningful, we took price again in early Q2, that was pretty meaningful, and then we're taking price again, I would say more surgically.
continue to see waves of inflation you know reemerge then we'll do what we've got to do in terms of retailer reaction
Let me give you just a couple thoughts on this. Number one, with respect to margins, our margins, and the good quarter we just had on margins, I think it's really important to remind everybody we're talking about margin recovery.
following a period of pretty meaningful margin compression. So you know that's kind of point one and point two is we've been really clear with our retail partners that A all of the pricing we have taken is justified by COGS inflation and B margin recovery is as important to them as it is to us because we need to recover our margins.
in order to sustain the innovation program that has driven category growth for these retailers in important isles like Frozen, as I mentioned just a minute ago. And the third point I'll make is, you know,
innovation program that has driven category growth for these retailers in important isles like Frozen as I mentioned just a minute ago. And the third point I'll make is you know
With respect to, you know, inflation from here, you know, it's still with us, right? So we're calling 10% on the year. It's not deflation. It's sustained inflation. And that's just an important reminder that we're not looking at a deflationary period. So that's got to factor into the retailer conversations.
Well, Dave, anything you want to add to that? Yeah, Rob, I would just say we're not going to come in on calendar year, but if you just look at, again, it goes back to looking quarter by quarter in the prior year and what our price mix was by quarter. And as you look at last year, last fiscal 22 each quarter, our pricing ramped up, right? So H1 last year, our price mix was roughly four and a half percent.
H2 of last year was about 11%, right? So as we look at H2 this year, we're wrapping on a much higher price number. So you could expect that the price mix component of our H2 to be lower because we're wrapping on an 11% versus four and a half in the first half. So that's the way to think about it, but it's, you know, that's the same thing happening with inflation as well. That's why that margin.
increase, that gross margin increase I talked about earlier, we expect to continue. Given that you've revised down your inflation outlook, is there any discussion about also revising down some of the price increases? No, because the price increases are not going to be as high as the
A revised down inflation outlook does not mean costs have dropped to below where they were prior to us taking pricing. In fact, it's still a 10% full year outlook, lower than that in the back half, but it's still inflationary. And by the way,
Compared to the normal range for the industry of 2% to 3% inflation, when you're talking 8-ish percent inflation, that's a big inflationary year. So, to the contrary, it needs you to think more about future price increases than it does price rollbacks. In categories that are true pass-through categories, when you get down to a true category level, it's not a category we're going to put coffee as an example.
You know, coffee is one of those categories. It's a pass-through category. Pricing comes up, you take it up, pricing comes down, you take it down. It can be deflationary. We're not experiencing deflation on average across the board.
is one of those categories. It's a pass-through category. Pricing comes up, you take it up, pricing comes down, you take it down. It can be deflationary. We're not experiencing deflation on average buying across the board. Got it. Thank you.
So, thank you, everyone. We are at time. Thanks again for joining us this morning, and we're looking forward to seeing you all at CAGNY next month. And, ladies and gentlemen, with that, we'll conclude today's conference call and presentation. We thank you for joining. You may now disconnect your lines.